GE Asset Management Ltd 31 December Pillar 3 Disclosures Important Notice

Transcription

1 GE Asset Management Ltd 31 December Pillar 3 Disclosures Important Notice This document has been prepared by GE Asset Management Limited ( GEAML ) to meet its annual disclosure obligations under the United Kingdom s Financial Conduct Authority ( FCA ) BIPRU 11 Pillar 3 disclosure requirements.

2 Introduction The 2006 Capital Requirements Directive ( CRD ) introduced a regulatory framework across the European Union which reflected the Basel II rules on capital measurement and capital standards. This was implemented in the United Kingdom by the Financial Service Authority, the predecessor regulator to the Financial Conduct Authority ( FCA ) through the creation of the General Prudential Sourcebook ( GENPRU ), and the Prudential Sourcebook for Banks, Building Societies and Investment Firms ( BIPRU ). The framework consists of three Pillars: Pillar 1 is based on uniform rules and is the minimum capital requirement for credit, market and operational risk. Firms are expected to operate above the minimum capital requirements set under Pillar 1; Pillar 2 refers to the Supervisory Review Process ( SREP ) where the FCA monitors the firm s Internal Capital Adequacy Assessment Process ( ICAAP ) and will express their view on whether the firm needs to hold additional capital for risks not covered under Pillar 1; Pillar 3 refers to market discipline which seeks to supplement the supervisory effort through the use of public disclosures where firms are required to publish details regarding their risk management processes, the firm s underlying risks, and capital position. The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. GEAML s annual disclosure was prepared as at 31 December 2014 in accordance with the firm s Pillar 3 disclosure policy. Frequency of Disclosure Pillar 3 disclosures are issued on an annual basis Media and Location The Pillar 3 disclosures for GEAML can be found on our website at pdf Verification The information contained in the firm s Pillar 3 disclosure has not been audited by the firm s external auditors and does not constitute any form of financial statement. BIPRU R - Risk Management Objectives and Policies GE Asset Management Inc. ( GEAM Inc. ), the parent of GEAML and collectively with GEAML ( GEAM ), places a high priority on risk management through its functional structure, governance processes, monitoring and reporting activities, and emphasis on employee 2 P a g e

3 integrity and values. As a part of GEAM s business structure, GEAML is part of a firm-wide risk management approach and framework. GEAM s comprehensive risk framework and strategy are managed using both a dedicated risk management team and cross-functional risk management processes. GEAM s risk management function is integrated throughout its operations and investment processes. GEAM s corporate governance processes address the firm s need for independent controls, segregation of functions, senior management involvement in risk management and oversight, and adoption of appropriate policies and procedures. Monitoring processes are utilised with the objective to identify and assess risks while reporting activities provide the firm s management and supervisory bodies with detailed information about the firm s risk exposure as well as mitigating actions that might be desirable. Figure 1 GEAML s Risk Management Framework overview Corporate Governance Segregation of functions Clearly defined roles and responsibilities Process maps for both trading & back office operations Risk policies Accounting policies Compliance policies Data protection policies Business continuity/disaster recovery plans Monitoring & Reporting Activities Operational risk assessment and monitoring Trading practices reviews Capital adequacy monitoring and reporting Disaster recovery testing Risk guideline monitoring and reporting Frequent communication and reviews held with senior management as well as Board of Directors BIPRU R - Scope of Application of Directive Requirements GE Asset Management Limited ( GEAML ) is a UK incorporated investment management company, headquartered in London. The firm is a wholly owned subsidiary of GE Asset Management Incorporated ( GEAM Inc. ), incorporated in the USA, and its ultimate parent undertaking is the General Electric Company. GEAM Inc. is not a Member State entity and no other EEA entities are within the same group of companies as GEAML. As such, GEAML reports on a solo basis and is not required to report on a consolidated basis. In addition, GEAML has established one branch office located in Germany ( GE Asset Management Limited Zweigniederlassung Deutschland, Munich). GEAML was formed to provide discretionary investment management services to affiliated entities as well as non-retail external clients, such as pension funds and insurance companies. The firm is authorised under MiFID to provide a number of investment services on a cross border basis to clients based in EEA countries. The German branch office conducts investment research and portfolio management services. 3 P a g e

