Capital Requirements Directive Pillar 3 Disclosure. December 2015

Capital Requirements Directive Pillar 3 Disclosure December 2015

1. Background The purpose of this document is to outline the Pillar 3 disclosures for BlueBay Asset Management LLP ( BlueBay ). BlueBay is a subsidiary of BlueBay Asset Management (Services) Ltd ( Services Ltd ). Services Ltd is the parent company of seven directly and indirectly owned subsidiaries (referred to as the Group ). Services Ltd is 100% owned by the Royal Bank of Canada. BlueBay is a UK limited liability partnership which invests for clients across the fixed income spectrum, from active long-only 'benchmark aware' portfolios to hedge funds/private debt. BlueBay also blends investment styles and use a range of sophisticated tools in order to exploit all factors of return. 2. Scope of Regulation BlueBay is authorised by the Financial Conduct Authority ( FCA ) as a Full-scope UK Alternative Investment Fund Manager and is categorised by the FCA for Prudential Regulatory purposes both as a Collective Portfolio Management Investment firm ( CPMI firm ) and a BIPRU firm. The Group is subject to consolidated disclosures by the FCA. 3. Basis of Disclosure BlueBay benefits from the FCA Capital Requirements Regulation derogation allowing it to carry forward the CRD III rules as at 31 December 2013 and as such, the following disclosures are in accordance with the requirements of Chapter 11 of Building Societies and Investment Firms (BIPRU). The disclosures included in this document relate to BlueBay. The disclosures cover both the qualitative and quantitative requirements. BlueBay is required to meet the requirement of the FCA s Capital adequacy framework. This framework consists of three pillars: Pillar 1 Capital Requirement calculated according to the FCA rules for limited licence firms; Pillar 2 requires firms, and the FCA, to take a view on whether additional capital should be held against capital risks not covered by Pillar 1; and Pillar 3 requires firms to publish certain details of their capital, risks and risk management process. BIPRU 11 Disclosure (Pillar 3) requires that a firm subject to the provisions of the Directive must disclose the relevant information required under this rule unless the information is believed to be immaterial, proprietary or confidential. The disclosures in this document are made in respect of BlueBay Asset Management LLP ( BlueBay ) in accordance with the BIPRU rule, to set out the key risks facing BlueBay, how it manages those risks, and how it has satisfied itself that it has sufficient capital in respect of those risks. 1

4. Capital resources BlueBay maintains sufficient capital to meet its regulatory requirements and takes a prudent approach to the management of its capital base. The amount and type of capital resources of BlueBay, at 30 September 2015 is set out in the table below: Capital 000 Tier 1 Capital Partnership Capital 48,580 Less deductions from Tier 1 Capital Intangibles (9,254) Total Capital 39,326 As a CPMI firm, BlueBay is required to hold a liquid capital in excess of the following: (a) Capital resource requirement for internally managed Alternative Investment Funds ( AIFs ) of 125,000 plus; (b) The higher of: I. Funds under management requirement which is calculated as 0.02% of funds under management in excess of 250 million (where funds under management is calculated as the sum of all AIFs managed by BlueBay) and; II. Fixed overheads requirement which is calculated as 25% of BlueBay s annual fixed overheads plus; (c) Professional negligence capital requirement which is calculated as 0.01% of AIFs funds under management. Capital resources of BlueBay, at 30 September 2015 is set out in the table below: Capital 000 (a) Capital resource requirement plus; 92 (b) Higher of: (i) Fund under management requirement 1,134 (ii) Fixed overheads requirement plus; 22,169 (c) Professional negligence capital requirement 567 Total capital requirement as a CPMI firm 22,828 BlueBay excess over requirement 16,498 2

