1. Overview Pillar 3 Disclosure March 2014 China International Capital Corporation (UK) Limited Pillar 3 Disclosure The European Union s Capital Requirements Directive ( CRD ) came into effect on 1 January 2007 and introduced a set of regulatory capital adequacy standards and associated supervisory framework across the European Union based on the Basel II Accord. The Directive is enforced in the UK as rules and guidance by the Financial Conduct Authority ( FCA ) and the Prudential Regulatory Authority (PRA) through the General Prudential sourcebook ( GENPRU ) and the Prudential sourcebook for Banks, Building Societies and Investment Firms ( BIPRU ). The Directive s framework is underpinned by three Pillars : Pillar 1, sets out the minimum capital amount that a firm is required to hold. In the case of China International Capital Corporation (UK) Limited ( CICCUK or the firm ) this is the highest of Euro 730,000, the sum of its market, credit and operational risk requirements. Pillar 2, requires the firm to assess whether its capital is adequate to meet its risks that are not covered by Pillar 1 and is subject to review by the FCA. This procedure forms part of the firm s Internal Capital Adequacy Assessment Process ( ICAAP ). Pillar 3, requires public disclosure of qualitative and quantitative information about the underlying risk management controls and capital position of a firm. The rules in FCA Handbook BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet the firm s Pillar 3 obligations by disclosing the company s risks facing, risk management framework and its capital positions. 2. Scope, Basis and Frequency of Disclosures CICCUK is authorised and regulated for investment management activities in the UK, by the FCA following the reorganisation of the Financial Services Authority ( FSA ) into the FCA and PRA on 1 April 2013. CICCUK is a owned subsidiary of China International Capital Corporation (Hong Kong) Limited ( CICCHK ), which is a wholly owned subsidiary of China International Capital Corporation Limited. The firm is categorised as a BIPRU 730,000 full scope firm by the FCA for capital purposes. The business lines in CICCUK are the Sales and Trading business which deals in securities as agent and the Investment Banking business which involves securities underwriting with firm commitment, the services of mergers and acquisitions advisory, private and public placements for equity and debt financing etc.. CICCUK does not hold client money and does not deal with retail clients. The firm only accepts Professional Clients and Eligible Counterparties. CICCUK does not fall within the definition of a UK consolidation group and is thus not required to prepare disclosures on a consolidated basis.
This disclosure document has been prepared for CICCUK in accordance with the requirements of Pillar 3 as set out in Chapter 11 of the BIPRU. These disclosures include those required by Chapter 11 of BIPRU with regard to remuneration. The information contained in this document has not been audited by the Firm s external auditors and does not constitute any form of financial statement and must not be relied upon in making any judgement on the firm. The disclosures will be issued on an annual basis, at a minimum, and will be made available at the public area of the office reception, 25th floor 125 Old Broad Street, London EC2N 1AR. This report may be published on the website hosted by CICC group or trusted third party. 3. Risk Management Framework The Board of CICCUK has overall responsibility for the determination of the risk appetite of the firm. The Board determines the high level risk framework, monitors the operation of the control processes. The firm maintains a cautious approach to risk management and overall risk appetite is conservative. Risks are measured, controlled and limited through clearly segregated and independent functions from front office business units, supported by written policies and procedures to ensure that the risks associated are mitigated by appropriate controls and processes. These result in a low risk profile for the business to make sure activities and operations in full compliance with regulatory and legal requirements. The firm is committed to maintain sufficient capital resources to meet both Pillar 1 and Pillar 2 requirements at all times. Senior management including Chief Executive and Board of Directors meets regularly or upon requests to discuss key business issues, including current projections for profitability, cash flow, regulatory capital management, business planning and risk management. The Risk Management Department ( RMD ) is responsible for identifying, monitoring and managing the risks faced by the firm. The RMD is also responsible for the implementation of appropriate policies and credit, market and operational risk management practices to manage the firm s exposure to potential losses arising in all areas of risk. The Board has adopted the three lines of defence model which can be summarised as follows: First line of defence: The front office employees of the business units are primarily responsible for identifying and managing risks in their area. The Operations and Operating Support departments identify potential risks resulting from the front office activities, alert front office to these risks and take action to mitigate them. Second line of defence: The second line of defence is made up by control and support units such as Risk management, Compliance, Financial Control, Legal teams. The control functions including risk, compliance and finance that have segregated reporting lines with business and provide independent monitor over the business.
