PIMCO Europe Ltd Pillar 3 Disclosure. As at 31 December 2015

Transcription

1 Pillar 3 Disclosure As at 31 December 2015

2 1. Introduction PIMCO Europe Ltd ( PEL ) is a company incorporated under the laws of England and Wales on 24 April 1991, and authorized and regulated by the Financial Conduct Authority ( the FCA ) (the regulator of the financial services industry in the UK) in the conduct of its investment business. PEL is an investment management company based in the UK that provides investment management services to institutional clients and intermediaries across the EMEA region. PEL manages investments for a wide range of clients, including public and private pension and retirement plans and other assets on behalf of investors around the world pursuant to written investment management contracts. PEL acts as advisor and asset manager to companies, central banks, educational institutions, financial advisors, foundations and endowments. The written investment management contracts entered into by PEL with its clients, may authorize it to make investments as agent on a client s behalf to purchase and sell securities and commodities and to enter into over-the-counter derivatives transactions, swap transactions, FX transactions, repurchase transactions, futures transactions, bank loan transactions and to otherwise trade in securities and derivatives transactions, including entering into forward transactions with respect to any of the foregoing for the client accounts. PEL does not undertake investment/trading activity on its own behalf. Nor does PEL hold client monies or client assets. PEL s clients independently appoint their own custodians. PEL is owned by PIMCO Global Advisors LLC, a Delaware based company, and is ultimately wholly owned by Allianz SE. PEL is not consolidated into any group for FCA prudential supervision purposes. PEL is ultimately majority-owned by Allianz SE. The Allianz Group, of which PEL is part, is among the world's largest financial services providers, offering insurance, banking and asset management products and services through property-casualty, life/health, banking and asset management business segments. Allianz is one of the largest insurance groups in the world based on gross premiums written, operates in more than 70 countries worldwide and has leading market positions in many of them. 2. Purpose of Disclosure PIMCO Europe Limited ( PEL ) is authorised and regulated by the Financial Conduct Authority ( FCA ). The FCA is responsible in the United Kingdom for the implementation of the 2006 Capital Requirements Directive of the European Union. The rules implementing the directive can be found in the FCA Handbook within the General Prudential Sourcebook ( GENPRU ) and the Prudential Sourcebook for Banks, Building Societies and investment firms ( BIPRU ). The regulatory capital framework consists of three pillars: Pillar 1: The minimum level of capital that PEL is required to carry to cover its credit, market and operational risks. Pillar 2: A process (Internal Capital Adequacy Assessment Process or ICAAP ) through which PEL determines whether it requires additional levels of capital to mitigate the specific risks it faces. The ICAAP is subject to regular review by the FCA who may direct PEL to hold additional capital at its discretion. Pillar 3: The specified disclosure that PEL is required to make of its capital, risk exposures and risk assessment process. The rules require disclosure of all material matters relevant to the levels of capital unless they are proprietary and confidential. This document seeks to address the disclosures required under Pillar 3. The purpose of the Pillar 3 is to encourage market discipline by developing a set of disclosure requirements which allow market participants to assess key pieces of information on a firm s Capital, Risk Exposure and Risk Assessment Process. The disclosures are to be made public for the benefit of the market and have been produced solely for the purpose of Pillar 3. They have not been independently verified and do not constitute in any form audited financial statements. This document is normally updated and published on an annual basis. The document will however be updated and published on a more frequent basis if there are any significant changes to the business, its scale of operations or its risk profile. pg 1

3 3. Enterprise Risk Management Framework 3.1 Corporate Governance Structure PIMCO and PEL have established a risk management framework that seeks to ensure that it has effective systems and controls to identify, monitor and manage risks faced by the firm. In addition to being a core part of the firm s ongoing operations, risk management is formalized through committees and cross-departmental business groups Board of Directors The Board of Directors is ultimately responsible for risk management at PEL. The Board meets as necessary, but at least on a quarterly cycle and receives formal reports on a range of capital and risk related matters. The Board manages PEL s risks though a framework of policies and procedures having regard to relevant laws, standards, principles and rules (including FCA principles and rules). These policies and procedures are updated as required. The roles and responsibilities of the Board are as follows: Setting PEL s risk appetite in conjunction with the firm s business strategy. Setting appropriate policies to manage risks to PEL s operations and the achievement of PEL s objectives. Seeking regular assurance that the system of internal control is effective in managing risks in the manner it has approved. Maintaining a sound system of financial control. Reviewing and approval of PEL s ICAAP (at least once per annum); pg 2