BlueBay s capital requirement amounts to the highest of the three components below: Pillar 1 capital requirement, which is calculated according to the FCA rules Pillar 2 capital requirement, which is based on BlueBay s own assessment of adequate capital required to mitigate key risks identified Cost of an orderly wind down, being the capital required to perform an orderly wind down of the business Pillar 1 capital requirement As a BIPRU Limited Licence 50K firm, BlueBay s Pillar 1 capital resource is determined at 30 September 2015 as being the highest of: - Base capital requirement of 50K - Fixed Overhead Requirement; and - the sum of Credit and Market Risk Requirements Risk 000 Credit Risk 9,376 Market Risk 1,642 Fixed Overhead Requirement 22,169 BlueBay s Pillar 1 capital as at 30 September 2015 is therefore determined as the Fixed Overhead Requirement of 22,169,000. As a Limited Licence firm, the Pillar 1 capital requirements for BlueBay do not include an operational risk capital component. This is considered as part of the Pillar 2 capital requirement. Pillar 2 capital requirement The Pillar 2 capital assessment consists of identifying key risks to which the company is exposed, assessing the probability of those risks occurring and quantifying the potential impacts of those risks to provide a Pillar 2 capital assessment. Risks which have an Impact score of 3 or 4 (which represents, on a scale of 1 to 4, risks with a major or severe impact to the business) were considered. The specific process involved the following: Identifying key risks per the Risk Register; Analysing the potential impact on BlueBay if a key risk were to materialise and any management action that would be taken; Determining whether the key risk could result in the erosion of BlueBay s capital base and if an amount of capital is required to cover it; and Summing up the capital required for each risk to give the Pillar 2 capital requirement; and Performing stress testing and reverse stress testing based on scenarios identified 3

The key risks facing BlueBay are set out on page 8. The following specific risk scenarios were considered as part of the ICAAP: Investment Risks: Investment Performance risk failure to deliver expected level of fund performance Breach of investment restrictions Business Risks: Regulatory, legal or tax changes and their impact on the business Failure to manage growth including the risk associated with foreign subsidiaries and branches and the implementation of an appropriate system infrastructure. Emerging Risk due to a major market event Loss of key clients Failure to maintain BlueBay s culture Reputational risk and losses arising from BlueBay s actions Operational Risks: Loss of key personnel - failure to recruit or retain key staff, the loss of a key portfolio manager and the lack of succession planning leading to a fall in AuM and a fall in fee income Breach of regulations or ethics the breach of regulations and ethical standards leading to material fines payable to the FCA, including insider trading in connection with investment activities and restrictions. Fraud/ theft major fraud and other financial crime Failure of a key third party or outsourced service provider Incorrect valuation of a fund Losses from inadequate or failed internal processes including incorrect reporting to clients, data governance and trading errors Financial Risks: Liquidity risk failure of a fund or BlueBay to meet payment obligations Loss of profitability due to FX exposure. Losses arising from insufficient insurance coverage Cost of an orderly wind-down An exercise was also performed to determine the cost of an orderly wind-down of the business. Summary The minimum regulatory capital for BlueBay is the Pillar 1 capital requirement, being higher than both the Pillar 2 capital requirement and the cost of an orderly wind-down. Stress and scenario testing were then performed to consider the effect of extreme scenarios on BlueBay s regulatory capital and in the most extreme scenario BlueBay would need to hold an additional 12.5m of capital. 4

5. Risk management framework Purpose Risk management at BlueBay is used to identify and quantify risks faced by the business, mitigate and manage such risks within the context of the overall risk appetite, and to provide ongoing monitoring of such risks for escalation as needed throughout the year. This is achieved through a strong risk governance framework, independent reporting, and robust systems and controls, which are regularly reviewed by staff responsible for risk monitoring and external reviews by independent third parties. BlueBay is engaged exclusively in asset management services, primarily as agent in managing client portfolios and does not undertake leverage on its balance sheet. As such there is generally low exposure and risk tolerance for market, credit, and liquidity risk and BlueBay has consistently maintained an excess of regulatory capital on balance sheet. The key elements of the risk framework and its summary are as follows: Risk Appetite BlueBay s risk tolerance is expressed through a risk appetite statement which defines the types and degree of risk that it is willing to accept in order to execute its business strategy. Formulated by the Board, it provides practical guidance to key stakeholders about the level of tolerance for risk in the principal risk categories BlueBay is facing. It also determines the framework of controls and oversight required to ensure risk exposures remain within acceptable levels. Risk Governance BlueBay s governance framework is designed to ensure clear accountabilities, defined authorities and an efficient flow of information. The Board The Board of BlueBay has responsibility for setting the risk management and internal control policies for BlueBay. It is responsible for reviewing the adequacy and effectiveness of the internal controls and risk management processes. In order to identify risks and potential control weaknesses the Board draws upon the Risk Register (a list of key risks identified by BlueBay) which it reviews on an annual basis. To assist in these responsibilities the Board agrees an internal audit program with RBC Internal Audit Department to review the processes and controls in place. Additionally the Board reviews the scope and nature of the external audits conducted by Deloitte and reviews findings. The Board comprises four non-executive members and four executive members, meeting at least 4 times per year. The Board fulfils this duty by means of direct intervention or by delegating appropriate responsibilities to the Management Committee. 5