Third line of defence: The Board relies on the internal audit function, which is outsourced to parent company CICCHK, to provide independent assurance on the operations of CICCUK. 4. Capital Adequacy and ICAAP CICCUK adopted the Standardised Approach to credit risk, the Basic Indicator Approach ( BIA ) to operational risk and the standard Position Risk Requirement ( PRR ) rules for market risk, in order to calculate the Pillar 1 minimum capital requirement. As part of the Internal Capital Adequacy Assessment Process (ICAAP), the Board has identified a number of other risks faced by the firm which do not attract capital under the Pillar 1 rules. The firm has allocated additional capital requirement for these additional Pillar 2 risks. The total capital requirement of the Group is determined as the sum of the Pillar 1 and the Pillar 2 capital requirements. Capital Resources At 31 October 2013 and throughout the year CICCUK complied with the capital requirements that were in force as set out by the FCA. The capital resources at 31 October 2013 were as follows(gbp,000): Share Capital 21,000 Retained profits from previous years - 15,546 Interim loss (un-audited) by Oct 2013-1,236 Total tier one capital after deduction 4,218 *The firm has no tier 2 or tier 3 capitals as part of capital resources. Minimum capital requirement (Pillar 1) The approaches and references are summarised below in order to calculate the Pillar 1 minimum capital requirement: Risk area Approach Reference 730,000 or Base requirement set by FCA GENPRU 2.1.45R The sum of followings if greater than 730,000: Credit risk; and Standardised Approach BIPRU 3 Market risk; and Operational Risk Position Risk Requirement (PRR) Basic Indicator Approach (BIA) BIPRU 7.5 BIPRU 6.3
CICCUK s overall minimum capital resource requirement under Pillar 1 is calculated by adding the credit risk charge to that required for operational risk and market risk. The following table shows both the firm s overall minimum capital requirement and capital adequacy position under Pillar 1 at 31st October 2013: GBP 000 Capital Minimum capital requirement by authorisation 625 Credit risk capital requirement 293 Market risk capital requirement Foreign Exchange PRR 23 23 Operational risk capital requirement 341 Pillar 1 Total 657 Total Capital Resources 4,218 Under the Standardised approach CICCUK uses Standard and Poor s, Moody s and Fitch Ratings as External Credit Assessment Institutions (ECAIs) across all its portfolios. Credit ratings are mapped to credit quality steps using the standard table published by FCA. The risk weighted assets breakdown by exposure classes under the standardised approach is set out in the table below: Exposure Classes & Credit Quality Steps S&P Moody Ficth Central Governments and Central Banks 1 2 3 4 5 6 AAA to AA- Aaa to Aa3 AAA to AA- A+ to A- A1 to A3 A+ to A- BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- BB+ to BB- Ba1 to Ba3 BB+ to BB- B+ to B- B1 to B3 B+ to B- CCC+ and below Caa1 and below CCC+ and below Risk Weight Exposure Value GBP '000 Risk Weighted Value GBP '000 0% 51 0 20% 50% 150% Unrated Institutions 1 AAA to AA- Aaa to Aa3 AAA to AA- 2 A+ to A- A1 to A3 A+ to A- 3 BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- 4 BB+ to BB- Ba1 to Ba3 BB+ to BB- 5 B+ to B- B1 to B3 B+ to B- 6 CCC+ and below Caa1 and below CCC+ and below Unrated 20% 149 30 20% 20% 50% 50% 150% 50% 3,661 1,830 Corporates 1 2 3 4 5 6 AAA to AA- Aaa to Aa3 AAA to AA- A+ to A- A1 to A3 A+ to A- BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- BB+ to BB- Ba1 to Ba3 BB+ to BB- B+ to B- B1 to B3 B+ to B- CCC+ and below Caa1 and below CCC+ and below 20% 50% 150% 45 67 150%
Unrated 291 291 Others* Unrated 1,439 1,439 Total 5,636 3,657 *the main component in Other exposure class is fixed assets. Internal Capital Adequacy Assessment Process CICCUK undertakes an Internal Capital Adequacy Assessment Process which is an internal assessment of its capital needs. As noted above, the ICAAP process takes account of both Pillar 1 capital requirements, making use of the various approaches set out in the FCA s BIPRU rules, but also considers the amounts of capital which are required to support other risks faced by the firm (the Pillar 2 risks). The ICAAP process includes an assessment of all material risks faced by the firm and the