4 3.2 Delegation of Authority The PEL Board has established certain standing committees to which it has delegated specific powers, duties and decisionmaking responsibilities. The sub-committees established include a Risk Committee, a Compensation Committee and an Audit Committee. In addition, the Board has delegated responsibility and authority for the day-to-day running of the business of PEL, in line with the business strategy and risk appetite set by the PEL Board, to the Chief Executive Officer. To support the Chief Executive Officer in discharging this responsibility, the PEL Board has established the European Business Committee as the executive advisory committee for PEL PEL Risk Committee The PEL Risk Committee, comprising only non-executive directors, assists the PEL Board with the oversight of PEL s risks and risk management activity. It is responsible for the regular monitoring of the firm's risk profile in relation to the Board defined risk appetite, the monitoring of the adequacy of the firm's regulatory capital position and for reviewing the effectiveness of the firm's risk management function and framework PEL Compensation Committee The PEL Compensation Committee meets regularly to establish the firm s remuneration principles and oversee the governance of the remuneration programmes, policies and procedures PEL Audit Committee The PEL Audit Committee comprises only non-executive directors and assists the PEL Board with reviewing the performance and effectiveness of the external auditors, internal auditors and the Finance reporting function Group Control Functions There are a range of risk management functions and committees that operate across the wider Group that can provide support to the PEL Board, as required, in discharging its responsibilities. PIMCO has several oversight groups specifically involved in managing investment risks. These groups include the Investment Committee, Counterparty Risk Committee, Pricing Committee, Defaulted Securities Committee, and Best Execution Committees Three Lines of Defence Model In order to provide independent assurance of risks and controls and to avoid a conflict of interest within individual roles the firm has adopted the three lines of defense risk management operating model. 1 st Line of defence The business has day-to-day ownership and responsibility for the identification and management of risks and controls across the processes that they operate. 2 nd line of defence Risk and compliance functions are responsible for establishing and facilitating the operation of a risk and control framework across the company. These control functions advise and challenge the business around the management of their risks and monitor their compliance with key policies and regulatory requirements. 3 rd line of defence Internal audit is responsible for the independent verification of the design and operation of the controls established by the 1 st and 2 nd lines of defence. pg 3

5 3.3 Risk Management Process PEL s Enterprise Risk Management Framework is designed to enable the firm to protect the interests of its clients by managing all elements of risk on a forward looking basis. The PEL Risk Management Policy outlines the firm's risk strategy and provides the best practice requirements for the day-to-day identification, monitoring and reporting of the risks specific to the business. PEL s risk management framework depicted above is comprised of the following key elements: - Risk Governance Oversight of the firm s risks and risk management activity through: o Defining the firm s risk appetite and monitoring the firm s risk profile. o Approval of the firm s regulatory capital requirement and monitoring its capital position. o Evaluation of the key risks to the firm s strategy and the way it conducts its operations. o Establishing risk related policies and procedures. Risk Identification & Assessment Forward looking evaluation of risks through: o The periodic update of risk and control self assessments ( RCSA ). o The identification and assessment of emerging risks within the business and across the industry. o A targeted program of risk assurance assessments. Risk Measuring & Monitoring Monitoring of risk trends and the quantification of potential risk exposures through: o Recording risk events and the evaluation of trends. o Identification of and quantification of risk scenarios. o Use of Key Risk Indicators to support the monitoring of the firm s risk profile. o Monitoring the status and completion of agreed key risk mitigating actions. Risk Culture Emphasising a culture which: o Recognises the importance of setting the right tone from the top. o Stresses that risk management is the responsibility of each and every employee. o Is supported by training and awareness programmes to ensure that all employees are aware of risk issues and understand the importance of good risk management practices. pg 4

