Indication Investments Ltd

Transcription

1 Pillar III CAPITAL REQUIREMENTS DISCLOSURES OF INDICATION INVESTMENTS LIMITED as at December 31, 2012 Under DIRECTIVE DІ of the CySEC

2 Table of Contents 1 INTRODUCTION The purpose of this document Policy statement Background STRUCTURE Board of Directors Risk Management Committee Management Internal Audit Risk measurement and reporting systems Risk mitigation Excessive risk concentration RISK MANAGEMENT Policies and objectives CAPITAL MANAGEMENT Regulatory Capital Internal Capital Adequacy Assessment Process (ICAAP) Credit & Counterparty Risk Market Risk Liquidity risk Foreign Exchange risk Operational Risk Reputation Risk Business Risk Regulatory Risk Legal and Compliance Risk IT Risk...14

3 1 INTRODUCTION 1.1 The purpose of this document This report has been prepared in accordance with the requirements of the Directive DI of 2011 ( Directive ) of the Cyprus Securities and Exchange Commission ( CySEC ) for the Capital Requirements of Investment F irms. The Directive implements the European Union s Capital Requirements Directive ( CRD ). While it is recommended to read this document in conjunction with audited financial statements of Indication Investments Limited (the Company ) for the period ended 31 December 2012, which contain supplementary information relating to the requirements of the above mentioned Directive, the Disclosures are prepared as a stand-alone document with the view to explain how the Company manages risks, under the requirements of the CySEC and how much capital is assigned to these risks for their management. 1.2 Policy statement The Company's Board of Directors has decided that it is not necessary to publish some or all of the Disclosures more frequently than annually. The Disclosures will be published only on the Company's website. 1.3 Background The Company was incorporated on 26 July 2011 and is a Cypriot Investment Firm licensed by CySEC (license number 164/12). The Company principal activity is to provide to its clients, both retail and professional, brokerage services on Forex and CFDs. Clients get access to state of the art platforms and advanced tools to effectively evaluate their trading strategies and place their trades with the highest levels of security and execution. In addition the Company offers free tutorials, news, analysis, risk management techniques and professional trading tools.

4 2 STRUCTURE The Risk Management function is carried out in respect of financial risks (credit, market and liquidity risks), operational risks and legal risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimize operational and legal risks. 2.1 Board of Directors The Board of Directors has a supervisory function and is responsible for the overall risk management approach. The Board of Directors authorizes the Company s risk management guidelines and policies, approves the annual investment strategy and overseas the overall risk management performance. The Board is also responsible for approval and submission of all the legal and regulatory reports to authorities. 2.2 Risk Management Committee The Risk Management Committee is formed with the view to ensure the efficient monitoring of the risks inherent in the provision of the investment services, as well as the risks underlying the operation of the Company, in general. The Risk Management Committee consists of a Managing Director, General Director and a Risk Manager and reports directly to the Senior Management. The Risk Management Committee is responsible for monitoring the adequacy and effectiveness of risk management policies and procedures that are in place, the level of compliance by the Company and its relevant persons with the policies and procedures adopted, as well as the adequacy and effectiveness of measures taken to address any deficiencies with respect with those policies and procedures that are in place, including failures by the Company s relevant persons to comply with those policies and procedures. 2.3 Management Management is responsible for managing the Company s assets and liabilities and the overall financial structure. It is also primarily responsible for the operations, funding and liquidity risks of the Company. The heads of Departments present to the Risk Management Committee actions taken in the direction of implementing the latest decisions of the Committee, in respect of their respective departments of responsibility.

5 2.4 Internal Audit Risk management processes throughout the Company are audited annually and on ad hoc basis by the internal audit function, which examines whether the procedures in place are adequate and whether there is compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Board of Directors. 2.5 Risk measurement and reporting systems The Company s risks are measured based on limits of potential maximum exposure, regulatory requirements and the expected loss likely to arise in normal circumstances taking into account the limited scope of operations. Monitoring and controlling risks is primarily performed the Risk Manager. 2.6 Risk mitigation The Company, as part of its overall risk management, uses various tools to manage exposures in credit risks, liquidity risks and exposure to change in foreign currencies rates, as stated further in the report. 2.7 Excessive risk concentration Concentration of risks arises when counterparties are engaged in similar business activities and/or operate in the same geographic region, or the activities that have similar economic features result in their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. The Company s activities are mainly exposed to the financial sector. To minimize this risk the Company implicates the policy of counterparty diversification. Identified concentrations of credit risks are also controlled and managed accordingly while monitoring potentially large exposures.