4 GEAML is authorized and regulated in the UK by the FCA as an Investment Management Firm. The firm is categorised as a BIPRU limited licence and BIPRU 50K investment firm as the firm does not deal on its own account nor provide underwriting investment services. The firm s FCA permissions permit investment management activities as agent only on behalf of non-retail clients and the firm is not permitted to execute transactions as Principal or trade on its own account. In 2014 the firm requested and was granted a variation of permission by its regulator removing GEAML s authorization to carry out investment services that include the placing of financial instruments without a firm commitment basis. BIPRU R - Capital Resource Disclosure The capital of GEAML is classified solely as Tier 1 capital. Tier 1 capital is comprised of called up ordinary share capital and the audited profit and loss reserves. There are no other items or deductions. The firm s capital resource at 31 December 2014 was 9.3M. Table 1 GEAML Capital Resources as at 31 December 2014 Capital Resources ( 000) Permanent Share Capital 4,000 Retained Profit 5,281 Deductions from Tier 1 - Total Tier 1 Capital 9,281 Total Tier 2 Capital - Total Tier 3 Capital - Total Capital Resources 9,281 Compliance with BIPRU 3, 4, 6, 7, 10 and the overall Pillar 2 rule BIPRU 3 Standardised Credit Risk The firm has adopted the Standardised approach for the calculation of credit risk. BIPRU 3.3 also requires firms to determine the risk weight of an exposure using approved ratings from an External Credit Assessment Institution ( ECAI ). GEAML uses the lower rating of Moody s, S&P and Fitch to map exposures to their respective credit quality step. Exposures mapped under the credit quality step are used to determine the Risk Weighted Exposure ( RWE ) as prescribed in BIRPU P a g e

5 Table 2 GEAML capital requirement for credit risk, as at 31 December 2014 Standardised exposure class Credit Risk Capital Component Exposures to Institutions 854 Exposures to Collective Investment Undertaking (CIU) 96,578 Exposures to Corporates 21,793 Exposures to Prepayments 47,051 BIPRU 3 - Credit Risk Capital Component 166,276 BIPRU 13 -Counterparty Risk Capital Component - BIPRU 10 Concentration Risk Capital Component - Total Credit Risk Capital Requirement 166,276 BIPRU 4 The IRB Approach The firm has not adopted the Internal Ratings Based ( IRB ) approach to credit risk. BIPRU 6 Operational Risk GEAML is a Limited Licence Firm and is not subject to the Pillar 1 Operational Risk Requirement. BIPRU 7 Market Risk As the firm does not trade on its own account or hold equity or commodity positions, the only portion of the market risk capital requirement applicable to GEAML is the Foreign Currency Position Risk Requirement ( PRR ). GEAML s foreign currency exposure relates to its assets and liabilities that are denominated in currencies other than GBP, predominately EUR and USD exposures. Table3 Market Risk Capital Requirement, as at 31 December 2014 Market Risk Capital Resource Component Market Risk Capital Requirement Interest Rate PRR - Equity PRR - Commodity PRR - Option PRR - Foreign Currency PRR 55,491 Total Market Risk Capital Requirement 55,491 5 P a g e

6 BIPRU 10 Large Exposure Requirement GEAML is a Limited Licence Firm and is not subject to the Large Exposure Requirement. BIPRU (1)R Compliance with Overall Pillar 2 Rule The ICAAP process is designed to ensure that the firm s management body adequately identifies, measures, aggregates and monitors the firm s risks. Firms are expected to hold adequate internal capital in relation to the risks they have assessed. GEAML s approach to the ICAAP is to ensure adequate capital has been assessed in light of the risks the firm faces in the pursuit of its business objectives. While assessing the potential impact of those risks the firm will also assess the effectiveness of the controls in place to mitigate their impact. The risks identified are stress tested against various scenarios to determine the amount of additional capital the firm believes is sufficient to cover stress testing. GEAML s ICAAP process consists of the following four stages: Risk identification identifies risk on the basis of the firm s risk profile and business strategy; Capital Assessment assesses the internal capital the firm should hold which is appropriate to the nature, scale and complexity of the firm s business profile; Capital Planning assesses the firm s capital requirement against the firm s 3-year business plan and growth forecasts through the use of scenario and stress testing techniques; and ICAAP conclusion identifies the appropriate ranges of capital in view of the risks identified as well as the firm s risk profile and strategic plans. Material Risks Group Risk GEAML belongs to a larger group whose parent is GEAM Inc., incorporated in the USA. Group risk refers to those risks which a firm is exposed as a result of the firms membership to a broader group. Group risk occurs when a negative event (e.g. large losses or negative headlines) from one member of the group adversely impacts the profitability of all members of the group, or inhibits other members of the group to effectively execute the group s business strategy. Operational Risk Operational risk is defined as a firm s exposure to potential losses that may impact its profitability and capital position. Operational risk may derive from inadequate internal processes or systems, external events, inadequate employee performance of from the breaching of or non-compliance with statutory provisions, contracts and internal regulations. The firm s operational risk management process consists of a cycle of risk identification and assessment, mitigation, monitoring and control. Identification and assessment reviews all significant processes where high priority risks are assessed against existing process controls. Risks are ranked according to their severity, detection and occurrence. Risk mitigation is where identified risks are either reduced or accepted by the firm. Risks to be reduced have action plans created to mitigate their impact on the business. Controls put in place to mitigate risks are continuously monitored and reviewed. Output from these reviews is communicated to senior management so that they may ascertain the effectiveness of the firm s risk strategy. 6 P a g e

