Pillar 3 Disclosures
Affirmative Investment Management Partners Limited
Background
The CRD, to which the Firm remains subject as a consequence of the UK CRDIII implementing Regulations, have three pillars; Pillar 1 deals with minimum capital requirements; Pillar 2 deals with Internal Capital Adequacy Assessment Process (“ICAAP”) undertaken by a firm and the Supervisory Review and Evaluation Process through which the Firm and Regulator satisfy themselves on the adequacy of capital held by the Firm in relation to the risks it faces and; Pillar 3 which deals with public disclosure of risk management policies, capital resources and capital requirements.
Scope
Affirmative Investment Management Partners Limited (“Affirmative”) is a MiFID Investment Management Firm. It acts solely as agent, so the main protection to our customers is provided through client money and asset arrangements. The Firm’s greatest risks have been identified as business and operational risk. The Firm is required to disclose its risk management objectives and policies for each separate category of risk which include the strategies and processes to manage those risks; the structure and organisation of the relevant risk management function or other appropriate arrangement; the scope and nature of risk reporting and measurement systems; and the policies for hedging and mitigating risk, and the strategies and processes for monitoring the continuing effectiveness of hedges and mitigants.
Risk Appetite
Affirmative seeks to take a conservative approach to risk and it has endeavoured to reflect this approach in the design of the business organisation, investment philosophy and strategy, and composition of the client base. The amount of capital retained is designed to adequately cover regulatory capital requirements and provide for future business growth.
A number of key operations are outsourced by our clients, typically the Funds we provide Investment Management services to, to third party providers such as administrators reducing our exposure to operational risk. The Firm has an operational risk framework (described below) in place to mitigate operational risk.
Risk Management Objectives and Policies
Risk management is the process of identifying the principle risks, including regulatory compliance risks, to Affirmative achieving its strategic objectives. Central to this process is establishing appropriate controls designed to manage those risks and to ensure that appropriate monitoring and reporting systems are in place. Risk management is an inherent part of Affirmative’s business activities. Affirmative’s risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of its major risks. Affirmative exercises oversight through the Risk Oversight Committee (ROC). The ROC meets periodically to review internal controls, risk management processes, regulatory compliance and relevant reports received from Affirmative’s outsource providers, advisors and auditors.
Amongst the risks inherent to the investment management process Affirmative has identified the following risks as being most relevant.
Credit Risk
Credit risk arises from cash and deposits with banks and financial institutions, as well as credit exposure to clients, including outstanding receivables and committed transactions.
The risk arises due to the potential non-payment of receivables and default by the banks.
Affirmative conducts due diligence on any potential counterparty before it enters into any formal arrangements. Affirmative holds cash on deposit with global rated banks and other financial institutions pre-approved by the ROC. Exposures to such institutions are periodically reviewed by the ROC.
Operational Risk
Operational risk includes those risks or events that could impact Affirmative’s people, processing and technology in such a way as to impact the achievement of Affirmative’s goals and objectives.
The adequacy of internal controls in relation to operational risk is periodically assessed across Affirmative. Independent evaluation and testing of controls central to the investment process is undertaken on an annual basis and results are reviewed by the ROC.
Systems, internal controls and human resources are in place to mitigate exposure to operational risk.
Market Risk
Market risk is defined as the risk of adverse movements of global securities markets, exchange rates, or interest rates.
Market Risk exposure has been assessed by Affirmative and is limited to Affirmative’s exposure to foreign currency exchange rate risk and hence to any assets held on the Firm’s Balance Sheet denominated in a foreign currency. The Firms Reporting Currency is sterling and all foreign currency assets are converted into sterling where possible on a regular basis.
Affirmative is exposed to market movements through the impact a market downturn may have on the value of funds under management and the consequent impact on management and performance fees. Scenario stress-testing has been conducted as part of the Internal Capital Adequacy Assessment Process (ICAAP) and Affirmative believes that the firm holds sufficient capital to manage this risk.
Affirmative is exposed to foreign exchange risk as the bulk of its liabilities are in sterling but management and performance fees are predominately calculated and paid in foreign currencies, primarily US dollars. Affirmative monitors its exposure to currency risk and seeks to minimise its exposure to fluctuations in exchange rates. This may be achieved by hedging against foreign currency exposures.
Liquidity Risk
Prudent risk management requires the maintenance of sufficient cash balances to ensure the operational expenses of Affirmative can be met.
Affirmative has in place processes to manage and control liquidity risk. Affirmative has established risk tolerance levels against which the liquidity position is monitored. Cash flow forecasts are the principle management information tool employed to monitor liquidity on a day to day basis.
Affirmative has concluded no additional capital is required in order to manage this risk.
Capital Resources
The capital resources of the business comprise Tier 1 capital after required deductions. As a limited licence firm the capital resources requirement is calculated as the total of Pillar 1 and Pillar 2 capital.
Pillar 1 capital is the greatest of:
- Base Capital Requirement of €50,000;
- The sum of Market and Credit Risk Requirements; and
- The Fixed Overhead Requirement (FOR).
Pillar 2 capital is calculated by Affirmative as representing any additional capital to be maintained against any risks not adequately covered under the requirement in Pillar 1 as part of its ICAAP.
At present Affirmative’s capital requirement is driven by the unlikely Pillar 2 Wind-Down Requirement, although the FOR and market and credit risks are reviewed periodically. Affirmative applies a standardised approach to credit risk, applying 8% to Affirmative risk weighted exposure amounts, consisting mainly of management fees due but not paid, and bank balances.
The regulatory capital analysis included below is calculated on this basis as at 30 November 2015.
Having performed the ICAAP it is Affirmative’s opinion that no additional capital is required in excess of the Pillar 1 capital requirement.
As at 30 November 2015 Affirmative’s regulatory capital position was:
