Stifel Nicolaus Europe Limited. Pillar 3 Disclosures As at 30 September 2015

Transcription

1 Stifel Nicolaus Europe Limited Pillar 3 Disclosures As at 30 September 2015

2 Contents 1. Overview 1.1 Introduction 1.2 Basis and frequency of disclosure 1.3 Location 1.4 Verification 2. Corporate Background 3. Overview of Governance and Risk Management Framework 3.1 Governance 3.2 Risk management 4. Own Funds and Capital Requirements 4.1 Capital Adequacy 4.2 Tier 1 Capital 4.3 Tier 2 Capital 4.4 Deductions from capital 4.5 Pillar 2 and ICAAP 5. Market Risk 5.1 Position risk 5.2 Foreign currency risk 6. Credit Risk 6.1 Overview 6.2 Credit risk: capital requirement 6.3 Use of ECAIs 7. Operational Risk 8. Liquidity Risk 9. Remuneration Disclosure 10. Leverage Ratio 2

3 1. Overview 1.1. Introduction On 26 June 2013 the European Parliament and Council approved the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD). Together these comprise CRD IV, which became applicable across the European Union (EU) on 1 January 2014, and is the framework for implementing Basel III across the EU. The CRR is directly binding on all member states while the CRD required incorporation into national law by individual member states. The following disclosures for Stifel Nicolaus Europe Limited (SNEL or the Firm) are prepared in accordance with CRD IV. This sets out certain capital adequacy requirements standards and disclosure requirements to be implemented by regulated firms. CRD IV consists of three pillars: Pillar 1 Sets out the minimum capital requirements to cover risks to authorised firms business; Pillar 2 - Specifies the assessment processes used by the authorised firm and the FCA to determine additional capital which should be maintained against any risks not adequately covered under Pillar 1; and Pillar 3 - Sets out required disclosure requirements for capital, business risks and risk management framework. The aim of the Pillar 3 disclosure requirements is to facilitate market discipline by allowing market participants to assess key pieces of information on the capital, risk exposures and the risk assessment processes of authorised firms. Pillar 3 also aims to complement the minimum capital requirements described under Pillar 1 and the assessment processes under Pillar 2. 3

4 1.2. Basis and frequency of disclosure SNEL (FRN: ) is a full scope 730k IFPRU firm and is subject to the provisions of the Financial Conduct Authority s (FCA s) IFPRU handbook (Prudential sourcebook for Investment Firms). These disclosures are for SNEL on a standalone basis. Pillar 3 disclosures will be published on an annual basis. The firm will consider making more frequent disclosures under the following circumstances: Where there have been material changes to: o The scale of operations; and/or o The range of activities. Where the Board of SNEL considers that the impact of events requires disclosure in accordance with FCA requirements. The financial disclosures in this document are based on the Firm s position as at 30 September As a result of the Firm s acquisition of the business operations of Oriel Securities on 1 March 2015, the Firm s governance and risk management frameworks have undergone changes during 2015 to account for the material increase in the scale and range of the Firm s operations. Disclosures in this document about governance and risk management reflect these updated frameworks Location This report is available on the Stifel Group s website at stifel.com/institutional/stifeleurope in the Important Disclosures section Verification Pillar 3 disclosures are not required to be and have not been externally audited except where the disclosures have been included within SNEL s audited financial statements. 4

5 2. Corporate Background SNEL is a 730K IFPRU investment firm, which is authorised and regulated by the FCA. SNEL is a wholly owned subsidiary of Stifel Financial Corp,. a publicly listed company on the New York Stock Exchange under the symbol SF. Stifel Financial Corp. (SFC) is a diversified financial services holding company that conducts its business through several wholly owned subsidiaries (the Stifel Group ). Its primary broker-dealer subsidiary in the United States, Stifel, Nicolaus & Company, Inc, is a full-service brokerage and investment banking firm established in The principal activity of the Firm is to provide broking and investment banking services to corporate and institutional clients. The activity encompasses institutional fixed income sales and trading, equity trading, equity research, institutional sales and advisory services, including corporate finance and broking. The Firm focuses on European fixed income products and equities and also North American equities. The Company has its headquarters in the UK and a branch in Spain, as well as a representative office in Switzerland. On 1 June 2014, the Firm acquired the business operations of its affiliate, Keefe, Bruyette & Woods Limited (KBWL). This comprised the entire operations of KBWL as a going concern, where the activity encompasses equity research, institutional sales and corporate finance services focused on the financial services sector. These operations are conducted under the KBW brand. Keefe, Bruyette & Woods and KBW are European registered trading names of the Firm. On 1 March 2015, the Firm acquired the business operations of its affiliate, Oriel Securities Limited, a UK based stockbroking and investment banking firm. Working under the Stifel brand and with the existing Stifel businesses in London, the combined business is building a London based, full service, middle market investment bank, with the ability to offer clients both equity and debt products in the public and private markets. 5

