CMC Markets Pillar 3 Disclosures

Transcription

1 CMC Markets Pillar 3 Disclosures 2011

2 Table of Contents 1. Overview Scope of application Risk management objectives and policies Capital resources Tier 1 Capital Capital management Internal Capital Adequacy Assessment Process Pillar 1 and Pillar 2 Capital Requirements Market risk Operational risk Credit risk Counterparty credit risk Exposures to interest rate risk in the non-trading book Liquidity risk Remuneration disclosures Decision making process for determining remuneration policy Code Staff criteria Link between pay and performance Remuneration cost for Code Staff Frequency, location and verification of disclosure Page 2 of 19

3 1. Overview These disclosures are made in order to comply with the Financial Services Authority s (FSA) rules which implement in the UK the European Union (EU) directives that give effect to the revised capital adequacy framework, Basel II agreed by the Basel Committee on Banking Supervision in 2004 and subsequently published in comprehensive form in The purpose of these rules is to ensure that regulated firms are managing the risk of inadequate capitalisation in a transparent way to ensure the stability of the markets in which they operate. Basel II is an international initiative aimed at implementing a more risk sensitive framework for the calculation of regulatory capital and is organised around three pillars which the Basel Committee considers to be complementary: Pillar 1: minimum capital requirements; Pillar 2: supervisory review; and Pillar 3: market discipline. Pillar 3 contains requirements for firms to publish specified information on the application of Basel II, their capital resources, capital requirements, risk exposures and risk management. FSA s rules for implementing Pillar 3 as incorporated in the EU Capital Requirements Directive are contained in Chapter 11 of The Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU). Information is disclosed in accordance with these rules unless it is not applicable to CMC Markets or is considered to be proprietary or confidential information. Page 3 of 19

4 2. Scope of application The disclosures in this document are made in respect of the CMC Markets Plc Group ( CMC Markets or the Group ) which provides financial spread betting, foreign exchange and derivative trading as well as financial information and stockbroking services to retail and institutional clients. CMC Markets is a UK Consolidated Group under the BIPRU 8 Rules and subject to consolidated supervision by the FSA. The entities included in the consolidated group, all 100% controlled by CMC Markets, are shown in the CMC Markets 2011 Annual Report. There are no known current or foreseen practical or legal impediments to the prompt transfer of capital resources or repayments of liabilities between parent and subsidiary undertakings except to the extent these items are required to meet the regulatory capital requirements of subsidiary undertakings. Page 4 of 19

5 3. Risk management objectives and policies The Board has put in place a governance structure which it believes is appropriate for the operations of an online retail financial services group and reflects the size and stage of development of the business. Although not required to meet listed company corporate governance principles and practices, they are followed as far as is practical. The structure is regularly reviewed and monitored and any changes are subject to Board approval. Management regularly considers updates to the processes and procedures further to embed good corporate governance throughout CMC Markets. The current Corporate Governance Structure is illustrated below: BOARD OF DIRECTORS Group Executive Committee Audit and Risk Committee Nomination and Remuneration Committee Internal Audit Review Group Operational Risks Group Complianceand Financial Crime Group Financial (Business) Risks The Board is responsible for the management of the Group, setting strategic aims and determining policy. It is responsible for meeting the obligations to shareholders and ensuring open communication to these shareholders. It controls and guides management teams and ensure an adequate risk strategy is formulated and followed with effective systems and controls in place to identify and manage risks. The Board Audit and Risk and the Nomination and Remuneration Committees carry out duties delegated to them by the Board and set out in written terms of reference. They report directly to the Board of Directors and their responsibilities are detailed below: The Audit and Risk Committee reviews the annual report and financial statements. It also manages and reviews the external and internal audit processes and reviews the policies and processes for assessing the effectiveness of systems for internal financial controls and reporting within CMC Markets. In addition, the committee monitors the management and control of financial, operational and reputational risk management particularly market, credit, liquidity and regulatory capital risks and operational risks such as IT, business continuity, financial crime, legal and regulatory issues. The Nomination and Remuneration Committee manages the process of Board appointments, performance review and succession planning. It agrees the remuneration policy of the Directors and senior executives and its application and reviews Group wide annual salary arrangements, performancerelated reward schemes and incentive plans. Further details of the Nomination and Remuneration Committee s activities are provided in section 6 below. The corporate governance structure also includes management committees and working groups which together provide a framework to support and monitor the management of the Group. The Group Executive Page 5 of 19