controls in place to identify, manage and mitigate those risks. The risks identified are stressed-tested against various scenarios to determine the level of capital that needs to be held. Where capital is deemed as not being able to mitigate a particular risk, alternative management actions are identified and described within the ICAAP Report. The ICAAP report is reviewed annually by the Board for challenge and approval. The overall features of the firm s capital resources for regulatory purposes are as follows. As the total capital after deductions was 4,218,000, the firm has 3,207,000 surplus of own funds as at 31st October 2013. GBP 000 Capital Pillar 1 Total 657 Pillar 2 Total 354 ICAAP capital 1,011 Current capital resources Total(Tier 1)* 4,218 Surplus (+) / Deficit (-) of own funds + 3,207 Solvency ratio (%) 417% 5. Sources of Risks Senior management have identified the following main risks to which the firm is exposed: Credit and Settlement Risk CICCUK considers the credit risk as unexpected losses may arise as a result of the firm s counterparties or clients failing to meet their obligations. The firm is exposed to credit risk in its balance sheet activities and in its daily settlements. Credit risk is generally limited as the bank deposits and receivable from clients and counterparties. The settlement is carried out on a delivery verses payment(dvp)
basis, exposure to unsettled market and client positions is limited to the extent of market movements between trade date and settlement date. To mitigate the credit and settlement risks, the credit assessments are conducted with respect to the client s financial standing, credit records etc. The credit ratings and settlement limits are established for all clients and subject to regular reviews. The firm has also clearly defined procedures in case of settlement failure or client bankruptcy to ensure that the outstanding position can be disposed in a timely manner. CICCUK only deals with cash security and does not hold any derivative or long settlement contracts against clients. Market Risk Market risk is the risk that arises from fluctuations in values of, or income from, assets, interest, exchange rates or market prices of commodities. CICCUK does not maintain a proprietary trading desk and CICCUK s policy is not to build a trading book. CICCUK incurs market risk of a limited amount generally in relation to foreign exchange fluctuations, primarily as a result of the fee income or account receivable being denominated in foreign currencies. The firm converts the foreign currency positions to sterling pounds every month to limit the foreign currency exposure. Due to the nature of its activities, the company has very limited exposure to other market risks. Operational Risk Operational Risk is defined as the risk of direct or indirect loss resulting from people, inadequate or failed internal processes and IT systems, or from external events. The firm seeks to mitigate all operational risks to acceptable levels, in accordance with its risk appetite, by maintaining a strong control environment, ensuring that staff having appropriate skills and training, and establishing an efficient and effective management structure. The Directors consider the Firm s arrangements for monitoring, recording and mitigating operational risk to be appropriate to the size, nature and complexity of the business. The firm has also established and maintained business continuity plan which is under review and rehearsal regularly. Liquidity Risk Liquidity risk is the risk that the firm, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost. Liquidity requirements in CICCUK generally arise from operational expenditure and transaction costs which are matched against fee income from clients. CICCUK is classified as an exempt full scope BIPRU investment firm as its total net assets are less than 50m at all times. As a result, the firm is required to meet the requirements set out in BIPRU 12.3 and 12.4, but is not required to meet the full ILAS requirements and neither is it required to hold a liquid assets buffer. However, the firm maintains appropriate cash buffer for liquidity purpose and actively monitors liquidity risk against defined early warning indicators. It is not considered material given the scope and nature of CICCUK s business and its model.