6 3. Overview of Governance and Risk Management Framework 3.1 Governance The Firm is managed by its Board of Directors (the SNEL Board), which meets quarterly. The SNEL Board includes both UK and US members, with the US members also functioning in key positions at SFC. This relationship provides for better coordination with Stifel s US business activities and strategy. Responsibility for day-to-day operations is delegated by the SNEL Board to the European Operating Committee (the EOC), which meets monthly. The EOC comprises of the majority of the Firm s Directors and SNEL heads of department. Where deemed appropriate, the SNEL Board delegates certain responsibilities to other committees, such as the Risk Committee and European Commitment Committee and/or local senior management. 3.2 Risk management The Firm s risk management procedures are ultimately the responsibility of the SNEL Board. The Firm s Risk Committee has day-to-day responsibility for monitoring, reporting and managing the risks of the business. However, the Firm s first line of responsibility for managing day-to-day risk within the business lies with each of the Firm s staff, overseen by key senior management, including trading desk managers and department heads. The Firm s risk management is effected in a number of ways, including: Reporting to management The SNEL Board, EOC and Risk Committee each receive reports at each meeting such as financial and capital reporting, monitoring of trading limits, legal updates and compliance updates including statistics on the Firm s client base and regulatory developments. 6

7 Employee Training Subsequent to rigorous recruitment procedures, the Firm s employees receive induction training upon joining the Firm as well as annual training such as market abuse and antimoney laundering courses. Employees are expected to be familiar with the Firm s compliance handbook and staff are made aware of any major updates to the handbook. This is to reinforce the importance of every staff member being a part of the Firm s risk management and compliance culture. Staff are supported in undertaking training where necessary to maintain competence for their role at the Firm. The Firm s approach is that the responsibility for staff s training and competence is shared between individual staff and the heads of department or senior line-managers, as applicable, assisted by the central functions of Human Resources and Compliance. Monitoring The Firm conducts daily monitoring of market risk and credit risk (the majority being unsettled trades). In addition, the Compliance department and risk function undertake various monitoring and surveillance activities. Client take-on The firm s clients are subject to robust procedures, including know-your-client (KYC) and anti-money laundering (AML) checks prior to being on-boarded. The Firm conducts ongoing screening of clients after they have been on-boarded. Operations and compliance risk Operational and compliance risk assessments are conducted annually and a key risk indicator framework is being put in place to monitor risk monthly. ICAAP The Firm assesses its exposures to risks and its capital adequacy as part of its regular ICAAP updates. The Firm s regulatory capital resources and capital requirements are discussed at SNEL Board, EOC and Risk Committee meetings. Internal audit Internal Audit reports are delivered to the SNEL Board on a regular basis, as discussed further below. The Firm is responsible for its local implementation of risk management policies and to ensure there is a clear organisational structure with defined layers of responsibility 7

8 throughout the Firm. Monitoring of risk management is additionally undertaken by the Risk Committee, as well as the SFC Audit Committee. The Enterprise Risk Management (ERM) department of SFC oversees the Stifel group s risk management framework and those of its operating subsidiaries, including SNEL. The Internal Audit Department of SFC oversees internal reviews of various operating subsidiaries, including SNEL and reports directly to the Chairman of the SFC Audit Committee. The SFC Audit Committee and the SFC Board of Directors have overall responsibility for the Stifel group s system of internal controls. The Internal Audit Department reviews the effectiveness of controls and the Stifel group s overall internal control structure, and delivers Internal Audit reports to the SNEL Board. The Board is responsible for setting the group s risk appetite and has set a low appetite for exposure to risk with the aim of achieving the strategic goal of being the UK s leading middle market investment bank, whilst maintaining prudent levels of regulatory capital cover. 8