6 Committee (GEC) is the senior decision taking forum, chaired by the CEO and comprising the functional heads of the business with delegated authority from the Board to manage the Group s businesses. The GEC is responsible for the delivery of Group strategy and is accountable for its execution within the business. Four working groups report to the GEC. These monitor and supervise the critical areas of financial (business) risks, operational risks, compliance and financial crime and the internal audit function. They are staffed by specialists in each field they cover which include, for example, treasury and capital issues, money laundering and client money matters. As part of the governance structure these working groups also have a direct reporting line to the Audit and Risk Committee in order to ensure that the oversight and challenge obligations of the latter can more directly be discharged. The Group Regulatory Reporting team monitors Pillar 2 requirements and reports to the GEC through the Financial (Business) Risks working group. CMC Markets has established a Group Risk Management Framework which provides an overall structure for the management of risk across the Group. The Group Risk Management Framework categorises risks to which CMC Markets is exposed and establishes a risk governance framework with detailed roles and responsibilities for risk management and the process for risk monitoring. In addition, a Group Risk Appetite Statement (RAS) has been produced to define the Group s strategic approach to risk management as a key component of the Group Risk Management Framework. It provides stakeholders with guidance on levels of acceptable risk within which the Group will operate; in order to safeguard the financial stability of the Group s and clients assets and the jobs of its employees. Within the RAS, the high-level appetite statements and key risk and performance indicators are underpinned by additional leading indicators and limit frameworks which are reviewed by the Operational Risks Group and Financial (Business) Risks Group. All breach notifications are reported to the Operations Group and escalated as appropriate to the GEC and Group Board. Additionally, material breaches will be notified as appropriate to the GEC as soon as they are identified in order to enable rapid resolution. As indicated above, risk is monitored and supervised by the working groups responsible to the GEC. The Board, through its committees as appropriate, carries the risk oversight role and the final responsibility for the management of risk. Page 6 of 19

7 4. Capital resources At the 31 March 2011, and throughout the year, CMC Markets has complied with the capital requirements set out by the FSA. The following table provides a breakdown of the capital resources and capital resource requirements at 31 March 2011: March 2011 March 2010 m m Core Tier 1 capital Deductions from Tier 1 capital (31.0) (43.9) Total Capital Resources (CR) Market risk capital requirement (MRCR) (12.6) (13.3) Operational risk capital requirement (ORCR) (25.2) (25.2) Credit risk capital requirement (CRCR) (7.0) (6.0) Counterparty risk capital requirement (CRCR) (1.5) (2.3) Total Pillar 1 Capital Resources Requirement (CRR) (46.3) (46.8) Surplus CR over CRR % CR to CRR 157% 166% 4.1 Tier 1 Capital Tier 1 Capital comprises share capital less own shares held in trust, other audited reserves and retained earnings. CMC Markets has no innovative Tier 1 instruments. A deduction is made from Tier 1 capital in respect of intangible assets, which principally comprise of capitalised software development costs, as these do not qualify as capital for regulatory purposes. 4.2 Capital management The Group s objectives for managing capital are as follows: to comply with the capital requirements set by the FSA and all other financial market regulators to which the Group is subject; to ensure that all CMC Markets Group entities are able to operate as going concerns and satisfy any minimum externally imposed capital requirements; and to ensure that the CMC Markets Group maintains a strong capital base to support the development of its business. 4.3 Internal Capital Adequacy Assessment Process The Group s Internal Capital Adequacy Assessment Process (ICAAP), prepared under the requirements of the FSA and the Capital Requirements Directive, is an on-going assessment of CMC Markets risks and risk mitigation strategies, to ensure that adequate capital is maintained against risks that the Group wishes to take to achieve its business objectives. The outcome of the ICAAP is presented as an Internal Capital Assessment (ICA) document covering CMC Markets. The ICA covers all material risks to determine the capital requirement over a three-year horizon and includes stressed scenarios to satisfy regulatory requirements. The ICA is reviewed and approved by the Board. The FSA can assess the ICA and set Individual Capital Guidance capital requirements for the Group as part of its Supervisory Review and Evaluation Process. The ICG is guidance about the amount and quality of capital resources that the FSA believe the firm should hold under the overall financial adequacy rule. Page 7 of 19

