Pillar 3 As at 31 st March 2011
Purpose of Disclosure This document sets out the Pillar 3 market disclosures for Threadneedle Asset Management Holdings an authorised and regulated limited license firm in the UK. In 2005 Threadneedle became the international asset management arm of Ameriprise, a US publically listed company. Threadneedle now benefits from the strength of being part of a worldwide asset management group, whilst retaining its own distinctive investment philosophy and brand identity. The Financial Services Authority s General Prudential Sourcebook ( GENPRU ) and Prudential Sourcebook for Banks, Building Societies and Investment Firms ( BIPRU ) implemented the Capital Requirements Directive, which is the common framework for implementing Basel II in the European Union. These rules are built on three pillars: Pillar 1: Minimum capital requirements Pillar 2: Guidance for the setting of bespoke capital requirements by the firm s Board executive through the Internal Capital Adequacy Assessment Process ( ICAAP ) and subsequent Supervisory Review and Evaluation Process ( SREP ). Pillar 3: Rules for the disclosure of risk and capital management, including capital adequacy. The purpose of Pillar 3 is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm s capital, risk exposures and risk assessment process. The disclosures are to be made public for the benefit of the market. Pillar 3 Page 2 of 9
Recommends Strategic Tactical Delegates FINAL Governance The Board Level governance committees are illustrated in the chart below. The Threadneedle Asset Management Holdings Sàrl Board is the board for the Luxembourgbased top-level holding company. The group is regulated on a consolidated basis by the FSA, and the regulated entities are largely controlled by delegation from the Threadneedle Asset Management Sàrl Holdings board, or by their own regulated Boards. Threadneedle Risk Governance Communication and escalation structure Audit Committee Risk Committee Remuneration Committee Threadneedle Asset Management Holdings Sàrl Statutory Relationship Main Operating Companies CEO & Threadneedle Executive Operational Communication and Reporting Credit Controls Projects IMLT PLT SLT DLT While risk management is ultimately the responsibility of the Board, certain areas of risk oversight and monitoring have been delegated to the Audit and Risk Committees, as well as to the Threadneedle CEO and the Threadneedle Executive and underlying risk committees. The Risk and Audit Committees are sub-committees of the Board, and meet at least four times a year, with oversight by the Audit Committee on all risk management activities. Their membership also includes members of the Ameriprise senior management, who are independent of Threadneedle executive management. The Audit Committee is chaired by the Senior Independent Non-Executive Director on the Board. The Risk Committee agenda includes Risk and Capital Reports as a standing item. Risk management principles and objectives The overall objective of risk management at Threadneedle is to protect its franchise. Risk to Threadneedle s franchise value comes from two main sources: 1. Investment management risk: Mandate compliance; and Investment performance. 2. Client mis-representation risk: Mis-selling; Mis-communication; and Client service errors. Pillar 3 Page 3 of 9
The overall objectives of risk management are: To assist the business in avoiding unacceptable losses in particular stemming from either of the major risk sources given above; and To assist the business in achieving consistent fund performance and corporate profit. Threadneedle believes achievement of these objectives will be furthered by adherence to the following principles: Senior management is demonstrably committed to risk management and to strengthening the risk aware culture of the organisation; Risk management is independent of the fund managers and of distribution ; Threadneedle s fiduciary responsibilities are first and foremost in people s thoughts; Risk management needs to be top-down as well as bottom-up; Encourage risk takers to think like risk managers; and Risk management does not mean risk avoidance. Risk Appetite Threadneedle has a Risk Appetite Framework covering: Operational risk; Market risk; and Credit risk. Threadneedle s risk appetite is defined both qualitatively and quantitatively. The qualitative risk appetite framework is expressed through Threadneedle s policies and the quantitative limits and tolerance levels of potential loss. Threadneedle has established an extreme loss tolerance that is not an annual loss tolerance but represents the maximum loss that the firm would never want to see exceeded. Threadneedle has also adopted a more operationally focused maximum annual loss tolerance has been set at 1/12 of the extreme tolerance. The risk appetite is fixed and is reviewed annually and more often should the firm s circumstances change in a material way. Where business risks are identified that could lead to a significant loss, the Threadneedle Executive determine the appropriate course of action to reduce or mitigate the risk where possible. Where risks are greater than the operational tolerance level, the Threadneedle Executive is required to: Put in place a plan to reduce or mitigate the risk where possible. Where it is not possible to mitigate the risk then the Board Executive will consider whether the activity should be scaled down or terminated. Smaller risks are mitigated through process improvements and business as usual activities facilitated by the risk and control self assessment process and the Operational Risk Department. Pillar 3 Page 4 of 9
Assurance Framework The operational risk department works closely with the other assurance functions, namely Internal Audit and Compliance. The Operational Risk department seeks to assist Audit and Compliance through the provision of data and management information to support the monitoring activities undertaken. FSA Remuneration Code The FSA implemented its new Remuneration Code (the Code ) as required by the Capital Requirements Directive and the Financial Services Act 2010. Under the new Code, Threadneedle must report annually on its remuneration governance process and certain details on its remuneration policies and practices. Decision-making process for remuneration policy Threadneedle has a Remuneration Committee (the Committee ) which meets regularly to establish the firm s remuneration principles and oversee the governance of the remuneration programmes, policies and procedures. The Committee carries out its responsibilities within the authority delegated by the Board and documented in its Terms of Reference. The responsibilities include approving the terms of the profit share pool, long term incentive plan, and any other incentive arrangements and the remuneration for senior level employees, including all positions identified as Code Staff. During 2011 a distinct project has commenced reviewing the key design aspects of overall remuneration approach for the firm for future years, which will report to the Committee on key