PILLAR III DISCLOSURE OF ALOULA GEOJIT CAPITAL FOR THE YEAR ENDED

Transcription

1 PILLAR III DISCLOSURE OF ALOULA GEOJIT CAPITAL FOR THE YEAR ENDED March 2018

2 Table of Contents 1 OVERVIEW SPECIFIC DISCLOSURE SCOPE OF APPLICATION CAPITAL STRUCTURE CAPITAL ADEQUACY RISK MANAGEMENT GENERAL QUALITATIVE DISCLOSURE OF RISKS CREDIT RISK CREDIT RISK MITIGATIONS COUNTER PARTY CREDIT RISK AND OFF BALANCE SHEET EXPOSURES MARKET RISK EXPOSURE OPERATIONAL RISK LIQUIDITY RISK ANNEXURES APPENDIX I ILLUSTRATIVE DISCLOSURE ON CAPITAL BASE APPENDIX II ILLUSTRATIVE DISCLOSURE ON CAPITAL ADEQUACY APPENDIX III ILLUSTRATIVE DISCLOSURE ON CREDIT RISK S RISK WEIGHT APPENDIX IV ILLUSTRATIVE DISCLOSURE ON CREDIT RISK RATED EXPOSURE APPENDIX V ILLUSTRATIVE DISCLOSURE ON CREDIT RISK MITIGATION

3 1 Overview The Pillar III disclosure is introduced under Article 68 of the Prudential Rules, which has been explained through Annexure 10 of the Prudential Rules with reference to Section 1 to Section 27. The purpose of Pillar III is to ensure that authorized persons have assessed the key pieces of information which includes Capital, Risk exposure, Risk Assessment Process and the capital adequacy requirements. It shall therefore rearrange the disclosure requirements as set out in Annexure 10 of the Prudential Regulation as well as includes additional suggested disclosure requirements with illustrative forms to provide added quality for the Pillar III disclosures. Based on the Prudential Regulations, Pillar III disclosure obliged the authorized person to submit information to the authority or disclose the information to the public as per Annexure 10, to be published in the Website of the authorized person as early as possible as but not later than in conjunction with the public disclosure of annual report. Pillar III contains both qualitative and quantitative disclosures with special references with the scale, complexity and sophistication of Authorized Persons approaches to risk management and capital adequacy assessment. The current Pillar III Report is prepared for Aloula Geojit Capital (AGC) on a standalone basis. 2 Specific Disclosure 2.1 Scope Of Application Aloula Geojit Capital Company (AGC) (the Company ) is a Saudi Closed Joint Stock Company established and registered in Riyadh, Kingdom of Saudi Arabia under commercial registration No dated 14 Muharram 1429 H (corresponding to 23 January 2008). The company started its activity of dealing as an agent under license number dated 6 Dhul Qidah 1429 H (corresponding to 4 November 2008) issued by Capital Market Authority (CMA). Subsequently CMA issued new license to carry out the activities of dealing as principal and agent, underwriting, managing, arranging, advising and custody of financial securities under authorization license number dated 24 Muharram 1431 H (corresponding to 10 January 2010). Subsequent to year-end 2013, CMA has renewed the license No on 9 Rabi-Thani 1435 H (corresponding to 9 February 2014) to allow the Company to carry out margin financing. AGC has the following business lines: Brokerage: AGC provides comprehensive trading services to its clients in Saudi Stock Market through Margin Lending, Online application, Mobile applications and Investment Cell. During the year 2017 Aloula Geojit Market position remained almost same as compared to 2016 even though there is a decrease in the value traded. Asset Management and Custody: AGC offers broad range of investment products and services to its client like Mutual funds, Discretionary Portfolio Management services and Real Estate Funds. As of December 2017, AGC has Three active funds Aloula Geojit Al Johar Saudi Equity Fund, Aloula Geojit Al Johar Saudi Equity Sharia Committee Standards Compliant Fundand Ishbelia Towers Real Estate Fund. Advisory: AGC provides strategic financial advisory services to a select target market. It advises and arranges funding for clients across the debt and equity spectrum and we have license to provide financial advisory services for Merger and Acquisition transactions, Also we did business of incorporating companies. Margin/Murabaha Financing: Murabaha Financing is a lending agreement with individual client, where in AGC will provide margin facility to HNI Clients based on Murabaha Lending 3