8 4.4 Pillar 1 and Pillar 2 Capital Requirements CMC Markets has adopted the standardised approach for credit risk and the basic indicator approach for operational risk. These requirements are added to the Market Risk Capital Requirement (see section 4.5) in order to calculate the Basel II Pillar 1 minimum capital requirement under the Capital Requirements Directive as set out in the FSA BIPRU rules. The Pillar 2 capital requirement represents the additional amount required to be held against risks not covered in the Pillar 1 calculations. As such, the Pillar 2 requirement is calculated by deducting the Pillar 1 capital requirement from the ICA for each risk type determined by the Group as a result of the ICAAP. Pillar 2 capital requirements are excluded from this disclosure but can be material in determining total capital requirements and any available surplus capital. They are therefore reviewed at least monthly at the CMC Markets Group Financial (Business) Risk working group meetings. 4.5 Market risk CMC Markets follows the FSA rules under BIPRU 7 for calculating its Market Risk Capital Requirement as follows: Equity PRR Standard Equity Method Interest Rate PRR Basic Interest Rate Method Commodity PRR Simplified Approach Foreign Currency PRR Standard Method The following table shows the elements that make up CMC Markets Pillar 1 Market Risk Capital Requirement: March 2011 March 2010 m m Interest Rate PRR (0.9) (0.9) Equity PRR (5.6) (6.7) Commodity PRR (1.2) (0.9) Foreign Currency PRR (4.9) (4.8) Market risk capital requirement (MRCR) (12.6) (13.3) CMC Markets monitors its Market Risk exposures on a real time basis to ensure adherence to internal trading exposure limits. CMC Markets does not use a VaR model for the calculation of its market risk capital requirement. Nor does CMC Markets have any non-trading book exposures in equities. Market risk is analysed as market price risk, interest rate risk and currency risk Market price risk This is the risk that the fair value of equity or commodity related financial instruments will fluctuate due to changes in market prices other than due to currency or interest rate risk. Market price risk arises from CMC Markets clients spread betting and trading contracts for difference (CFDs) which are based on underlying equities and indices on world stock markets, foreign currencies, commodities and interest rates and the derivative (OTC and exchange-traded) or physical positions CMC Markets takes to hedge these client positions. All derivatives used to hedge client positions are margin-traded so the profit or loss arising on the position is settled on a daily basis. The use of derivative financial instruments is governed Page 8 of 19

9 by Group policies approved by the Board, which provide written principles on their use consistent with the Group s risk management strategy. CMC Markets monitors its market price risk on these client positions against internally approved limits as defined in the Group s risk appetite and hedges these client positions based on a number of internally agreed metrics to manage its net exposure. These metrics include the size of the client position, CMC Markets view of current market conditions and the volatility and liquidity of the underlying instrument in which its clients are spread betting or trading CFDs. These positions are monitored on a global basis so all open positions held by CMC Markets clients are combined to calculate CMC Markets total net client exposure to ensure optimal hedging decisions are made. The diversity of the product range and global distribution of client base significantly reduces CMC Markets revenue sensitivity to individual asset classes and instruments. The direct result is consistent historical revenue performance throughout periods of varying market movements and volatility levels Interest rate risk This consists of cash flow interest rate risk (the risk that future cash flows of a financial instrument will vary due to changes in market interest rates) and fair value interest rate risk (the risk that the value of a financial instrument will vary due to changes in market interest rates). Interest rate risk arises from unhedged client positions where the underlying instrument is subject to cash flow or fair value interest rate risk. These positions are managed subject to internally approved limits that are set in accordance with CMC Markets risk appetite. Interest rate risk also arises from the mismatch between the repricing of financial assets and liabilities as described in Section Currency risk This is the risk that the value of assets and liabilities denominated in a foreign currency will fluctuate due to adverse movements in exchange rates. Currency risk arises from unhedged client positions in foreign currencies where the value of the underlying currency fluctuates against Sterling. These positions are managed in accordance with CMC Markets internally approved limits subject to CMC Markets risk appetite. CMC Markets residual currency risk (excluding risk on client positions denominated in foreign currencies above) relates to balance sheet translation exposure and transactional currency flows arising from earnings in foreign currencies. These risks are managed by the Financial (Business) Risk Group which regularly reviews them and makes recommendations to the Board regarding their management. Balance sheet translation exposure is actively managed to ensure negligible foreign currency net asset exposure on a group basis. Forecasted foreign currency earnings are hedged using various hedging instruments including CFDs, currency forwards and options. The percentage of these earnings hedged is determined by the Financial (Business) Risk Group based on guidelines set out in CMC Markets Global Hedging Policy. 4.6 Operational risk CMC Markets has adopted the BIPRU 6 Basic Indicator Approach to calculate the Pillar 1 capital requirements for operational risk. This produces an operational risk capital requirement equivalent to 15% of the three-year average of CMC Markets net income. Page 9 of 19

