Annual information about capital adequacy and risk management within East Capital Financial Group 31 December, 2011

Transcription

1 1 (6) Annual information about capital adequacy and risk management within East Capital Financial Group 31 December, 2011 East Capital AB and the financial group The purpose of this report is to compile the information that must be disclosed pursuant to Swedish law and the regulations of Swedish Financial Supervisory Authority (SFSA) governing the disclosure of capital adequacy and risk management information (Capital Adequacy and Large Exposures Act 2006:1371 and the SFSA regulation FFFS 2007:5). The information in this report pertains to the East Capital financial group ( the Group ). East Capital AB is a Swedish Securities company which is regulated by SFSA. Regarding capital adequacy, East Capital Financial Group is responsible to report on capital adequacy for the Group. The Group comprises the following companies: All companies are fully consolidated in the group based accounting. Entity Financial Holding Company Investmen t Company Fund Managem ent Company Financial institution Ancillary services undertaking Non financial companies Cadre Invest SA Stora Vattnet Invest AB Rytu Invest AB East Capital Holding AB East Capital Asset Management AB East Capital AB East Capital International AB East Capital Alternative Investments Ltd East Capital Private Equity AB East Capital Real Estate AS East Capital (Lux) S.a.r.l. East Capital EFI AB ECPUF AB Clarefield Ltd Agro Region East Capital PCV Management AB East Capital Explorer Licensing AB SN Intressenter AB MFG Intressenter AB East Capital Advisory SA East Capital Asia Ltd. East Capital Laulasmaa AB East Capital Laulasmaa Consortium AB Laulasmaa Invest OÜ

2 2 (6) General risk strategy and risk profile East Capital is an independent asset manager specialising in Eastern European and Asian financial markets, with around SEK 31 bn in assets under management, both in public and private equity. The majority of the assets under management are in securities funds managed according to EU: s UCITS-regulation. The Group also has long term investments in these regions in its own balance sheet. The Board has decided that the overall risk strategy is to limit the risks related to the operations. When the Group provides financial products and services, risk shall be estimated and compared to expected revenue to the extent it is economically justifiable. The risk-taking shall be limited and no speculative elements shall occur in the daily operations. The Group has neither proprietary trading nor credit granting to clients. The Group is not funded by lending from customer accounts (Swe: inlåning från allmänheten or external loans. As the risks are fairly limited, the Group is allowed by the Swedish Financial Supervisory Authority (SFSA) to use the simplified method to calculate the capital requirement (alternative method). The alternative method for calculating capital requirement means that capital base shall as a minimum correspond to 25% of the fixed costs in the last annual financial statements. The Group also manage the risks in financial holdings related to the assets managed on behalf of clients and funds. The risk level in each mandates is decided by respective client or in the fund rules decided on for each fund. This means that as long as the managing companies act within decided risk level, the risks related to financial holdings are carried by respective client/unit holder and is not a risk related to the managing companies. The risk for incorrect management is however an operational risk related the management company. Among the risks to which the Group is exposed, operational risk represents the largest capital requirement. Operational risk is an integral and unavoidable part of the Group s business as it is inherent in the processes to provide services to the Group s clients. Next to operational risk, credit risk the second largest source of capital required for the Group. East Capital do not offer any credits to clients and do not have propriety trading. The Group s credit exposure is arising from long-term investments (principal investments). The reason for the relative high-risk exposure is that the main investment area is within emerging markets and that investments also involve private equity and property. These investment types can have a high volatility in market values and are normally more sensitive to rapid negative market changes and the valuation can be more complicated compared to investments in more developed markets. Regarding the portfolio management which the company (East Capital AB) performs on behalf of funds and customers, the company manages risks in financial holdings. The external limits for the agreed risk levels are set by each customer or in the fund rules applicable for each fund. Under condition that the company manages the financial holdings within these limits, the risk is carried by respective customer or shareholder and is not the risk for the management company. The risk for incorrect management is a risk for the management company. Risks and risk management Operational risks Operational risks are the risk of economic losses due weaknesses in procedures and system and human errors. The Group has established internal regulations, such as policies, instructions and other documents with the purpose of governing the operations of the Group. These documents are subject to annual review by the Board of Directors. To assess the operational risk a selfassessment approach is used. All major departments are involved in the assessment in which major risks are identified and assessed based on probability of default and estimated economic impact. The Group has procedures for incident reporting of identified weaknesses in