6 4. Capital Resources 4.1 Capital Requirement PEL is categorised as a Limited License firm by the FCA for capital purposes. In accordance with the relevant FCA rules and as a BIPRU Limited License firm, PEL s Pillar 1capital resource requirement is the higher of: a. Its base capital requirement of 50,000; or b. Its Fixed Overhead Requirement ("FOR"); and c. The sum of Credit and Market Risk Requirements. PEL has a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency and its foreign currency denominated bank accounts. Its credit risk arises from management and performance fees receivable from the funds under its management and its bank accounts. PEL follows the standardised approach to market risk and the simplified standard approach to credit risk. PEL is subject to a FOR and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk based capital required. It is PEL s experience that the FOR establishes its capital requirements and hence individual market risks, including foreign exchange risk, and individual credit risks are considered not to be material in accordance with BIPRU PEL s Pillar 1 capital requirement is determined by reference to the firm s FOR and is calculated in accordance with the FCA s General Prudential Sourcebook ( GENPRU ). The requirement is based on the FOR since, at all times, this exceeded both the total of PEL s credit and market risk capital requirements and the base capital requirement of 50,000. The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff and allowable commissions and fees. The firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year. This is monitored by the Head of Finance and reported to senior management on a monthly basis. 4.2 Regulatory Capital The firm is a Limited Liability company. Its capital comprises permanent share capital, retained reserves and share premium. The table below illustrates PEL s capital position as at the 31 st December It is PEL s policy to maintain regulatory capital resources above the minimum regulatory capital requirement at all times. PEL s regulatory capital requirement is calculated as the higher of the Pillar 1 plus Individual Capital Guidance ("ICG") capital requirement, the Pillar 2 capital requirement and the wind-down capital requirement. The Pillar 1 capital requirement plus ICG has been assessed as the highest of the Pillar 1 plus ICG, Pillar 2 capital requirement and the wind-down capital requirement and has therefore been determined as PEL s minimum regulatory capital requirement. Capital adequacy 000 Regulatory capital resources Share premium reserve 43,516 Retained earnings 37,134 Core tier 1 / Total tier 1 capital 80,650 Regulatory capital requirement Pillar 1 plus ICG Regulatory capital surplus 15,135 pg 5

7 4.3 Operational Risk Operational risk is defined as the risk of reduction in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events. As described within the Enterprise Risk Management section, PEL seeks to manage this risk through fostering a strong risk culture across the firm, supported by a clear risk governance structure and a risk management framework based on industry best practice. As a BIPRU Limited License firm, PEL is not required to calculate an operational risk requirement. Instead, it calculates a FOR which can be used as a proxy for the operational risk requirement. Pillar 2 stress testing has been carried out to quantify the impact of individual risks materialising at a point in time. PEL s Pillar 2 capital requirement is determined by identifying the material risks from its Top Risk Assessment which is constructed taking into account the output from across its risk management framework. These key risks identified by the firm are documented within its ICAAP. 4.4 Credit Risk Credit risk is defined as the risk that unexpected losses may arise as a result of PEL s counterparties failing to meet their obligations to pay. PEL is exposed to credit risk in the context where a client fails to pay investment management fees due and also with respect to unsecured cash placed in bank deposits. PEL s clients are predominantly large, sophisticated institutional entities where the risk of default is generally at the low end of the spectrum. The impact should a client default is mitigated by the high level of diversification across PIMCO s client base. A standard report highlighting all amounts outstanding beyond set thresholds is generated on a monthly basis for account managers and senior management. This report enables prompt and focused identification of potential credit risk situations. PEL calculates its Pillar 1 credit risk in accordance with the rules under BIPRU 3.4 Simplified method of calculating risk weights. Given its relatively low exposure to Credit Risk, PEL has adopted a more conservative approach of using the requirement under Pillar 1 as a floor to its capital requirement for Credit Risk under Pillar Market Risk Market risk is defined as the current or prospective risk to earnings or value arising from adverse movements in equity and commodity prices, interest and/or foreign exchange rates. This risk can arise from open positions in bonds, securities, currencies, commodities, or derivatives. PEL s only source of market risk is FX risk. PEL seeks to minimise FX exposure by minimising net balance of the currency of its payment obligations and the currency of its income receivables as far as possible to achieve a natural hedge. PEL does not conduct any proprietary trading activities. PEL calculates its capital exposure to Market Risk in accordance with the BIPRU rules within Pillar 1. Given its relatively low exposure to Market Risk, PEL has adopted a more conservative approach of using the requirement under Pillar 1 as a floor to its Pillar 2 Market Risk capital requirement. 4.6 Liquidity Risk Liquidity risk is defined as the risk that PEL is unable to meet its financial obligations as they fall due without adversely impacting its financial position, the normal course of its business or its reputation. It is PEL s policy to always maintain sufficient liquid funds to meet the higher of our obligations, including any contingent liabilities and off-balance sheet liabilities, as they are forecast to fall due over the next three months, or as needed in the event of an orderly wind down, whichever is the greater. The Company s liquidity is monitored through the monthly financial preparation and reporting process which includes a forward looking assessment of the liquidity position of PEL. Cash balances and compliance with the Company s Liquidity policy is reported quarterly to the Audit Committee and the Board. pg 6