4 by purchasing shares and transfer the same to the prospective clients at a mutually agreed price by strictly adhering to CMA required margin coverage ratio. Through providing Margin facility and quality services to investors Aloula Geojit is expecting a substantial increase in market share. As part of the risk assessment processes, AGC identifies the risks in the following categories: Pillar 1 Risks - Credit Risk, Market Risk, Operational Risk Pillar 2 Risks - Concentration Risk, Interest Rate Risk, Liquidity Risk, Strategic Risk, Reputational Risk and Regulatory Risk Pillar 3 Risk Market Discipline by disclosing the qualitative and quantitative information to the public on an annual basis on website With reference to the existing business model and the liquidity in overall business Aloula Geojit Capital didn t oversee any material or legal impediment in the prompt transfer of capital or repayment of liabilities between AGC and the related business partners/subsidiaries/associates. At the same time Aloula Geojit doesn t have any subsidiaries at the time of preparation and publishing of this disclosure in the AGC website. 2.2 Capital Structure The total number of subscribed shares of the Company is 5,200,000 with a par value of SR 10 each. The details of paid up share capital is as follows: The components of capital include the paid up share capital, audited retained earnings. The audited retained earning includes balances carry forwarded towards accumulated losses until 2016 and the profit/loss for the year 2017 and Zakah provision until 31/12/2017. In accordance with Article 125 of the Saudi Arabian Regulations for Companies and the Company s article of association, the Company is required to transfer 10% of its net profit every year to a statutory reserve every year until such reserve equals 50% of the paid up capital as a minimum. This reserve is not available for distribution. Components of Tier-1 & Tier 2 capital includes the following: 4

5 Table (I) Tier 1 & Tier 2 Capital (Amounts in SAR 000) Detailed disclosure please refer Appendix I Tier 1 Capital is comprised of Share Capital, Statutory Reserves, unrealized losses from HFT Investments and Accumulated Loss/ Earnings Tier 2 Capital is Change in Fair value of AFS investments 5

6 2.3 Capital Adequacy The Authorized persons are required to fulfill the minimum level of capital to support the business strategies accordingly to the risk parameters defined by the Prudential Regulation. Capital Market Authority ( CMA ) has issued Prudential Regulations (the Rules ) dated 30 December 2012 (Corresponding to 17 Safar 1434 H). According to the Rules, CMA has prescribed the framework and guidance regarding the minimum regulatory capital requirements and its calculations. Prudential rules are based on Pillars which has Pillar I, Pillar II and Pillar III. Pillar III regulates how information s regarding risk management, capital requirements, capital adequacy etc should be made to Public. A general overview of the risk, review and related processes has been appended below: Aloula Geojit Capital s approach in assessing adequacy of its capital to support current and future activities envisages around the following principles: It has a process for assessing its overall capital adequacy in relation to its risk profile and a strategy to maintaining capital levels. This includes doing a test analysis of the Risk before implementing any new business strategy to ensure AGC to be in line with the minimum capital requirements of CMA. Review of AGC s Internal Capital Adequacy Assessment Process (ICAAP), pre-approved by the Risk and Compliance Committee members and final approval by the Board of Management. A detailed review has been conducted through the RCC committee and ensuring compliance with CMA regulations, with appropriate actions being taken whenever needed. AGC is always operating above the minimum capital ratios to ensure business continuity by avoiding unexpected interventions while implementing the business policies. The above monitoring and control procedures intervene at an early stage to prevent capital from falling below the minimum levels as required by the Risk profile. 6

7 Aloula Geojit Capital with a Tier 1 & Tier 2 Capital maintains a ratio of 1.22, well above CMA s minimum capital requirements and comparatively lower than Table (II) Capital Adequacy Comparison 2016 & 2017 Capital Adequacy Calculation (SAR '000) Capital base % age change Total capital base 29,500 33,305-11% Minimum capital requirement Market Risks 1 1 Equity Risk Fund Risk - - Interest Rate Risk Commodities Risk FX Risk 1 1 Underwriting Risk Excess Exposure Risk Settlement Risk Credit Risks 22,033 20,166 9% Exposures to government, central banks - - Exposures to corporates, admin bodies, NPO Exposures to APs, banks % Listed shares - - Investment funds 1,269 2,758-54% High risk investments - - Securitisations, resecuritisations - - Margin financing 4,208 3,869 9% Prohibited risks 1,037 - Other on-balance sheet exposures 15,194 13,503 13% Off-balance sheet commitments - - Operational risks 2,122 2,674-21% Total minimum capital requirement 24,156 22,842 6% Total capital ratio (time) % Surplus/(Deficit) in Capital 5,344 10,463-49% Detailed disclosure please refer Appendix II 3 Risk Management 3.1 General Qualitative Disclosure of Risks AGC believes that the risk assessment undertaken for the above reflects an acceptable level within its risk profile. Risk management processes of AGC involves identification of risks, establishing controls, monitoring the risk through Risk and Compliance Committee (RCC) consists of members from the management and one independent Board Member of AGC. AGC has a well defined Risk Management Policy with reference to general operations and Margin Murabaha Financing. The Committee Meets once in every month 7