Management Committee The Management Committee is responsible for the execution of the business strategy and therefore bears responsibility for ensuring effective management and oversight of the BlueBay business. It coordinates the development of business strategy and reviews overall financial performance against budget. The members of the Management Committee collectively have direct responsibility for all functions within the firm and receive regular management information reports from the various departments through regular meetings with the department heads. The Management Committee comprises the Chief Executive Officer ( CEO ), two Co-Chief Investment Officers ( CIO ), Chief Financial Officer ( CFO ), Chief Operating Officer ( COO ), Head of Human Resources and Global Head of Business Development and meets twice monthly. The following two internal committees have been established with delegated responsibilities to assist with risk management, reporting into the Management committee: Group Risk Committee The purpose of the Group Risk Committee is to set policy and provide oversight over business and operational risks, review the effectiveness of BlueBay s control environment and to enhance staff awareness of the risks and mitigating policies and procedures. The Committee comprises the Head of Risk & Performance (chair), COO, CFO, Global Head of Compliance, Head of Operational Risk, Head of Investor Relations, Director of Investment Operations and General Counsel. The Committee meets monthly. Market Risk Committee The purpose of the Market Risk Committee is to set policy relating to BlueBay s investment risk management framework and provide ongoing review and oversight of investment risk and performance. Additionally the Committee establishes risk guidelines for BlueBay products as well as providing oversight over financial risks assumed by BlueBay. The Committee comprises the Head of Risk & Performance (chair), two Co-CIOs and the Head of Investment Risk. The committee meets weekly. The cross-memberships within Management, Group Risk and Market Risk Committees encourage and enable the flow of information across the BlueBay. Taken together, these committees provide ongoing oversight over all risks faced by BlueBay. Risk & Control Monitoring Risk management is the responsibility of all staff with each department performing functions that are vital for the effective management and mitigation of risks. BlueBay manages a variety of risks including investment (incorporating credit, liquidity, market and counterparty risk), financial, operational and business risks. BlueBay relies on three layers of controls, oversight and assurance, the three lines of defence model, for risk management. The business lines have responsibility to operate within an effective control environment; the risk and control functions set the framework for effective risk 6