9 4. Own Funds and capital requirements 4.1 Capital Adequacy The following table presents a summary of the Firm s Own Funds and the capital requirements as of 30 September '000s Own Funds Tier 1 capital 27,128 Tier 2 Capital 7,500 Total Own Funds 34,628 Own funds requirements Market risk 2,030 Credit risk 1,635 Settlement risk 21 Operational risk 4,791 Total requirements 8,477 Surplus own funds 26,151 Risk weighted assets (RWAs) 105,963 Capital ratios (as % of RWAs) CET % Tier % Total capital 32.7% 4.2 Tier 1 Capital Tier 1 Capital is comprised of the following: '000s Common Equity Tier 1 capital (CET 1) Share capital 31,718 Other reserves 9,976 Retained earnings (11,249) CET 1 before deductions 30,445 Deductions from CET 1 Intangible assets (1,781) Deferred tax asset (1,536) Total deductions (3,317) CET 1 capital 27,128 Tier 1 capital 27,128 9

10 4.3 Tier 2 Capital Tier 2 capital consists of a perpetual subordinated loan of 7.5 million from the parent company, SFC. The loan is unsecured and has an interest rate of 6.5% per annum payable every six months. This meets all of the specific requirements of Article 63 of the CRR as eligible tier two capital and also the limits in respect of the ratio to tier one capital as set out in Article 4(71)(b) of the CRR. 4.4 Deductions from capital Deductions from capital comprise intangible assets related to business acquisitions by the Firm ( 1.781m) and a portion of the Firm s deferred tax asset which is required to be deducted in accordance with EU CRR ( 1.536m). 4.5 Pillar 2 and ICAAP As a full scope IFPRU investment firm, SNEL is required to undertake an ICAAP in order to establish the level of capital it deems sufficient to support its business activities. More specifically, the ICAAP assessment is intended to determine whether the FCA Pillar One requirements of market, credit and operational risk provide an adequate level of capital to support the Firm s business. As part of SNEL s ICAAP, the Firm has: Carried out regular assessments of the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover the nature and level of the risks to which it is or might be exposed; Identified the major sources of risk and its ability to continue to meet its liabilities as they fall due; Conducted a reverse stress test to ensure adequacy of capital resources; and Ensured that the processes, strategies and systems described in its ICAAP are both comprehensive and proportionate to the nature, scale and complexity of its activities. This process is reviewed at least annually. 10

11 5. Market Risk The below table shows the components of market risk requirements as at 30 September 2015: Market risk requirement '000s Equity PRR 1,765 Foreign currency PRR 265 Total requirement 2, Market Risk position risk Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. SNEL is subject to market risk through its principal trading activities, of which the vast majority are in long and short positions in UK traded equities and funds. The primary purpose of SNEL s principal trading activities is to enhance the Firm s service to its institutional and corporate clients. The Firm does not use derivatives but it has the necessary external and internal permissions to allow it to so for hedging purposes. Risk is mitigated by setting prudent limits on individual and aggregate gross and net overnight stock positions. Trading book limits and position risk are monitored daily. Publicly traded investments are marked to market daily and variances either reported through the profit and loss for the trading book or via other comprehensive income for available for sale non-trading book investments. The valuation of non-public investments is reviewed periodically for impairment. The Firm calculates its requirements for market risk on positions (Equity PRR) in accordance with articles and article 348 of the EU CRR. Beyond the aforementioned principal trading, the Firm has limited direct market risk in its equities and fixed income trading businesses, as it acts on behalf of clients on a matched principal or an agency basis. In the event of a default by a trading counterparty, the Firm 11

