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Pillar 3 Disclosure

Background

The following information is provided pursuant to the Pillar 3 disclosure rules as laid out by the Financial Conduct Authority (‘FCA’) in section 11 of its Prudential sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).

The FCA has implemented a prudential framework for investment firms that consist of three ‘pillars’:

  1. Pillar 1 sets out the minimum capital requirements.
  2. Pillar 2 is an assessment of whether additional capital is needed over and above that determined under Pillar 1; and
  3. Pillar 3 requires the investment firm to publish its objectives and policies in relation to risk management and information on its risk exposures and capital resources.

The rules provide that disclosures are not required where the information is not regarded as material to a user relying on that information for the purpose of making economic decisions or where the information is proprietary or confidential. WK Capital LLP (‘WKC’) is a BIPRU €50,000 limited licence firm and these disclosures are not subject to audit.

Risk Management

WKC’s Management Committee (the ‘MC’) is the main governing body of the business. The MC is responsible for the process of risk management, as well as forming its own opinion on the effectiveness of the process. In addition, the MC decides WKC’s risk appetite or tolerance for risk and ensures that it has implemented an effective, on-going process to identify risks, to measure its potential impact and then to ensure that such risks are actively managed. Senior management is accountable to the MC for designing, implementing and monitoring the process of risk management and implementing it into WKC’s day-to-day business activities.
 
WKC has produced a Risk Management Policy. The objective of this policy is to identify the business risks that WKC faces as a result of carrying on its business. WKC’s risk management policy identifies the probability of the risk occurring and the procedures put in place by WKC to control, eliminate or mitigate the identified risks.  The policy details WKC’s assessment of the degree of residual risk in light of its risk management controls. WKC’s risk management policy considers the following risks:

  • Organisational Risk.  Risks arising from organisation risk.
  • Business Strategy Risk.  The risk that the business plan and business development strategy do not address all strategic risks, is not approved at the appropriate level and does not allow WKC’s plans to be carried out so that its objectives can be achieved.
  • Regulatory Risk.  The risk that WKC suffers financial, reputational or litigation damage through failure to monitor, control and eliminate or substantially reduce regulatory compliance risk.
  • Client Risk.  The risk that WKC fails to meet its client performance and client service expectations leading to client defection and loss of revenue.
  • Financial Crime Risk.  The risks that arise from a failure to prevent money laundering, insider dealing or market abuse.
  • Personnel Risk.  The risk that human resource policies fail to recruit and retain competent people to enable WKC's plans to be carried out and its objectives achieved.
  • Legal Risk.  The risk that agreements and contracts are not developed or maintained properly to protect WKC and its clients.
  • Infrastructure and Systems Risk.  The risk that IT systems fail to support the transactions WKC carries out on behalf of its client.  This also encompasses IT systems failing to provide required management and accounting information.
  • Business Continuity Risk.  The risk that WKC will not be able to continue to meet its obligations to its client and counterparties due to a significant interruption in its ability to function caused by extraneous events.
  • Market Risk.  The risk that WKC’s revenue and/or operations might be damaged by adverse market conditions.
  • Operational Risk.  The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.
  • Capital Adequacy and Financial Risk.  Risks arising from WKC’s capital position, the adequacy of capital to support the level of current and anticipated business activities and the access to further capital.  Risks arising from inadequate financial controls.
  • External Environment Risk.  The risk that WKC may be negatively impacted by extraneous events or factors that are not under its control.
  • Outsourcing Risk.  The risk of failures on the part of service providers leading to failure on the part of WKC in respect of its regulatory and contractual obligations.

WKC has assessed business and operational risks and has set out appropriate actions to manage them. It has a risk framework in place to mitigate risks including operational, credit and market risks. Risk within WKC is managed by use of the following:

  • the MC regularly reviews and assesses risks that are applicable to WKC;
  • WKC has a conservative approach to risk;
  • WKC has identified its risks and recorded them in a ‘risk register’;
  • the ‘risk register’ is reviewed at meetings of the MC;
  • WKC has undertaken scenario analysis and stress tests on the most significant risks identified. This informs the MC how risks are likely to materialise and what, if any, impact there is likely to be to WKC’s financial position; and
  • WKC has in place an internal control framework to govern its processes and procedures and to mitigate any risks.

Capital Resources

Since incorporation, WKC has complied with the Capital Requirements Directive. WKC’s Pillar 1 capital resources requirement is the greater of:

  • Base capital requirement of €50,000;
  • Fixed overhead requirement; or
  • Sum of the market and credit risk requirements.

In accordance with Pillar 2, WKC has undertaken an Internal Capital Adequacy Assessment Process (‘ICAAP’) based upon the risks to which the business is exposed. This analysis concluded that additional capital above the Pillar 1 requirement is not required.
 
WKC is a BIPRU securities and futures firm without an investment firm consolidation waiver deducting material holdings under (GENPRU 2 Annex 4). Tier 1 Capital consists of capital contributions. As all profits of WKC are allocated to its members, it has no profit and loss reserves. WKC had the following regulatory capital position as at 30 April 2013:

  £000
Capital contribution 63
Profit and (loss) account and other reserves 0
Tier 2 capital after deductions 0
Total 63

For its Pillar 1 regulatory capital calculation of credit risk, under the credit risk capital component WKC has adopted the standardised approach (BIPRU 3.4) and the simplified method of calculating risk weights (BIPRU 3.5). WKC’s capital requirements in accordance with BIPRU 3 are shown below:

  £000
Fixed Assets (8% x£0) 0
Cash (1.6% x £60k) 1
Debtors (8% x £0) 0
Total 1

WKC is primarily exposed to credit risk as a result of potential non-collection of advisory and management fees. It holds all cash balances with UK banks assigned credit ratings of single A or above. Furthermore given the nature of WKC’s clients, the MC believes that the risk of past due or impaired exposures is minimal. A financial asset is past due when a client has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.
 
WKC has non-trading book potential exposure only. As at 30 April 2013 WKC had no market risk exposures.
 
WKC’s fixed overhead requirement (‘FOR’) is disclosed as a proxy for the Pillar 1 operational risk capital calculation. WKC’s Pillar 1 capital resources requirement is the FOR which is the higher of the FOR and the sum of Market Risk and Credit Risk Requirement. As at 30 April 2013 the FOR (GENPRU 2.1.53) amounts to £22,403.