findings and recommendations for change. The Committee was comprised of three members throughout 2010. This included two Committee members who were not employees of Threadneedle and who served as Ameriprise Financial nominated Directors on the Board. The other member was the Executive Chairman of the Board. The Committee received independent advice on regulatory compliance with the Remuneration Code from PricewaterhouseCoopers LLP and on remuneration issues and trends from McLagan. Role of the relevant stakeholders The Committee takes full account of the firm s business and strategic objectives in setting remuneration policy and is mindful of its duties to shareholders and other stakeholders. The Committee seeks to preserve shareholder value by ensuring the successful engagement, motivation and retention of employees. The link between pay and performance for Code Staff Remuneration is made up of fixed pay (ie salary and benefits) and variable pay that is performance-related. The variable pay includes (1) short term incentives tied to the firm profitability, business results, and individual performance and (2) long term incentives linked to the creation of shareholder value. Long-term incentive awards represent the deferred element of variable pay and are conditional on vesting requirements and future performance. The variable pay decisions for individuals on both short term and long term incentives is dependent on the individual s performance assessment which considers risk management and the firm s standards of performance and conduct. Code Staff identification and quantitative disclosure The FSA classifies Code Staff as those staff whose activities could have a material impact on the firm s risk profile. The Code Staff for Threadneedle have been identified through an exercise that involved the mapping of risks and responsibilities, and consideration of other factors. For the calendar year 2010, there were a total of 20 Code Staff who were employees of Threadneedle for all or a portion of the year. They were all senior managers who were in significant management, control, or risk functions for the firm. The operations Pillar 3 Page 5 of 9
of Threadneedle are considered a single business unit. The aggregate total remuneration for Code Staff for the period ending 31 December 2010 was 15.7m. A significant portion of this total remuneration was deferred in the form of long term incentive awards. Total remuneration represents salary, profit share awards, long term incentive awards, and the estimated employer value of pension accruals or contributions on their behalf. Pillar 3 Page 6 of 9
Capital Resources Threadneedle s assessment of capital adequacy Threadneedle as a limited licence firm maintains sufficient capital to meet its regulatory requirements. In line with these requirements, Threadneedle maintains the higher of Pillar 1 and Pillar 2 (ICAAP) capital requirements. The adequacy of the capital held by Threadneedle is assessed, at least annually, as part of the Individual Capital Adequacy Assessment Process (ICAAP) and is subject to formal approval by the Board of Directors. As of 31 March, the Group s capital resources amounted to 123.4m. Threadneedle Group resources as of 31 March 2011 000 Total Capital and Reserves 349,146 Liabilities 225,742 Consolidated Group financial resources 123,404 As of 31 March, the Group s Pillar 1 minimum capital requirement amounted to 37.7m. On a Pillar 1 basis this gives a regulatory surplus of 85.7m. Requirement 000 Market Risk + Credit Risk 37,695 Fixed Overhead Requirement 34,518 Minimum Capital Requirement 7,145 Total Group Financial Resources Requirement 37,695 Consolidated Group financial resources 123,404 Total Group Pillar 1 Surplus 85,709 The Threadneedle ICAAP assesses the amount of capital required to mitigate the risks to which Threadneedle is exposed over a 12 month time horizon. The ICAAP considers the impacts of future business plans as well as potential adverse scenarios (such as market downturns or significant operational errors) on the capital resources of Threadneedle, so that regulatory capital requirements are met at all times. The firm s exposure to risk categories as defined by the FSA and Threadneedle s strategies with respect to key risk categories is shown below: Treatment of Risk Types The following are the key risk types that are assessed within the ICAAP and throughout the business: Pillar 3 Page 7 of 9
Operational Risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, systems or from external events. Examples of significant operational incidents that could arise are: fraud, theft of Threadneedle intellectual property, technology failures, fund valuation errors, trading errors, mis-selling of products or errors in fund prospectuses. Threadneedle uses a scenarios based approach to the calculation of operational risk capital. This approach is used as it allows the business to engage more fully in understanding the risks the business is exposed to and in the management of those risks. Threadneedle has identified operational risk scenarios that represent the top operational risks to which the business is exposed. Threadneedle also has an insurance programme designed to reduce its exposure to liability and to protect its assets. Operational Risk is reported and escalated to the Controls Group, Threadneedle Executive and the Risk Committee. Market Risk Market risk is defined as the possibility of losses in the market values of assets, such as equities, bonds and other market-traded instruments, appearing on Threadneedle s balance sheet. Market Risk is reported to the Threadneedle Executive and the Risk Committee. Credit Risk Credit risk is defined as the risk of default by counterparties and a resulting loss to the company s balance sheet. A factor which may contribute to increased credit risk is concentration of assets held with a single counterparty. Counterparties for Threadneedle are banks and other financial institutions holding the company s cash balances, money market deposits and other similar investments, debtors and commission sharing balances held at broking firms used by Threadneedle. Threadneedle only places deposits with institutions having a minimum credit rating and considers the credit risk from its funds to be minimal. The Credit Policy and counterparty risk appetite adopted across the firm ensures that exposures to counterparties are diversified and not concentrated. Exposure versus limits are monitored and reviewed by the Credit Committee and reported to the Threadneedle Executive, the Risk Committee, the IMLT and ultimately, the Board. Liquidity risk Liquidity risk is defined as the risk that the firm, although solvent, either does not have sufficient available resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. Threadneedle maintains a surplus of liquid resources sufficient at all times to meet any immediate requirements it could prudently foresee. Liquidity Risk is monitored by the Fund Pricing and Dealing Committee in Threadneedle. Pillar 3 Page 8 of 9
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