Business Risk The key business risk in CICCUK is the significant reduction or mis-projection of the revenues against initial planning. The risk is managed not only by setting realistic business goals taking account of the external environment, but also by monitoring against budgets and targets on a regular basis so that appropriate remedial actions can be taken in good time. Stress testing is conducted in order to assess and evaluate the ongoing potential impact of the various key business risks. Concentration Risk Concentration risk is the risk arising from a lack of diversification in the business. The counterparties that CICCUK deals with are a varied collection of firms and fund managers and are therefore relatively diversified. In addition, as the only exposure would relate to the outstanding fees, the level of exposure will depend on the extent of trading in the previous period and when fees have been invoiced. There is therefore unlikely to be substantial credit concentrations to any individual counterparties. 6. Remuneration Code Disclosure In December 2010, the FSA issued its Policy Statement PS10/20 Revising the Remuneration Code which introduced a new SYSC 19A ( the Code ) in the FSA Handbook. The Code took effect from 1 January 2011 and sets out the FSA s requirements in respect of remuneration paid by financial institutions. CICCUK qualifies as a Tier 3 firm under the Code. The decision-making process for determining remuneration policy CICCUK s remuneration policy is formulated and applied by the CICC Compensation Working Group ( the Working Group ). The Working Group comprises one or more individuals who are senior management members of CICC to be responsible for overseeing CICC s remuneration policies across the CICC group, together with a nonexecutive director of CICCUK (who is also a director of CICC) and an executive director of CICCUK who represent the interests of CICCUK within the Working Group. These two individuals have particular experience of matters related to remuneration policies and remuneration decisions in respect of CICCUK. They ensure that any decisions in respect of the determination of Code Staff and remuneration of Code Staff are compliant with the Code and are consistent with and promote effective risk management at the level of CICCUK. The Working Group has the following responsibilities in relation to CICCUK: 1. Oversee the implementation and operation of remuneration policies across CICCUK to ensure these are implemented and operated in a way that is consistent with and promotes effective risk management and does not encourage risk taking which exceeds the stated risk appetite and framework of CICCUK. In particular, the Working Group has regard to the FSB Principles for Sound Compensation Practices, the Code and local regulations;
2. Review and approve the remuneration policy for CICCUK and review this policy at least annually; 3. Approve the population of individuals considered to be Code Staff as defined in the Code and review this population at least annually to ensure ongoing appropriateness; 4. Review and approve the remuneration proposals for senior executives, material risk takers, and other employees and directors of CICCUK (including Code Staff); 5. Review and approve any guaranteed bonuses, retention or severance payments made by CICCUK to ensure that they are in line with the CICCUK remuneration policy; 6. Review and approve the remuneration structures and performance management for senior officers working in risk and compliance functions to ensure that individuals in these roles are appropriately remunerated in line with functional objectives and in accordance with the Code; and 7. Review decisions and recommendations of senior management at CICC group level before adopting them, and seek to resolve any issues they may have in relation to those decisions and recommendations with CICC. These responsibilities involve liaising with relevant personnel in departments such as HR, risk, legal and compliance. The Working Group takes full account of the company s strategic objectives in setting remuneration policy and is mindful of its duties to CICC, as the shareholder, and other stakeholders. It seeks to preserve shareholder value by ensuring the successful retention, recruitment and motivation of employees. Link between pay and performance The determination of the CICC group s bonus pool is an iterative process conducted at group level. The Working Group determines a bonus pool based on factors including risk-adjusted firm performance, business unit performance and individual performance award recommendations. It reviews information and recommendations received from the directors of CICCUK and business heads at the CICC group level before finalising its own recommendations to the senior management of the CICC group. Ultimate responsibility for the approval and sign-off of the overall available bonus pool rests with the senior management of the CICC group. The Working Group considers the finances of CICCUK when determining discretionary bonuses to CICCUK staff. Financial performance measures are set on an annual or semi-annual basis by the business heads in conjunction with HR and the Working Group. The key financial performance indicators that were used in the year to 31 December 2013 to determine the total pay-out include: company revenue; profit margin before tax; profit margin before bonus pay; risk weighted profit; and market share.
Remuneration is also based upon the individual s contribution to the development and management of CICCUK s business. This is assessed by the persons responsible for that business at a CICC group level, who work together with the management of the local business in CICCUK and the Working Group to reach a determination. Individual performance is evaluated at business level by departmental heads based on an assessment of performance against financial and non-financial metrics. Nonfinancial criteria used in the performance evaluation process include: companyoriented behaviour; interdepartmental teamwork; performance; attitude and relations with colleagues; long-term client relationship development; business creation and development; and compliance with risk management process. The likely longer term performance of an employee and that employee s value to the business are taken into consideration, but at present future earning streams are not recognised upfront. Quantitative information CICCUK identified eight individuals who were Code Staff for all or part of the year to 31 December 2013, all of whom were categorised as senior management. The total aggregate remuneration for Code Staff in the year to 31 December 2013 was 1,183,892.19, of which 1,032,176.23 constituted fixed remuneration and 151,715.96 constituted variable remuneration. (END)