Old Park Capital Limited ("OPC") is an investment firm incorporated in the United Kingdom and authorised and regulated by the Financial Conduct Authority ("FCA").
Basel II came into effect in 2008 and is a revision of the existing framework, which aims to make the framework more risk sensitive and representative of modern risk management practices. There are four main components to the new framework:
The new Basel Accord has been implemented in the European Union via the Capital Requirements Directive (CRD) governing the amount and nature of capital that must be maintained by credit institutions and investment firms. The new framework consists of three 'pillars'.
In the UK, the directive has been implemented by the FCA in its regulations through the General Prudential Sourcebook ('GENPRU') and the Prudential Sourcebook for Banks, Building Societies and Investment Firms ('BIPRU').
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). The aim of Pillar 3 is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes adopted by OPC.
The following disclosures are made in conformance with BIPRU 11. This document contains the Pillar 3 disclosures for OPC. We are permitted to omit required disclosures if we believe that the information is immaterial such that omission would be unlikely to change or influence the decision or a reader relying on that information. In addition, we may omit required disclosures where we believe that the information is regarded as proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers and counterparties.
We have made no omissions on the grounds that it is immaterial, proprietary or confidential.
Frequency of disclosure
These disclosures are based on OPC's position as of 31 May 2011. The next Pillar 3 report will be issued within four months following 31 May 2012.
Risk management procedure
OPC is governed by its directors, who determine the business strategy and risk appetite. They are also responsible for establishing and maintaining the firm's governance arrangements along with designing and implementing a risk management framework that recognises the risks that the business faces.
The directors undertake a detailed risk assessment in order to establish an accurate risk profile of OPC and to enable appropriate procedure to be implemented. Having identified the risks, the directors ensure that adequate assessment of those identified risks are carried out in order to establish appropriate procedures to manage and mitigate these risks on an ongoing basis. The directors meet both formally as the board members and informally on a regular basis as officers of the company to discuss cash flows, profitability, regulatory capital management, business review and risk management. The directors manage the firm's business and have a template risk matrix to identify risks taking account of relevant laws, standards, and principles with the aim of operating a defined and transparent risk management framework. The risk matrix is reviewed frequently and updated as required.
Part of the risk management procedure is to identify and appoint specific areas of risk within the firm to the relevant experienced individual.
The directors understand the nature of risks posed to the firm in the light of the FCA's regulatory objectives as well as the firm;s business objectives. Having identified the risks, it is important for the directors to ensure that adequate assessment of those risks identified is carried out in order to establish appropriate procedures to manage and mitigate these assessed risks. The effectiveness of implementation of such procedures should be monitored and recorded. Appropriate contingency plan for the identified risk must also be established and tested.
The procedure needs to be monitored regularly in order to verify its efficiency and effectiveness. The nature of the monitoring will depend upon the circumstances, such as the particular risk involved, the potential for the procedures not to be followed, and any warning signs that are evident. The monitoring process should set out the nature of the monitoring to be conducted and the frequency with which such monitoring is to be performed. It is important that specific monitoring tests be performed on a regular basis.
Where the monitoring process reveals failures in the procedure, it is important that the firm acts in a timely and appropriate manner to rectify the failures. Independent reviews of the procedure and its monitoring process should also take place at least annually or as frequently as required. Such independent reviews assist the directors to:
The FCA rules also require the firm to assess and monitor on a regular basis the risks it faces in order to ensure that such risks are managed effectively by the firm and to identify areas of weakness and non-compliance. Monitoring of risks must be performed on a regular basis for each area of the firm's operations, and the results must be reported directly to the directors for review to ensure prompt action to correct any deficiencies or breaches identified.
Managing Risk Events
The directors recognise that it is inevitable that a risk event might occur. The manner in which such risk event will be managed will depend upon the nature of the risk event. Where the firm has drawn up a contingency plan, this should, of course be followed. However, the firm should be prepared to assess at each stage the effectiveness of the various elements of the contingency plan and be prepared to deviate from such plan, where it is appropriate to do so.
Some of the issues likely to be considered when managing a risk event include:
Once the directors have identified the risk events that might occur it is necessary then to plan how the firm will manage these risk events if and when they do arise. Ideally all risks that have been identified should have a contingency plan. The contingency plan should:
It is important that, so far as possible, the contingency plan is also put into practice in a test scenario. It is only when the contingency plan is put into practice that any potential deficiencies in the plan become apparent. It is equally important that access to the contingency plan, and its performance, is not materially impaired by any IT systems failure.
BIPRU 11.5.2 Disclosure: Scope of application of directive requirements
OPC is incorporated in the United Kingdom and authorised and regulated by the FCA. The firm is classified as a BIPRU Limited Licence firm with base capital requirement of 50k.
OPC is not authorised to deal in investments for its own account or underwrite or place financial instruments on a firm commitment basis. OPC is not authorised to hold client money.