6 3 RISK MANAGEMENT 3.1 Policies and objectives It is essential and fundamental for the Company s business to ensure a good risk and capital management function, which is an essential element of Company s operations. The Company has, as one of its major goals, the achievement of growth without losing sight of the related risks. The Company constantly improves the stability of its operations by identifying and reacting to strategic, operational and other type of risks on time. We consider the maintaining of adequate capital levels as a key factor helping to counter the potential risks. One of the Company's objectives when managing capital is to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. The Company has a regulatory obligation to monitor and implement policies and procedures for capital risk management. Specifically, the Company is required to test its capital against regulatory requirements and has to maintain a minimum level of capital. An additional requirement is for the Company to report on its capital adequacy and it is necessary to maintain a constant minimum capital adequacy ratio which is set at 8%. The capital adequacy ratio expresses the capital base of the company as a proportion of the total risk weighted assets. Management monitors the reporting and has policies and procedures to meet the specific regulatory requirements. Preparation of financial statements on monthly basis assists the Company to monitor and assess the financial and capital position of the Company. Company s risk management and control system addresses the following key risks: - Credit and counterparty credit risk - Market risk - Operational risk The risk management policies and procedures of the Company are devised to ascertain and analyze the above risks, to recommend suitable risk limitations and to monitor the degree and frequency of such risks. The purpose of Risk Management is to operate independently of risk taking functions and is designated to monitoring the following: - the adequacy and effectiveness of the Company s risk management policies and procedures - the level of compliance by the Company and its relevant persons with the arrangements, processes and mechanisms adopted - the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons of the Company to comply with such arrangements, processes and mechanisms or follow such

7 policies and procedures The management of risks is an important part of everyday business and management practice. It is the responsibility of all management to: - Identify potential business risks - Assess these risks - Create awareness of these risks - Correctly respond to and manage these risks - Proactively balance risk, reward and controls - Monitor the risks - Report annually on these risks and the risk profile The Risk Management Committee shall present the findings to the Board of Directors.

8 4 CAPITAL MANAGEMENT 4.1 Regulatory Capital The Company regulatory capital base consists of Original Own Funds (Tier 1 Capital), which includes share capital, share premium and profit and loss reserve. Intangible assets (such as computer software) are deducted when deriving the Company s Capital Base. As at 31 December 2012 the Company did not have any securities, subordinate loans and cumulative preferential shares that could be considered Additional Own Funds (Tier 2 Capital). The Company s capital base as at 31 December 2012 is presented in the table below: Original Own Funds Paid-up capital 3,000 Share premium 1,828,000 Accumulated losses from the current period (614,987) Original Own Funds 1,216,013 Less: Intangible assets (65,746) Capital base 1,150,267 As at 31 December 2012 the Company s share capital comprised of 3,000 shares, which were issued at a premium. All shares rank equally and carry one vote. Although the legal requirements for minimum capital adequacy ratio of CIF s are 8%, the Company was maintaining considerably higher level of capital at %. 4.2 Internal Capital Adequacy Assessment Process (ICAAP) The ICAAP Manual is an integral part of the management process and decision-making procedures of the Company and is kept in the Company s premises. The ICAAP report is a document that explains how the Company has implemented and embedded the process within its business. The Risk Management department, in cooperation with the Accounting department, is responsible for the preparation of the ICAAP document, whilst Senior Management has the overall responsibility of approving the ICAAP document and submitting it to the CySEC. The process followed for the preparation of the ICAAP document consists of the following steps: Identifying risks and assessing the management of those risks. Documenting the techniques used for the quantification of the risks identified. Calculating the amount of capital required for each type of risk identified.