8 5. Remuneration Code Disclosure 5.1 Requirement PEL is authorised and regulated by the Financial Conduct Authority as a BIRPU firm and is subject to the BIPRU Remuneration Code at SYSC19C of the FCA s Handbook (the RemCode ). Our remuneration policy is designed to ensure that we comply with the RemCode and that our compensation plans are consistent with and promote sound and effective risk management; do not encourage excessive risk taking; include measures to avoid conflicts of interest; and are in line with the firm's business strategy, objectives, values and long-term interests. Proportionality - PEL applies the RemCode on a proportionate basis in accordance with the FCA's General Guidance on Proportionality dated 1 July 2015 (the "Guidance"). In accordance with the Guidance, PEL does not consider it appropriate to apply the rules relating to (i) retained shares and other instruments (SYSC 19C R); (ii) deferral (SYSC 19C.3.49R); (iii) performance adjustment (SYSC 19C.3.51R); or (iv) ratios (SYSC 19C.3.44R) Application of the requirements We are required to disclose certain information on at least an annual basis regarding: i. Decision making processes relating to our remuneration policy; ii. The link between pay and performance; iii. Aggregate quantitative information on business area remuneration and Code Staff (see 5.3 below) i. Decision Making on Remuneration Policy The PIMCO Group Compensation Committee (PCC) governs PIMCO group wide remuneration strategy and ensures that the approaches adopted incentivize and reward strong performance, outstanding client service, effective risk management, contribution towards the firm s longer-term goals and conduct that places the needs and interests of clients first. The Board of PEL has the responsibility for implementing remuneration strategy at local level. This task is delegated to the PEL Compensation Committee, a formal sub-committee of the PEL Board. The Chair of the PEL Compensation Committee provides a formal report to the PEL Board on a quarterly basis. The remuneration policy of PEL is proposed by the PEL Compensation Committee and approved by the PEL Board. The current policy takes into account the overall PIMCO Group compensation strategy along with the requirements of the BIPRU Remuneration Code at SYSC19C of the FCA s Handbook (the RemCode ). This ensures that PEL s approach to compensation rewards strong performance and promotes a culture of compliance and effective risk management. The PEL Compensation Committee is advised by PwC in the UK on compensation regulation matters. ii. Link Between Pay and Performance Variable compensation is regarded as an important tool to create the right type of performance and risk culture at the firm. In addition to a fixed salary, all employees participate in the firm s variable compensation program with more senior employees and investment professionals receiving a higher proportion of their total compensation through a discretionary, performance-based variable payment. This payment is made annually, normally in December, and relates to the performance year from 1 October the previous year to 30 September of the current year. More senior employees may also participate in the firm s long-term incentive program (LTIP) and the firm s deferred equity program. Further details are outlined below. pg 7

9 The variable compensation pool for the firm is agreed annually based on firm wide business performance. This pool is allocated among the firm s business units including PIMCO s EMEA region (which incorporates PEL) through a collaborative process between firm management and local management which takes account of PEL s business performance. Local management is then responsible for implementing a process to evaluate the variable compensation level for each individual employee. This is based on an individual assessment of the performance of each employee by their manager and takes into consideration the following factors: Local team performance; External market comparisons for similar roles at other firms; Individual performance relative to objectives; Conduct or risk related issues that contravene the firm s polices, expectations and values. Individual compensation recommendations are reviewed by PEL s senior management, adjusted as necessary to reflect risk, compliance or conflict of interest related issues and submitted to the PEL Compensation Committee for their review. Following this, the PEL Group Compensation Committee reviews the compensation recommendations of PEL along with all other firm wide business units. Following this review, the recommendations are returned to the PEL Compensation Committee for final review and approval. More senior employees whose total compensation is above a specific threshold also participate in a mandatory long-term incentive program (LTIP). Through this program, a proportion of total compensation this will be deferred for three years. The amount paid at the end of the three years is adjusted on the performance of the firm during that period (subject to a floor and cap). It is only payable as long as the individual remains an employee. In addition, a smaller number of senior employees may be included in the firm s deferred equity program. Through this program, certain employees may be granted options to acquire equity-like instruments in PIMCO with a three to five year vesting schedule. The value of these instruments and the cash-flows from them are based on the valuation and performance of PIMCO. Overall, PEL s approach and that of the firm creates a merit-based culture of high performance that promotes effective risk management, provides a constant focus on client outcomes and discourages excessive risk taking and short-termism. 5.3 Remuneration disclosure The below tables disclose the aggregate quantitative information on remuneration, for staff whose actions have a material impact on the risk profile of the firm. Breakdown of remuneration of staff in respect of whom disclosure is required by business area (BIPRU (6) Business Area Total Remuneration Portfolio Management Staff 34,352,883 Non Portfolio Management Staff 16,613,176 Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm (BIPRU (7) Senior Management Other members of staff Total Remuneration 17,824,937 33,141,122 50,966,059 pg 8