10 Operational risk is the risk of loss or negative impact to CMC Markets resulting from inadequate or failed internal process, people and systems or from external factors such as new regulation and key supplier failure. The following scenarios are considered by CMC Markets Board to be key risk themes and therefore risk mitigation measures have been put in place to reduce the risks to an acceptable level: Information leak or loss; Malicious embezzlement or account takeover; Bribery of an official by an external officer; Terrorist attack; Major loss of a staff group; and Severe damage to key IT systems.. Mitigation measures are explained below in relation to each risk theme Information leak or loss A severe loss or compromise of sensitive client or corporate information resulting from inadequate protection of information, non-adherence to policy or malicious theft could result in regulatory sanction or fine and reputational damage. CMC Markets attempts to prevent such information loss arising through robust information security system access controls, formalised role-based access and technical controls. There are a number of sudden events (such as fires and floods) that may result in the invocation of the CMC Markets Business Continuity Plan (BCP) and/or the IT recovery plans Malicious embezzlement or account takeover The controls that CMC Markets has in relation to preventing internal and external fraud or other malicious acts of embezzlement or account takeover include daily cash reconciliations, authorisation procedures and segregation of duties and restriction of access to internal systems. Insurance provision has also been made in relation to wrongful acts by employees Bribery of an official by an external officer CMC Markets endeavours to ensure compliance with the requirements of the Bribery Act 2010 through specific Bribery Act and general financial crime compulsory training and awareness programmes for all staff. CMC Markets has also put in place a number of initiatives to mitigate the associated risks including: a Gifts, Hospitality and Inducement Policy, the Group Code of Conduct, and a Third Party Due Diligence Framework Terrorist attack To ensure the impact to business as usual is kept to a minimum, CMC Markets regularly tests its Business Continuity Plan (BCP) and IT recovery plans, ensures up to date training is provided and property and business interruption insurances are in place Major loss of a staff group CMC Markets operates a policy of open, transparent and fair staff assessment and reward and endeavours to keep employees informed and engaged in its business strategy, performance, key projects and initiatives via good management communications. The Group also mitigates the risk of loss of skill and knowledge through strong succession planning, cross training and business continuity planning. Page 10 of 19

11 4.6.6 Severe damage to key IT systems The risk of sudden and severe service unavailability of CMC Markets key IT systems, primarily the core trading platforms and payment and third party banking systems, is mitigated through access controls, employing technical experts with up to date training and awareness and regularly updated antivirus and malware protection. The Group s property insurance also covers the replacement of hardware. 4.7 Credit risk Credit risk is the risk that CMC Markets clients and counterparties may fail to pay amounts owed to the Group as they become due. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of events that occurred after the initial recognition of the asset ( a loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets. Evidence of impairment could include significant evidence that the counterparty will enter bankruptcy or other financial reorganisation. If there is objective evidence that a loss event has occurred, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted at the asset s original effective interest rate. The resultant provisions are deducted from the appropriate asset values in the balance sheets. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised the provision is adjusted and the amount of the reversal recognised in the income statement. Financial assets are written off when it is reasonably certain that receivables are irrecoverable. The Group s principal financial assets are deposits and other cash balances held with banks and other financial institutions, trade and other receivables and investments. CMC Markets uses the standardised method to calculate the Pillar 1 Credit Risk Capital Component which is based on the various exposure classes of the financial assets held by the Group. The following table is an analysis by exposure class of CMC Markets credit risk exposure as at 31 March 10. * Other items include tax, plant and equipment and other receivables The following tables provide further breakdown by geographic region and counterparty type. Exposure by geographic distribution March 2011 March 2010 m m Exposure class Corporate/Private clients Institutions Other Items * Total Europe North America ANZ Asia Total March 2011 m m m m m Institutions Corporate/Private clients Other items Total Page 11 of 19