12 may be exposed to market risk if it is required to purchase or sell financial instruments in the open market to satisfy obligations to other clients or counterparties. SNEL may have exposure to market risk in connection with underwritings, where it may agree to purchase securities which have not been fully sold at the time of purchase by the underwriting group. Prior to agreeing to participate in any underwriting, the terms of the transaction and SNEL s participation are presented to the European Capital Commitment (ECC) Committee consisting of representatives of senior management of SNEL and the Stifel Group. The ECC Committee utilises various resources in analysing a potential underwriting commitment. Adequacy of capital resources to support the transaction is reviewed with a view to limiting the amount and duration of related capital exposure. Approval of a majority of participants attending an ECC Committee is required prior to proceeding with an underwriting. 5.2 Market Risk foreign currency risk Foreign currency risk is the risk that fluctuations in exchange rates will result in change in net income or cash flows in monetary assets and liabilities denominated in foreign currencies. The Firm completes activity in various currencies other than its functional currency. Foreign currency balances on the Firm s balance sheet are regularly monitored. Material FX exposures on the balance sheet may be hedged if it is deemed appropriate. Revenues earned in foreign currencies are converted periodically to GBP to reduce the extent and the length of time that the firm is exposed to FX risk. The Firm calculates the capital requirement for foreign currency risk (the FX PRR) in accordance with articles of the EU CRR. 12

13 6. Credit Risk 6.1 Overview SNEL engages in various securities underwriting, trading and brokerage activities servicing a diverse group of corporate and institutional investor clients. We have exposure to credit risk through the potential non-performance of these clients in fulfilling their contractual obligations pursuant to securities and loan transactions. In addition, we have exposure to other financial institutions for open trades, cash deposits with banks and customer accounts receivable. The main source of credit risk is counterparty credit risk, and it is monitored on a daily basis. Counterparty risk arises primarily from: Customers trading in securities with SNEL Customers trading in loan instruments with SNEL SNEL executing trades through local brokers Fees receivable from corporate and investment banking clients Cash deposited in banks Credit risk arising from trade settlement is mitigated as a result of the delivery versus payment (DVP) mechanism, whereby if a trading counterparty fails to make payment, the stock is not delivered. In such circumstances the risk is more akin to market risk, where the Firm may be required to purchase or sell financial instruments in the open market to satisfy obligations to other clients or counterparties. Credit risk arising from non-settlement is considered by the Firm to be low. The Firm seeks to mitigate credit risk through robust customer screening and selection procedures, establishing credit limits for clients where deemed appropriate, monitoring unsettled trades daily and having pro-active debtor management. The firm s clients are all professional or institutional clients and are subject to know-your-client (KYC) and anti-money laundering (AML) procedures before trading with the Firm. The Firm conducts ongoing screening of clients after they have been on-boarded. 6.2 Credit risk: capital requirement The credit risk capital component is calculated in accordance with the requirements of the EU CRR. Exposure balances are weighted using a range of appropriate risk weights from 13

14 0 % to 150%, and then multiplied by 8% to compute the Pillar 1 credit risk capital component. Exposures in relation to forward contracts for non-regular way transactions are calculated using the original exposure method as per article 275 of the EU CRR. The below table shows credit risk capital component as at 30 September 2015: Credit risk capital component Exposure class Risk weighted exposure Credit risk requirement % Capital requirement '000s '000s Public sector entities 41 8% 3 Institutions 12,966 8% 1,037 Corporates 1,234 8% 99 Equity exposures 272 8% 23 Other items 5,931 8% 474 Total 20,443 1, Use of ECAIs The Firm uses External Credit Assessment Institutions ( ECAI ) as part of its assessment of banks for the purpose of depositing its own cash resources, of the Firm s clearing firms and of certain other counterparties. Ratings from Moody s, Standard & Poor s and Fitch may be used. Many of the Firm s credit exposures are to unrated counterparties. 14

15 7. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including any resulting legal risk. To mitigate this risk SNEL has robust procedures and controls in place covering all internal departments and operational areas. Compliance with internal procedures is monitored within a risk-based Compliance Monitoring Program, which is conducted on a periodic basis throughout the year. In addition, the Internal Audit Department of SFC oversees internal reviews of various operating subsidiaries, including SNEL, and delivers Internal Audit reports to the SNEL Board. Potential sources of major operational risk include: key personnel risk; third party and outsourcing risk; trading error risk; business continuity risk; technology and technology security risk; regulatory compliance risk; reputational risk; economic/systemic risk; and litigation risk. The Firm manages these risks through appropriate controls and mitigates its potential exposure by general and financial risks insurance. As well as taking appropriate external expert advice, the Firm s support and operational functions provide expertise to manage and reduce the operational risks identified, including the Accounting, IT, Human Resources, Operations, Legal and Compliance departments. Significant operational risk events are reported to the Board so that the Board can ensure that processes are put in place to reduce both the risk of such events recurring and the related exposures arising. The firm calculates its operational risk capital requirement under Pillar 1 using the basic indicator approach as described in article 315 of the EU CRR. 8. Liquidity Risk Liquidity risk is the risk that the Firm will be unable to meet its financial commitments as they fall due. The EU CRR liquidity standards require a firm to maintain adequate liquid resources to ensure there is no significant risk that liabilities cannot be met as they fall due. To mitigate this risk the Firm maintains low levels of leverage and keeps a significant proportion of balance sheet assets in liquid cash holdings. 15