management and provide oversight and monitoring; and independent (internal and external) auditors provide assurance over the effectiveness of risk management, controls and governance. Imbedded as the first line of defence are the processes and procedures implemented in each department which are overseen by Business Managers. These vary depending on the specific function and include reviews, approval sign-offs, maintenance of registers and enforcement of the BlueBay s policies. BlueBay s Risk and Performance Department forms part of the second line of defence and is tasked with the independent monitoring of all risk categories, with a dual reporting line into the Chief Executive Officer and the Chief Operating Officer. Operational risk is managed and mitigated by means of an embedded risk governance framework, giving clearly defined reporting lines, suitably trained and qualified staff and a comprehensive structure of internal controls with appropriate monitoring and oversight. The process followed is to identify, assess, mitigate, monitor and report these risks. Also, as part of the second line of defence, the Compliance Department undertakes a risk-based monitoring programme to determine whether controls are operating effectively and legal and regulatory requirements have been complied with. Monitoring activities are determined by a riskbased plan depending on the assessment of the regulatory risk in each area. The Compliance Department also has responsibility for the ongoing monitoring of portfolio holdings to ensure compliance with investment guidelines. Additionally, departments such as Legal, Finance and Operations also provide independent review and challenge as part of their day-to-day operations. Each department completes a quarterly positive assurance report on the key controls in place, assessing whether they have worked effectively during the period. On an annual basis a formal review is undertaken of the risks facing the business and the controls that mitigate those risks. These risks and controls are assessed and scored giving a rated risk register which is reviewed by the Board. Breaches and errors are escalated to Risk and Compliance and recorded in the breaches and errors register. Issues are brought to the attention of the Risk Department for inclusion in the Risk Register and advised to the relevant committees and if necessary the Board. Independent Monitoring & Verification Independent verification of systems and controls is provided by Internal and External Audit. Internal Audit services are provided by RBC Group Internal Audit, who rep ort their findings to the BlueBay Board and to the RBC Audit Committee responsible for subsidiary entities. The Internal Audit programme involves an annual audit of departments within BlueBay, with all departments audited at least every three years. The frequency of review is determined by a risk assessment carried out by RBC Group Internal Audit. The Internal Audit program helps the Management Committee ensure that adequate systems of internal control are in place and it provides assurance to the Board and the RBC Audit Committee that the risks identified by BlueBay are being properly managed. BlueBay also uses specialist firms in its overseas offices to provide internal audit reviews that ensure compliance with local regulatory requirements. These firms include Tokyo Consulting (Japan), KPMG (Luxembourg), ACA/Optima (US) and Deacons (Hong Kong). 7

External audit services are provided by Deloitte, who are the reporting accountant for the annual report and accounts and for the ISAE 3402 Assurance report on controls at a service organisation ( ISAE 3402 ). Deloitte reports in the ISAE 3402 on the design of control procedures and the achievement of specified control objectives. They also report on the effectiveness of the control procedures which were tested. Deloitte also reviews BlueBay s systems and controls associated with preparation of its financial statements, on which clients may rely to assess BlueBay s financial strength, in its role as the external auditor. Issues identified in audit reviews are agreed with the responsible manager and resolved within a given time frame. The Group Risk Committee monitors the status of open issues and ensures timely completion. For periods commencing after 31 October 2015, external audit services will be provided by PwC as prescribed by RBC s change in auditors. Key Risks The main risks faced by BlueBay are: Investment Risks Investment performance risk, which is the risk that funds fail to deliver the expected level of performance. This may result in client redemptions and a reduction in fees earned. This is one of the principal risks faced by BlueBay, and therefore considerable resources are devoted to the mitigation of this risk. All funds operate under clear mandates governed by detailed guidelines covering market, counterparty and liquidity risk monitored by the Risk and Performance department and reviewed by the Market Risk Committee. Pre-trade and post-trade checks monitor compliance with investment restrictions. All funds are valued daily by an internal Pricing Group, which enhances transparency of risk positions. Weekly performance reports serve to highlight any issues with fund performance to senior management, and regular performance attribution analyses provide insight into the drivers of profits and losses. Fund liquidity risk is the risk that a fund may be unable to meet redemption obligations. This could come about as a result of large client redemptions during a period of challenging market conditions. Mitigations against this include portfolio level liquidity guidelines and monitoring, including warning triggers. Additionally BlueBay has developed and scenario tested a crisis management plan for this specific event. Business Risks Business strategy risk is the risk that management will pursue inappropriate strategies or fail to implement the strategy ineffectively. This includes the strategies around new products, new infrastructure and the sustaining of the firm s culture and control environment during periods of growth. Clearly defined accountability, reporting lines, committee structures and governance allow the Board and Management Committee to receive appropriate management information on which to base their strategies and monitor implementation. Whilst BlueBay engages in new initiatives that carry the risk of failure the financial loss associated with such initiatives is typically limited to the set up costs from new fund launches. Bluebay restricts itself to new business strategies within its core area of expertise. 8