12 Europe North America ANZ Asia Total March 2010 m m m m m Institutions Corporate/Private clients Other items Total Exposure by counterparty type Banks Non-Banks Investments Other Total March 2011 m m m m m Institutions Corporate/Private clients Other items Total Banks Non-Banks Investments Other Total March 2010 m m m m m Institutions Corporate/Private clients Other items Total All exposures have a residual maturity of less than 3 months. Credit Risk is actively managed and controlled by Group Financial Risk and Group Treasury teams. Group Treasury is responsible for managing and controlling corporate credit risk. Group Financial Risk is responsible for monitoring and controlling client credit risk which results from client trading activity. Client credit risk is managed in accordance with the Group Client Credit and Liquidity Risk Management Framework Corporate Credit Risk It is CMC Markets policy to manage credit risk by only placing funds with financial institutions that meet certain short-term and long-term external credit ratings as detailed below: Rating S&P Fitch Short-term A-1 F1 Long-term A A Limits are regularly reviewed and divergence from this policy is measured with a level of risk appetite. Limits are in place to monitor exposure to individual counterparties or connected groups of counterparties. Funds deposited with various financial institutions are subject to internal concentration risk limits and these are reported regularly to the Financial (Business) Risk Group. Credit risk also arises from deposits and excess funds placed with brokers that CMC Markets uses to hedge its net client positions. The following table gives details of the exposure value of cash held on deposit and the corresponding credit quality assessment step. Page 12 of 19

13 March 2011 March 2010 m m Long-term rating AAA-AA A+ to A BBB+ to BBB Unrated* Total * a breakdown of the unrated exposures can be found in the table below. March 2011 March 2010 m m Investments - - Trade receivables Corporation tax recoverable Deferred tax assets Property, plant and equipment Other receivables Total Client credit risk CMC Markets does not offer credit facilities to clients and funds must be deposited in order to open a position. CMC Markets operates a real-time marked-to-market trading platform with client profits and losses being credited and debited automatically to their account. Credit risk occurs where a client s funds held by CMC Markets (trading margin and free equity) are insufficient to cover losses incurred by the client upon liquidation. In particular, client credit risk can arise where there are significant, sudden movements in the market i.e. due to high general market volatility or specific volatility relating to an individual underlying financial instrument. Client credit risk is therefore monitored daily with reference to the market price movement of the underlying instrument in which the client holds a position and the equity the client holds in relation to the margining requirement calculated for their position. CMC Markets also monitors potential client credit risk exposures, under various market volatility scenarios, on a daily basis. The following table breaks down the trade and other receivables. March 2011 March 2010 m m Trade and other receivables Neither past due nor impaired Past due but not impaired Impaired Gross carrying value Less: allowance for impairment (1.5) (2.4) Net carrying value Amounts due from clients are considered to be past due from the date that positions are closed. The amounts past due but not impaired are not analysed by due date as they are not considered material exposures. Page 13 of 19