3 3 (6) procedures, system and human errors. The incident database is also used for assessing operational risks based on historical events. If an incident occur, incident, the need to change procedures or systems is identified in order to strengthen the internal control. The incidents are monitored and reported by the Risk function. The risk function is independent from the operations and reports to the CEO and the Board. Reports are submitted monthly to CEO and at least quarterly to the Board. A specific operational risk within portfolio management is that the management of funds is non-compliant with limits and regulations given by the customer, the law, Supervisory authorities and fund rules. The company has formal controls to ensure that the portfolios are managed in line with set investment instructions. The control has three levels. The first controls are limits in the portfolio management system which the portfolio managers have access to. The Middle office function controls that the holdings in the portfolios are compliant with investment instructions for respective portfolio. The middle office monitors the limits both pre- and post-trade. The risk- and compliance functions perform regular reviews to ensure that controls by the middle office function are performed adequately. The middle office functions reports all deficiencies on a daily basis to Head of Units, Risk- and compliance functions. Credit risks The companies within the group are not engaged in credit facilities to customers. In relation to capital adequacy the credit risks are referred to assets in the balance sheet such as holdings on bank accounts, group receivables, inventories and long term investments. The counterparty exposures are mainly related to cash on bank accounts or depositions with banks. There are limits for counterparty exposures to banks. The credits mainly consist of other exposures (mainly participations in associated companies, subsidiaries, listed companies and funds), short term investments of the excess liquidity and other receivables (mainly intra group). The credit risk is managed by the Group s Treasury function. The credit risk is divided between following exposures: Average credit exposure 2011 (SEK 000s.) Government 44,542 Institution 243,852 Corporate 127,897 Other items 540,507 Total Exposure 956,797 Credit exposure (SEK 000s.) Government 68,503 Institution 226,107 Corporate 126,073 Other items 526,924 Total Exposure 947,607

4 4 (6) The remaining duration for the majority of the exposures is less than 3 month: Region (SEK 000s.) up till 3 months 3 to 6 months 6 to 12 months over 12 months Sweden 263,989 42,249 8,833 66,152 Other Nordic countries 914-3,731 - Rest of Europe 130,466 6,784 4, ,393 Outside Europe 17, , Total 412, ,481 17, ,685 Market risks (currency and interest rate risks) The currency risk is mainly related to holdings in the group in foreign currency. The currency risks related to cash flows are usually hedged. Currency risk related to holdings is not hedged. The Group is exposed to limited interest rate since most of the assets and liabilities are very short term, normally just one or a few days. The table below shows the effect due to an interest rate shock correspond to a sudden and sustainable parallel shift by 200 basis points applied to the yield curves. Profit and loss effect, 2011 (SEK 000s.) Profit and loss effect, 2010 (SEK 000s.) Stress test An unexpected increase of 200 basis points should lead to a positive P/L effect of: An unexpected decrease of 200 basis points should lead to a negative P/L effect of: Liquidity risks In order to monitor its liquidity position and mitigate liquidity risk the Group uses daily/weekly/36-monthly cash forecasting systems which provide on-going visibility as to imminent, medium-term and long-term liquidity needs and minimise the risk of facing unforeseen liquidity requirements. There are set liquidity limits to ensure that the liquidity requirements can be met also in stressed market situations. Liquidity surplus is placed with banks or government bonds. The group has no external funding which needs to be considered. For contingency reasons, there is external credit granting facilities in place. Maturity analysis of the liabilities of the Group as at year-end 2011: (SEK 000s.) up till 3 months 3 to 6 months 6 to 12 months over 12 months Credit Institutions Other liabilities 238, ,289 Total 238, ,289 Other risks annual internal capital adequacy assessment process (ICAAP). The Board of Directors assesses annually the group s total capital need by assessing the capital need for all risks which the group is exposed to, regardless minimal requirements by the stipulated by Swedish law. In the internal capital adequacy assessment also business risks are taken into consideration.