OPC is authorised by the FCA only to undertake Regulated Activities with or for Professional Clients and Eligible Counterparties.
OPC is not part of a consolidated group for prudential purposes.
BIPRU 11.5.3 Disclosure: Capital Resources
OPC is a private company limited by shares. The firm's capital position as at 31 May 2005 is summarised as follows:Core Tier One capital Tier One capital after deductions Upper Tier Two capital Lower Tier Two capital Total Two capital after deductions Total Tier One plus Tier Two capital after deductions Total Tier Three capital Total capital resources after deductions
OPC is a small firm with simple operating infrastructure. The firm has no market risk as it does not trade on its own account and credit risk is the firm's cash at the bank. OPC follows the simplified standardised approach to credit risk. The firm is subject to the Fixed Overhead Requirement ('FOR') and is not required to calculate an operational risk capital.
The firm is a limited licence firm and as such, its capital requirement is the greater of:
We have identified limited credit risk exposures that are less than the base capital requirement. Our FOR is greater than our base capital requirement. Therefore we always maintain a minimum capital amount of 58k.
BIPRU 11.5.4 Compliance with BIPRU 3, BIPRU 4, BIPRU 6, BIPRU 7, BIPRU 10 and the overall Pillar 2 rule
Under Pillar 2 of the CRD, OPF is required to enact an Internal Capital Adequacy Assessment Process (ICAAP). This is an on- going process. The ICAAP document is presented to the directors for formal review and then approved by the board annually. The data and assumptions used in the assessment of risk and capital adequacy are continually assessed and updated. This is formally done once a year. The capital resources are updated on a quarterly basis. However, should new risks materialise or be identified by the firm, these risks will be incorporated into the overall process.
The directors have identified that business, operational, credit and concentration risk are the main areas of risk to which the firm is exposed.
BIPRU 11.5.5 Retail exposures
OPD is not authorised to act on behalf of Retail Clients, therefore the company does not have any retail exposure.
BIPRU 11.5.6 Equity exposures
OPC does not have any equity exposures.
BIPRU 11.5.7 Counterparty credit risk exposures and BIPRU 11.5.8 credit risk and dilution risk
OPC adopts the simplified standardised approach to credit risk.
Credit risk is defined as the risk a borrower or counterparty will fail to meet its obligations.
The firm has the following exposures:
Procedures in place to mitigate the risks are:
BIPRU 11.5.9 Value adjustments and provisions
This section is not applicable.
BIPRU 11.5.10 Company's calculating risk weighted amounts in accordance with the standardised approach
OPC adopts the simplified standardised approach to credit risk. As a limited licence firm that has only incidental credit exposures, it would be costly to establish the systems needed to include the credit assessments of ECAIs and export credit agencies in our regulatory capital calculations.
BIPRU 11.5.11 Company;s risk weighted exposure amounts in accordance with internal rating based (IRB) approach
OPC does not have specialised lending exposures or equity exposures.
BIPRU 11.5.12 Market risk
OPC does not trade on its own account and therefore does not create any market risk requirements in respect of its own business.
BIPRU 11.5.13 Disclosure: Use of Value at Risk (VaR) model for calculation of market risk capital requirement
OPC does not use the VaR model for calculation of market risk, as the firm does not trade on its own account and therefore does not create any market risk.
BIPRU 11.5.14 Operational risk
Operational risk is defined as a risk or loss or damage (financial, regulatory or reputational) resulting from inadequate or failed internal process, people or systems, or from external causes (whether deliberate, accidental or natural).
OPC key risk exposures:
The directors have identified relevant risks and produced a risk matrix, listing the risks, issues and steps taken to mitigate the risks to enable the directors to monitor the ongoing operational and compliance risks. These form part of our ICAAP. Any weakness and potential failures are reported at the board meetings.
Responsibility for each of these risk categories is allocated to a risk owner, all of whom are directors or members of staff reporting to the co-CEOs or the Compliance Officer. The steps taken to mitigate the risks are: retaining Sturgeon Ventures as compliance consultants, having a comprehensive compliance manual, providing all staff with annual compliance training, AML and KYC checks performed on new clients, standardised procedures subject to independent oversight, record keeping demonstrating the performance of systems and controls, timetable of all regulatory filings, robust and timely accounting and financial review process.
BIPRU 11.5.15 Disclosure: Non-trading book exposures in equities
OPC does not have any non-trading book exposures in equities.
BIPRU 11.5.16 Disclosures: Exposures to interest rate risks in the non-trading book
OPC has no exposure to interest rate risk and does not anticipate any future risk.
The firm has no borrowings nor does it anticipate any future borrowings other than the occasional short term overdraft.
Therefore interest rate fluctuations will not materially affect the company in this respect.
BIPRU 11.5.17 Securitisation
The firm is not involved in the securitisation of assets.