14 4.8 Counterparty credit risk This arises principally from exposures arising in the trading book due to financial derivative instruments as well as unsettled non-trading book transactions and is calculated as 8% of the total risk-weighted exposure amounts. CMC Markets calculates counterparty credit risk (CCR) on client margin balances which are greater than their total equity. Although the risk is significantly reduced by the automatic liquidation on CMC Markets trading platforms which will liquidate the clients positions before they become a debtor. Counterparty credit risk is also calculated on open futures positions held with our broker and measures under the CCR Mark to Market method. 4.9 Exposures to interest rate risk in the non-trading book Exposures to interest rate risk in the non-trading book are evaluated by running a number of scenarios based on underlying business cashflows and interest rate assumptions with forecasts adjusted monthly. The Group s interest-bearing financial assets mature in the short-term, with maturities no longer than three to six months. As a result, CMC Markets is subject to limited exposure to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates. CMC Markets only long-term indebtedness relates to a three year fixed cost chattel mortgage (maturing October 2013) which is not subject to interest rate risk. Interest rate risk on liabilities is therefore limited to short-term variable rate facilities, principally its committed broker credit facility. CMC Markets therefore has a partial hedge of its interest rate risk exposure between assets and liabilities Liquidity risk Liquidity risk is the risk that CMC Markets will encounter difficulty in meeting obligations arising from its financial liabilities. CMC Markets' policy is to maintain sufficient liquidity resources to meet its financial liabilities in both normal and stressed conditions. CMC Markets ensures that liquidity risk is inherently low through the operation of its business model. CMC Markets does not offer credit to clients and requires that they collateralise trading positions in cash; CMC Markets operates to a strict client liquidation policy that eliminates material client credit risk; CMC Markets client margin policy is based on the volatility of client traded instruments and reflective of broker margin rates with whom the firm hedges client positions; CMC Markets ensures that all liquid assets are held in short term, cash equivalent, high credit quality investments or institutions and undertakes regular credit reviews of all counterparties; and CMC Markets does not engage in maturity transformation and maintains an appropriate duration for its liquid assets given the expected maturity of financial liabilities. Despite the low level of liquidity risk in normal circumstances, CMC Markets is aware of the risk of unforeseen events leading to potential liquidity difficulties. CMC Markets utilises a three year liquidity forecast to model expected cash flows arising from normal trading operations, corporate activity and funding. This forecast is updated regularly and is subject to a range of stress scenarios. These stress scenarios comprise a number of single and combined, firm specific and market-wide events representing realistic liquidity impacts based upon empirically determined or management best estimate of both financial impact and probability, in order to determine the ability of CMC Markets to continue to function effectively under stressed conditions. Page 14 of 19

15 CMC Markets Contingency Funding Plan ensures that the interaction of the liquidity forecast and stress testing leads to appropriate early warning triggers to ensure that issues are escalated to CMC Markets senior management within a suitable timeframe so that funding alternatives or commercial decisions appropriate to CMC Markets can be reviewed in a timely manner. CMC Markets is confident that its operational framework leads to a low level of natural liquidity risk. Furthermore, the firm recognises that unforeseen events have the potential to increase liquidity risk and therefore takes pro-active action to mitigate such occurrences. Page 15 of 19

16 5. Remuneration disclosures CMC Markets is required to comply with the Remuneration Code ( the Code ) requirements within the FSA s handbook of rules and guidance. These rules recognise that not all the Code s principles apply to firms equally and introduce a concept of proportionality, which applies the Code to the extent that it is appropriate to a firm s size, internal organisation (including legal structure) and the nature, scope and complexity of its activities. The FSA has defined a high level four tier proportionality framework which sets out their expectations on the level of application of the Code requirements to different types of firm. Within these tiers, CMC Markets meets the definition of the proportionality tier 3, and these disclosures reflect the requirements for such tier 3 firms. 5.1 Decision making process for determining remuneration policy The Nomination and Remuneration Committee is made up of the Group s Non-executive directors. Attendance may be invited from senior executive management and regular attendees include the CEO and the Group Head of HR. Meetings are held at least twice a year and written terms of reference as approved by the Board include: the regular review of the structure of the Board; to lead the process for making Board appointments and to ensure plans are in place for orderly succession; participation with the Board in its periodic review of the performance of Directors and to make recommendations arising from such review; consideration and periodic recommendation to the Board of the remuneration policy (including incentives linked to the Company s performance measured, amongst other things, by financial results adjusted for risks) relating to the executive Directors and other senior executive managers that it is designated to consider and ensuring that such policy attracts and retains high calibre Directors and senior executive management; and the review of Group wide annual salary arrangements, performance related pay schemes and incentive plans and to consider and make recommendations in respect of their rationale, structure and aggregate cost. The Nomination and Remuneration Committee does not retain external consultants although external consultants may be asked to provide advice on specific issues as these arise. 5.2 Code Staff criteria The FSA Remuneration Code requires CMC Markets to identify individuals whose professional activities have a material impact on its risk profile (known as Code Staff ) and the Code requirements and disclosures (applicable to tier 3 firms) apply to those individuals. The following groups of employees have been identified as meeting the FSA s criteria for Code Staff: The Directors of CMC Markets plc Members of the GEC Staff performing Significant Influence Functions Employees in any other Controlled Function Page 16 of 19