8 and reports will be submitted to the Audit Committee of AGC for further review and discussions. AGC Compliance department ensure communication to the employees to ensure organization wide compliance which facilitate early detection and awareness of Risks to ensure regulatory compliance. AGC policies and procedures are reviewed annually and approved by the Board. There are series of delegations and approval processes through Internal Committees approved by the Board to minimize unexpected loss and which contributes to the successful implementation of AGC business Strategies. AGC has a risk management framework structure to monitoring and control the governing body and executive management. The structure of the committee includes Board of Directors, Senior Management, Internal Committees including Risk and Compliance Committee. Compliance report to the Board members includes compliance monitoring programs with a disclosure on department policies and practices. The Board members meet at least 4 times a year and internal committees have approved charters with a minimum of two to three meetings in a month. The General structure of the Risk and Governing body structure been appended below: ALOULA GEOJIT CAPITAL AGC has updated policies and procedures approved by the Board of Directors to ensure that business activities are conducted in line with business strategies and with minimum risk.for any deviations from the approved procedures and limits set by the Board of directors, Management will be immediately reported to the Executive Committee of the Board through the senior management of AGC. The risk which is directly mandated by CMA regulations such as Investment Fund Regulations, Real Estate Fund Regulations, APR s and Prudential s etc. are being considered before entering into major investment decisions which impacts the organization strategy and capital adequacy. AGC s policy on training the staff in respect to regulations with well defined risk management frame work limits the risks at execution and operational levels mitigate the risk earlier than late. 8

9 3.2 Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. AGC credit risk arises principally from its exposure to local banks where it places deposits, Investments in funds and the Margin murabaha financing to its clients. AGC reviews Margin Murabaha clients based on an approved Margin Credit Risk policy Framework. AGC management reviews regularly any adverse impact on counterparty rating and follows strict compliance to the CMA regulations with respect to external rating and credit quality steps. AGC s uses standardized approach to calculate credit risk exposures and their distribution of risk assigned to each Credit Risk groups been appended in Appendix III. AGC uses credit rating agencies prescribed by CMA to determine the credit exposures by using the credit quality steps. Credit rating of the related exposures are determined from the below mentioned credit rating agencies, mapped to the exposures assigning a risk weight according to the table below. Table (III) Credit Quality Steps and CRA mapping Detailed disclosure please refer Appendix IV The Company exercises judgment to calculate the impairment loss of available for sale investments and other underlying assets. The Company follows yearly review on impairments of assets and impairments resulting losses or gains are recognized through the statement of income. AGC doesn t have any impaired exposures or related provisions for the year ended AGC has exposures with UAE Banks and Bahrain Bank in connection with current account balances. Accordingly 99% of the Cash and Cash equivalents are placed with local commercial banks in the Kingdom. Breakdown of our current accounts placed in UAE Bank, Bahrain Bank & local Banks have been listed below:- Table (IV) Geographic Distribution of Exposures (Amounts in SAR 000) Balance in Deposit and Current Accounts Equivalent (SAR '000) % age Exposure Mashreq Bank, UAE 2 0% Bank Muscat International, Bahrain 3 0% Local Commercial Banks, KSA % Total % 9