Regulatory risk is the risk that the BlueBay s profitability may be negatively impacted by regulatory changes. BlueBay accepts the demands of this risk and maintains an open and constructive dialogue with the FCA as well as other regulatory agencies to gain insight into potential regulatory developments. Emerging risk covers risks that are currently remote and poorly understood but likely to grow greatly in significance. BlueBay accepts that it is exposed to changing industry trends and potential dislocations of the markets it is operating in. BlueBay relies on the knowledge and experience of its Directors and senior managers to manage these risks. Reputational risk is likely to arise as a result of a failure to manage other risks in line with the stated risk appetite. This is one of the principal risks for an asset management business, and BlueBay recognises that effective risk management and strong internal controls are central to the business model. Operational Risks Risk of loss from inadequate or failed internal processes including errors, breaches and NAV misstatements.. BlueBay seeks to avoid risks from operational processes and technology through the continued development of a robust infrastructure and adherence to documented processes and controls. The effectiveness of internal controls is reviewed by internal and external audit. Keyman risk. The loss of a member of the Management Committee or a key investment or distribution professional could have a material adverse impact on retention and revenues. BlueBay seeks to minimise the risk of losing key employees and partners through competitive remuneration packages and maintaining an attractive working environment. In order to minimise the impact of people risk BlueBay maintains a succession plan and promotes shared responsibilities for key functions. Breach of regulatory or ethical standards. BlueBay manages this risk through a rigorous programme of training and monitoring. There are a number of key policies in place covering market abuse, conflicts of interest, anti-bribery etc. and all staff are required to complete training on these. The Compliance department then conducts a risk based monitoring programme against these policies to ensure that they are adhered to. Fraud or the risk of loss from financial crime. BlueBay seeks to minimise the opportunity for fraud and financial crime through rigorous enforcement of segregation of duties and due process. In addition, the Group promotes staff awareness through regular training with regards to relevant policies and regulations. Outsourcing risk, which is the risk of loss or reputational damage as a result of service failure on the part of an outsourced service provider. Whilst BlueBay does outsource certain key processes, it actively seeks to avoid outsourcing risk through a rigorous selection process of service providers, ongoing due diligence and the application of exit and recovery plans in the instance of failure, including the ability to replicate certain processes in house. Cyber Crime. This is an increasingly challenging area due to the rapid changes in technology and sophistication of cyber criminals. BlueBay manages this risk with a structured Information Security policy and procedures. This includes standard builds for infrastructure systems, security software and a regular patching programme. BlueBay also has contracted with a Managed Security Service Provider to provide 24/7 security event monitoring. 9

Loss of key clients. This risk can materialise following periods of poor investment performance or failures to maintain the quality of client relationships. BlueBay manages this through robust risk and compliance controls around investment management, dedicated client relationship managers, flexible client reporting and monitoring of clients at risk. Financial Risks Liquidity risk, which is the risk that the Group may be unable to meet its payment obligations as they fall due. Liquidity risk is mitigated by the fact that the Group has no debt, maintains cash levels in excess of regulatory capital requirements and its main cost items are discretionary compensation linked to the profitability of the funds it is managing. Counterparty credit risk, which is primarily the risk of a potential loss of cash reserves due to bank failure. To mitigate this risk, BlueBay has diversified its banking relationships across highly rated systemically important banks. It may also invest in UK Government securities. Market risk, which is primarily the risk that the value of fees generated from foreign currency fund products, may decline in sterling terms due to fluctuations in the exchange rate (see foreign exchange risk below). Senior management monitor BlueBay s exposure to foreign exchange risk on a regular basis and may take appropriate measures in accordance with RBC group policies to manage this risk. 6. Ongoing review The Pillar 3 disclosures will be reviewed in conjunction with the ICAAP report. The Board has granted the Chief Financial Officer and Executive member of the Board, Nick Williams, responsibility for the approval of the Pillar 3 disclosures and ICAAP Report. The Report and disclosures will be formally presented to the Board and reviewed as part of the business planning cycle on a semi-annual basis, unless the Board is made aware of a major event before then requiring a complete review of BlueBay s risks and capital position. BlueBay intends to publicise updates to its Pillar 3 disclosures on its corporate website on an annual basis in conjunction with the publication of its Annual Report. BlueBay has not and is not required to have its Pillar 3 disclosures audited by the external auditors. 7. Remuneration Remuneration disclosures for BlueBay can be found on the firm s website. http://www.bluebay.com/en/corporate-governance/ 10