17 5.3 Link between pay and performance The Group s remuneration policy supports the Company business strategy, which is based on building longterm relationships with customers and employees and managing the financial consequences of business decisions across the entire economic cycle. All Code Staff receive a salary (executives) or fees (non-executives) that reflect their market value, responsibility, and contribution to CMC. The Company pays market competitive salaries with variable pay awards based on performance. Pay increase are based on merit. The level of the pay increase is influenced by Company affordability and market influences. Salary increases outside the annual pay review cycle are subject to a strict process of justification, control and approval. The variable pay element is differentiated by performance. Taking into account the expected value of awards, the performance related elements of pay make up a relatively small proportion of the total remuneration package for most Code Staff, whilst maintaining an appropriate balance between fixed and variable elements. The policy is to position base salaries to reflect the relevant market median and the total package is designed to enable upper quartile performance to be rewarded with upper quartile remuneration levels. Overall the policy is designed to ensure that cost effective packages are provided which attract and retain directors and senior management and employees of the highest calibre and motivate them to perform to the highest standards. At the same time, the objective is to align individual rewards with the Group s performance, the interests of its shareholders, and a prudent approach to risk management. In this way the Company balances the requirements of its various stakeholders: customers, shareholders, employees and regulators. The variable pay element includes a short term incentive plan and a long term incentive plan Short term incentive The purpose of the discretionary annual bonus is to reward for Company performance and above average individual performance over the financial year. The award is in the form of cash paid and there is currently no deferred component. There are two performance criteria: 1. The key financial performance metrics are EBITDA (Earnings before interest, taxes, depreciation and amortisation) and profit after tax at Group level. If this performance metric is not achieved, no bonus is paid out. Whilst the achievement of financial objectives is the criteria to deliver bonus to staff, the Company uses an integrated approach that includes cash, profit and capital to define the financial targets and sustainability of CMC Markets. Within the dashboard, risk metrics, both financial and non-financial are explicitly included to ensure that the bonus pool is shaped by risk considerations. 2. Individual performance is assessed against individual objectives cascaded down from the dashboard to regions and businesses dashboards in an aligned manner, thereby ensuring that return, risk and efficient capital usage shape reward considerations. The Audit and Risk Committee provides input into the dashboard, ensuring that key risk measures are included. Once the Company performance targets have been achieved at Company level, individual performance is assessed at all levels to determine the allocation of the pool. Page 17 of 19

18 CMC Markets discretionary approach allows full flexibility in aligning bonus pools to business and individual performance. HR ensures fairness and consistency of individual awards across the organisation with the GEC as the final moderator Long-term incentives Senior managers (and most code staff) are aligned with shareholders through a long-term incentive plan (LTIPs), which pays out based on performance against Group targets over a two to five year period and are delivered in the form of share options to further improve alignment with shareholders. The LTIP was put in place as a means to provide long term retention and stronger incentive through the use of equity. More specifically the purpose is to reflect the Company performance over the long-term and to reward the creation of sustained growth in shareholder value and to encourage alignment with shareholders. Participants are awarded a number of Share Options to acquire ordinary shares in CMC Markets plc, subject to the achievement of Company performance conditions. The Options are nil cost. 5.4 Remuneration cost for Code Staff For the year ending 31 March 2011 the aggregate remuneration in respect of Code Staff was as follows: Senior Management Other Total m m m Business area Key Management Customer acquisition and maintenance IT development and support Global support functions Number of employees Page 18 of 19

19 6. Frequency, location and verification of disclosure The Board of Directors does not consider that the Pillar 3 disclosures should be made any more frequently than annually unless there has been a material change in either the approaches or permissions used to calculate regulatory capital or in the nature and characteristics of the business. All figures provided in these disclosures reflect the financial position at 31 March 2011, the Group s most recent financial year end. The Pillar 3 disclosures have been reviewed by the Board of Directors of CMC Markets UK plc and are published on CMC Markets corporate website ( These disclosures are not subject to audit except where they are equivalent to those prepared under applicable accounting standards for inclusion in CMC Markets 2011 Annual Report. Should you have any queries, please contact: Nick Moss Chief Financial Officer N.Moss@cmcmarkets.com CMC Markets plc 133 Houndsditch London EC3A 7BX Company number: Page 19 of 19