9 Determining the need for additional capital buffers to ensure the Company has enough capital over a cycle. Through the ICAAP exercise it was ascertained that the Company has adequate capital to be able to cover both its Pillar 1 and Pillar 2 risks. Upon the approval of the ICAAP report by the Board of Directors, the Company proceeds with adjustment of its Capital adequacy calculations for Pillar 1 so as to apply the Company s latest financial projections included in the report. 4.3 Credit & Counterparty Risk Definition: Credit Risk is the risk that counterparty may potentially fail to meet its obligations when they become due. The Company is exposed to Credit Risk arising from the probability that counterparty will be unable to make payments in full when these are due. The Company identifies and monitors Counterparty Credit Risk and Concentration Risk as part of Credit Risk. In calculating the minimum capital requirement, risk weights are assigned to exposures, after the consideration of various mitigating factors, according to the exposure class to which they belong. For exposures with institutions, the risk weight also depends on the term of the exposure (more favorable risk weights apply where the exposure is under three months). The categories of exposures the Company is exposed to with regards to credit risk are receivables from brokers and clients, deposits with banks and other assets. By asset class they are classified as claims to institutions, clams to corporate entities, short term claims and other. The Company has policies in place to ensure that services are provided to customers with an appropriate credit history and monitors on a continuous basis the ageing profile of its receivables. The customers and the counterparty limits are calculated, set, reviewed and updated by the Company regularly and as applicable. Record is maintained of the customer and counterparty risks and limits identified. Cash balances are held with high credit quality financial institutions and the Company has policies to limit the amount of credit exposure to any financial institution. Asset Class Value of Exposures before Credit Risk Mitigation Provisions/ Impairments Average Value of Exposures /risk weighted Institutions 1,111, ,262 Corporates 59,807-59,807

10 Short term claims Other 66,977-66,977 Overdue claims Total Exposures 1,238, ,046 The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk as at 31 December 2012 was: Trade and other receivables 3,609 Cash at bank 280,131 Total 283,740 It should be noted that the Company held cash and assets on behalf of its clients only in the third party, which the potential clients signed for in recognition of acceptance of the risks associated with them. As for the exposure to the particular country and financial institution the following information shows the situation as of December 31, 2012: Country Institution Rating (Moody s) Amount Cyprus (EU) Bank of Cyprus (ex Cyprus Popular Bank Co Ltd) Caa3 276,021 Russian Federation Promsvyazbank Ba2 3,780 Latvia (EU) JSC "Rietumu Banka" N/A 330 USA INTL FC Stone N/A 831, Market Risk Definition: Market Risk is defined as the risk of financial loss as a result of changes in market factors which reduce the Market Value ("MV") of the trading portfolio of financial instruments and foreign currencies. The Company's Market Risk arises from open positions in currency, price and interest rate risk. The Company's Market Risk department manages these risks, as well as liquidity risk. The main sources of foreign exchange risk for the Company are certain bank and broker accounts balances in foreign currencies and exposures in foreign currencies from fees receivables. For the period ended 31 December 2012 the Company did not bear substantial market risk, apart from foreign exchange risk and liquidity risk.

11 4.4.1 Liquidity risk One of the main sources of liquidity risk is the maturity mismatch between assets and liabilities. The Company considers liquidity risk to be a material risk since it can affect the Company s position as a going concern. Monitoring of liquidity risk is an integral part of the day-to-day risk management. Specifically, in order for the Company to achieve its objective of minimizing liquidity risk, the Risk Management Committee ensures that: - acceptable maximum risk assumption limits are defined - further break down of the risk limits is performed, where applicable - stop loss control limits are implemented - open positions within approved limits are followed up Furthermore the management ensures that sufficient cash deposits are maintained and weekly reconciliation of balances are performed. The maturity analysis of financial liabilities as at 31 December 2012 is presented in the table below: 31 December 2012 On demand Carrying amounts Contractual cash flows and less than 1 month From 1 to 12 months Trade and other payables 84,387 84,387-84,387 Between 1-5 years More than 5 years 84,387 84,387-84, Foreign Exchange risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Company s functional currency. The Company is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the USD. At 31 December 2012, the Company had total net assets in US$ of 1,092,772 which comprised of cash at bank and with broker, and receivables. The following table demonstrates the sensitivity to reasonably possible changes in the USD/Euro exchange rate, with all other variables held constant, of the Company s loss before tax. There is no direct impact on Company s equity. Effect on loss before tax Increase/decrease in rate USD/EUR exchange rate +10% 99,343