16 9. Remuneration disclosure 9.1 Classification of the Firm The following disclosures are made in accordance with the Capital Requirements Regulation (CRR), SYSC 19A: IFPRU Remuneration Code and the FCA s General Guidance on Proportionality: The IFPRU Remuneration Code (SYSC 19A). SNEL has been classified as a Tier 3 firm for the purposes of the Remuneration Code ( the Code ), as an IFPRU Investment Firm with total assets below 15bn and the disclosures below are made accordingly. 9.2 Decision making process for remuneration policy The SNEL Board of Directors is responsible for the firm s remuneration policy. The Board receives recommendations from the Executive Committee, comprising the firm s senior executive management. Prior to approval, the Board reviews and, if appropriate is able to moderate, the firm s remuneration policy. The Board is responsible for approving the firm s Code-compliant remuneration policy and for the annual review and confirmation of compensation arrangements, taking into account the long-term interests of shareholders and other stakeholders in the firm. The board consists of Executive Directors of SNEL, as well as members who serve primarily as directors of SNEL s parent company, Stifel Financial Corp. In addition, the Board maintains a watching brief, on a day to day basis and would make any necessary amendment to remuneration policy for changes in the firm s risk profile. 9.3 Role of relevant stakeholders As stated above, the Executive Committee, represented by the Chief Executive, makes recommendations to the Remuneration Committee when determining remuneration policy, and the Risk Committee would recommend to the Board and the Remuneration Committee any necessary amendment to remuneration policy for changes in the firm s risk profile. 16

17 9.4 Link between pay and performance The firm s remuneration structure comprises a market-competitive level of fixed remuneration, and a performance-related variable element. Risk adjustment is inherent within SNEL s variable remuneration policy, as payments are moderated according to the performance of the firm as a whole, and considered against the firm s capital resources. On an annual basis, an individual s performance is assessed, including self-appraisal, colleague feedback and manager appraisal. Assessment is based on all aspects of an individual s contribution to the firm including financial performance, business development and non-financial metrics (such as attitude to compliance and risk, teamwork and broader contributions to the firm). Staff are therefore exposed to the firm s overall performance and paid dependent on their individual performance. 9.5 Code Staff SNEL s Code Staff comprise senior management (including those senior management engaged in control functions) and all individuals whose professional activities have a material impact on the firm s risk profile. The following information is in respect of the business as a whole for the twelve month period to 31 December Senior management/code staff Full year to Dec 2014 '000s Aggregate remuneration 18,318 Fixed renumeration 5,843 Variable renumeration 12,475 Non cash variable renumeration 2,436 Number of beneficiaries 35 Average number of beneficiaries 35 17

18 9.6 Deferred remuneration The following table sets out the outstanding deferred remuneration in respect of code staff Full year to Dec 2014 '000s Openning deferred compensation 12,007 Awarded during the year 1,476 Paid during the year (3,677) Outstanding as at end of period 9, Higher paid employees The following table sets out the number of employees with remuneration greater than 1m. Higher paid employees 2014 EUR 1M to 1.5M 3 EUR 1.5M to 2M 4 EUR 2M to 2.5M 1 > Than 2.5M Leverage Ratio The Firm is not a credit institution and the use of leverage is not a material part of its business model. Although the Firm considers that excess leverage is not a material risk, Article 451 of the CRR requires the disclosure of the leverage ratio. Accordingly, the ratio on a transitional basis as at 30 September 2015 is 43%, which is comfortably in excess of the 3% minimum requirement that is expected to come into force in