7 The firm has a comprehensive business continuity plan in place which is tested on a regular basis. GEAML s business continuity strategy seeks to minimize the consequence and impact of a business interruption due to the unavailability of systems or office space. Credit Risk Credit risk is the current or prospective risk to earnings and capital in the event that a contractual partner defaults on its contractual obligations or does not deliver in full accordance with the conditions of the contract. For GEAML, credit risk relates to its non-trading book exposures which are limited to third-party receivables from clients and exposures to institutions where we maintain deposits. Credit risk in the firm is limited. Market Risk Market risk is the current or prospective risk to earnings and capital arising from adverse movements in asset prices. Market risk also includes foreign exchange risk resulting from adverse movements in currency exchange rates. GEAML s exposure to market risk is its exposure to foreign exchange fluctuations relating to its unhedged revenue and expense positions that are denominated in currencies other than GBP (predominately EUR and USD). Market risk in the firm is limited. BIPRU R - Remuneration GEAM s compensation program is aligned with guidelines established by GE Corporate which are supported by strong corporate governance including as is applicable the GE Board of Directors Management Development and Compensation Committee ( GE MDCC ). The key principles guiding the design of GEAM s compensation program are as follows: Performance: Rewards are linked to individual performance against both qualitative and quantitative goals and objectives. Higher performance yields higher rewards. GE Beliefs: Rewards are linked to demonstrated individual behaviors aligned to the GE Beliefs. The GE Beliefs were introduced in 2015, and offer a refreshed mind-set, spirit and behaviours to help our employees work together and deliver on GE s goals and objectives. Employees are assessed as to how they exhibit and set an example relative to common behavioural anchors set across levels; Market Competitiveness: Reward opportunities are competitive with the external labor market in which GEAM competes. Internal Equity: Reward opportunities are internally equitable, subject to the individual s experience, performance and other relevant factors. Prudent Risk: Rewards (particularly in the form of incentive compensation) must not encourage excessive risk taking that is beyond GEAM s ability to effectively identify and manage risk and should consider the long term performance outcomes of those risks taken. The consistent application of these design principles enables GEAM s compensation program to be reasonable, balanced and effectively attract, retain, motivate and engage employees who strive to achieve the mission, goals and objectives of GEAM in a way that is compatible with effective risk management controls. 7 P a g e

8 GEAM provides the following components of pay to some or all employees: Base Salary: All GEAM employees receive a base salary delivered via periodic payroll installments that vary in frequency from country to country but are most commonly monthly or bi-weekly. The amount of base salary an employee receives is a function of many factors including but not limited to the size, scope and impact of their role, the market value of that role, and their own individual performance and contributions while in that role. A base salary amount is established and agreed to when an employee enters a new role and can later be adjusted through the annual salary review process. Incentive Compensation: GEAM employs multiple incentive compensation strategies to cover the wide-ranging nature of roles throughout the organization. These strategies can be summarized into three primary types of plans as follows: GE Annual Executive Incentive Plan ( AEIP ) one plan covering executives who either have broad leadership roles or significant portfolio responsibilities. The size of the GEAM incentive bonus pool in a given year is based upon overall GE financial performance against key financial goals and is designed to reward executives for sustained financial and operating performance, effective risk management and overall leadership excellence. GEAM Variable Incentive Compensation ( GEAM VIC ) plan design covering GEAM investment professionals. Eligible roles are in the Lead Professional Band and above. GE Corporate Variable Incentive Compensation ( Corporate VIC ) plan design, covering Senior Professional Band employees in non-investment management roles. Incentive compensation varies (positively and negatively) based on business results (including financial and corporate governance) as well as individual performance and therefore an employee is not entitled to participate in, or receive any particular amount under, GEAM s incentive compensation plans. Annual Incentive Plan Review Process All Incentive Compensation plans are subject to an annual review process designed to monitor the appropriateness of GEAM s incentive compensation practices. The review sessions are led by the GEAM Inc. Senior Vice President, Human Resources ( GEAM Sr. VP HR ), and the GE Corporate Finance Senior Human Resource Manager. The annual review process focuses on the stated objectives of each plan, its funding methodology, individual award calculations, and any potential risks the plan may incentivize. 8 P a g e

9 Incentive Compensation Risk is the risk that such programs may incentivize employees to expose a firm to imprudent, longer-term risks in the interest of maximizing the firm s revenue or short-term profits. When properly aligned, incentives should not reward excessive risk taking. Pursuant to GEAM s compensation program requirements, GEAM s incentive compensation arrangements will: Provide eligible GEAM employees with incentives that appropriately balance risk and reward, Be compatible with GEAM s internal control structure and enterprise-wide risk management policies and practices, Be supported by strong corporate governance, including active and effective oversight by the GEAM Senior Leadership Team, Balance financial and non-financial measures 9 P a g e