5 5 (6) Capital adequacy analysis The capital base and the capital requirement are calculated in accordance with Swedish law and regulations (Law of Capital adequacy and large exposures (2006:1371) and the SFSA s regulations (2007:1). The financial group shall comply with legal capital requirements on creditand markets risks. The capital requirement for credit risk is between 0 to 8% of assets booked values based on the assessed risk. The capital requirement for market risks (currency risks) is 8% of the net exposures of the total net exposure in foreign currency. To cover the operational risks, the company and the financial group applies an alternative capital requirement according to Chapter 2, 9 and Chapter 9, 8 in the Law of capital adequacy, which means that the aggregated capital requirement is the largest of i) the sum of the capital requirement for creditand market risk or d ii) the capital requirement for cost risk which is 25% of the fixed costs in the annual statement for the previous year. The company shall also ensure that the general capital requirement of EUR is always met. The capital base consists of shareholders equity less intangible assets. The group has approval from the Swedish Financial Supervisory authority to use the alternative method for calculating the capital requirement. The alternative method for calculating capital requirement means that capital base shall as a minimum correspond to 25% of the fixed costs in the last annual financial statements. At December 31, 2011, the Group s capital base totalled TSEK and the total capital requirement for pillar I was TSEK 96,374 leading to a capital adequacy ratio of 5.29 (4.82 per December 31, 2010). Thus, the Group meets the requirements imposed by the capital adequacy regulations. The capital base must correspond to at least the sum of the capital requirements. The Group shall ensure to maintain the amount of internal capital that the Board of Directors consider adequate to cover all the risks to which the Group is exposed to. The Group s optimal capital level is dependent upon balancing the following: To operate above minimum regulatory capital levels, taking into consideration the Group s risk profile and the requirements from the SFSA To give a high return on capital and at the same time keep the capital in the business at strong but efficient level To meet the requirements from the SFSA, the Group s capitalization shall be risk-based, founded on an assessment of all risks inherent in the operations and forward looking, aligned with strategic and business planning. This is done in the annual internal capital adequacy assessment process.

6 6 (6) Information on capital base and capital requirement: Capital Base Dec. 31, 2011 (SEK 000s.) Amount for primary capital Amount for supplementary capital - Amounted for extended capital base - Deductible items and limit values - Total capital bass Capital Requirement Dec. 31, 2011 (SEK 000s.) Capital requirement for credit risks Capital requirement for operational risks 0 Capital requirement for market risk (foreign exchange rate risk) Capital adequacy requirements for costs risks Total minimum capital requirement Capital adequacy ratio pillar I 5.29 Capital adequacy by class of credit exposure All companies in the financial companies group apply the standardised method in computing capital adequacy for credit risk. Dec. 31, 2011 (SEK 000s.) Exposure to sovereign states and central banks 68,503 Risk-weighted amount - Capital requirement - Institutional exposure 226,107 Risk-weighted amount 45,221 Capital requirement 3,618 Corporate exposure 126,073 Risk-weighted amount 126,073 Capital requirement 10,086 Other items 526,924 Risk-weighted amount 526,924 Capital requirement 42,154 Total capital requirement, credit risks 55,858 Capital adequacy for expenditure-based risks At December 31, 2011 capital adequacy for expenditure-based risk was TSEK 96,374. Capital adequacy for currency risk At December 31, 2011 capital adequacy for currency risk was TSEK