12 -10% (99,343) The Company s management monitors the exchange rate fluctuations on a continuous basis and acts accordingly. The Company takes all reasonable steps to ensure that its capital requirements with regards to foreign exchange risk are not excessive so that they can cause the Company to be in any financial impediment. The total capital requirement for market risk (relates to the risk arising from foreign exchange positions) is 86, Operational Risk Definition: Operational Risk is defined as the risk of direct and indirect loss resulting from inadequate or failed processes, people and systems from external events. The following types of risk are included in the operational risk: Reputation risk Business risk Regulatory risk Legal and compliance risk IT risk Physical or environmental risk The Company manages operational risk through a control-based environment in which processes are documented and transactions are reconciled and monitored. The CEO of the Company is responsible for the management of the operational risk. The Disaster Recovery Plan is elaborated, describing the situations of the situations of technical, physical and environmental risks and risk of some external events. The Company s policy with regards to the management of operational risk is aiming at promoting and developing the risk conscious approach among the employees where operational risk is identified and monitored through reporting of operational risks; the staff is involved in monitoring and upgrading the Company s systems. Existing policies addressing the issues of business continuity, backups and information safety, personnel replacement are aiming at the considerable decrease of operational risks.

13 As the Company is new on the market, the assumptions for potential profitability is expected in year 3 (2015) of operations. The capital requirement for operational risk as at 31 December 2012 is 80,000. So, the total capital requirements for 2012 under Pillar I (in thousand ) are: Risk Category Pillar 1 Capital Requirement Credit and Counterparty Credit Risk 28 Market Risk 87 Operational Risk 80 Total Capital Requirements Reputation Risk Reputation risk is the current or prospective risk to earnings and capital arising from an adverse perception of the image of the Company on the part of customers, counterparties, shareholders, investors or regulators. Reputation risk could be triggered by poor performance, the loss of one or more of the Company s key directors, the loss of large clients, poor customer service, fraud or theft, customer claims and legal action, regulatory fines. The Company has policies and procedures in place when dealing with possible customer complaints in order to ensure the best possible assistance and service under the circumstances. The Company does its best to provide services of high quality while doing transactions or safekeeping instruments belonging to clients. As a result, the possibility of having to deal with customer claims is very low. Also, the Company s Directors are made up of high level professionals who are recognized in the industry for their integrity and ethos; this adds value to the Company Business Risk Business risk includes the current or prospective risk to Company s performance and capital, arising from changes in the business environment such as the deterioration in economic conditions. The Company takes into consideration economic and market forecasts and monitors on the regular bases fees levels and marketing moves of potential competitors in order to maintain proper competitive edge, thus minimizing the Company s exposure to business risk. All above mentioned are analyzed and taken into consideration when implementing the Company s strategy Regulatory Risk Regulatory risk is the risk the Company faces by not complying with relevant Laws, Regulations and Directives issued by its supervisory body. If materialized, regulatory risk could trigger the effects of reputation and strategic risk. Compliance with these procedures and policies are further assessed and reviewed by the Company s Internal Auditors and suggestions for improvement

14 are implemented by management. The Internal Auditors evaluate and test the effectiveness of the Company s control framework at least annually. Therefore the risk of non-compliance is very low Legal and Compliance Risk Legal and compliance risk could arise as a result of breaches or non-compliance with legislation, regulations, agreements or ethical standards and have an effect on earnings and capital. The probability of such risks occurring is relatively low due to the detailed internal procedures and policies implemented by the Company and regular reviews by the Internal Auditors. In addition, the board meets at least annually to discuss such issues and any suggestions to enhance compliance are implemented by management IT Risk IT risk could occur as a result of inadequate information technology and processing, or arise from an inadequate IT strategy and policy or inadequate use of the Company s information technology. The Company is using, among other, a backup system that can restore smooth operation in case of failure.