10 AGC has segregated all of its assets both short term and long term in a different maturity buckets as shown in the table below:- Table (V) Residual Contractual Maturity Profile (Amounts in SAR 000) The present contractual maturity ensures greater amount of comfort in meeting the short term and long term obligations of the Company and reflect sound liquidity positions based on the present level of operations. 3.3 Credit Risk Mitigations AGC has taken reasonable steps to mitigate credit risks which include Margin Murabaha financing. The company enrolled the first Murabah customer in December 2014 based on a standard agreement with equal amount of collateral with minimum risks, in compliance with Authorized Personal Regulations Chapter Four Article 45. The Company RCC team reviews the marginable stocks every quarter and assigns stock weight age to mitigate concentration risk and liquidity of the stock. There are defined policies and procedures for providing Murabaha facilities by taking equivalent collateral as risk mitigants, Stock wait age to reduce the risk of concentration and the rights of AGC to enforce and realize the security at the time of default are the risk mitigant measures currently held. (Please refer to Appendix V for details) 3.4 Counter Party Credit Risk and Off Balance sheet Exposures The Counter party risk is the risk that counterparty to a transaction may default before completing the satisfactory settlement of the transactions. AGC neither have any exposures by financial collateral, guarantees or netting agreements nor any Off-Balance Sheet exposures as of December Market Risk Exposure Market risks refers to risk in dealing with market such as market price movements, foreign exchange rates, equity prices, credit spread and commodity prices resulting in loss to the Company earnings and capital which reflects the carrying value of AGC s assets and liabilities. 10

11 The firm follows the approach and methods defined in the CMA guidelines for capital computation for different components of trading portfolio of the firm. The capital computation process, which is primarily linked to inherent risk within the different components of the trading portfolio, are also used for the purpose of assessment and controlling of risk in the trading portfolio. As of 31st December 2016, the firm has exposures in other currencies which attract FX risk. The Capital Charge is as follows:- Table (VI) Market Risk Capital (Amounts in SAR 000) 3.6 Operational Risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk but excludes reputation and business/strategic risk. Operational risk is inherent within each and every activity or process conducted by the business. Operational Risk Assessment AGC follows the basic indicator approach for assessment of capital adequacy of operational risk. In this approach, AGC computes capital requirement at 15% of the average operating income of the last three years subject to maximum of 25% of overhead expenses. 11

12 Table (VII) Operational Risk Capital (Amounts in SAR 000) Approach 1 Year Gross Income Average Gross Income Risk Capital Charge (%) Capital Required ,586 Basic Indicator Approach (BIA) ,714 3,894 15% ,073 Approach 2 Year Expenses Risk Capital Charge (%) Capital Required Expenditure Based Approach (EBA) Maximum of (BIA or EBA) ,490 25% 2,122 2,122 AGC present system of recording the data into the system by ensuring the quality of the input, policy and procedures in respect to each department functions, reconcile the operational losses across the business lines bringing data integrity and correctness in capturing operational risk capital to a great extend. 3.7 Liquidity Risk Liquidity Risk is the potential for loss to an institution arising from either its inability to meet its obligations or to fund assets as they fall due without incurring unacceptable cost or losses. Often, liquidity risk arises due to mismatch in the maturity pattern of assets and liabilities. In the case of surplus situation, liquidity takes the form of opportunity cost in the form of loss of income due to investment of idle funds in low yield assets rather than higher yielding assets. Liquidity Risk Management The Company study different liquidity indicators and establish various liquidity ratios which can measure the liquidity constraints faced by the firm in the near future. The Finance Department identifies few components in the balance sheet and defines the liquidity ratios which are monitored on regular basis Liquidity reviews AGC prepares a statement of expected cash flows arising at the time of settlement of its assets and liabilities and allocates them in different time intervals in which they are expected to occur. The time intervals have been defined as per the prudential rules of Capital Market Authority (CMA) as stated below: 12

13 Table (VIII) Liquidity Risk Bucketing The net cash flows across all time intervals were accumulated to observe the quantum of cumulative new cash flow in each bucket. Presently AGC has sufficient financial resources to meet its obligations when they falls due Current account helps in bringing the funds at any point of time to meet any short term and long term obligations of the Company. 4 Annexures 4.1 Appendix I Illustrative disclosure on Capital Base 13

14 4.2 Appendix II Illustrative disclosure on Capital Adequacy 14

15 4.3 Appendix III Illustrative disclosure on Credit Risk s Risk Weight 4.4 Appendix IV Illustrative disclosure on Credit Risk Rated Exposure 15

16 4.5 Appendix V Illustrative disclosure on Credit Risk Mitigation References Capital Market Authority - Prudential Rules - Issued by the Board of the Capital Market Authority, based on the Capital Market Law, issued by Royal Decree No. M/30, dated 2/6/1424AH CMA suggested format Version th December 2014 (P3 Guidelines-Appendices & P3 CMA V.8) 16