Pillar III

1.0 Introduction

Pollen Street Capital Limited (“Pollen Street” or the “Firm”) is required by the FCA to disclose information relating to the capital it holds and each material category of risk it faces to assist users of its accounts and to encourage market discipline.

The Capital Requirements Directive (“CRD”) created a revised regulatory capital framework across Europe covering how much capital financial services firms must retain. In the United Kingdom, rules and guidance are provided in the General Prudential Sourcebook (“GENPRU”) for Banks, Building Societies and Investments Firms (“BIPRU”).

The FCA framework consists of three “Pillars”:

  • Pillar 1 sets out the minimum capital requirements that companies need to retain to meet their credit, market and operational risk;
  • Pillar 2 requires companies to assess whether their Pillar 1 capital is adequate to meet their risks and is subject to annual review by the FCA;
  • Pillar 3 requires companies to develop a set of disclosures which will allow market participants to assess key information about its underlying risks, risk management controls and capital position. These disclosures are complimentary to Pillar 1 and Pillar 2.

Rule 11 of BIPRU sets out the provisions for Pillar 3 disclosure. The rules provide that companies may omit one or more of the required disclosures if such omission is regarded as immaterial. Information is considered material if its omission or misstatement could change or influence the decision of a user relying on the information. In addition, companies may also omit one or more of the required disclosures where such information is regarded as proprietary or confidential. The Firm believes that the disclosure of this document meets its obligation with respect to Pillar 3. Pollen Street will make the Pillar 3 quantitative disclosure on an annual basis, following the completion of its ICAAP.

In addition, the Firm, on account of its classification as a full scope Alternative Investment Fund Manager (“AIFM”), is subject to a parallel "own funds" requirement as detailed in Article 9 of the Alternative Investment Fund Managers Directive.

2.0 Firm Overview

Pollen Street is incorporated in the UK and is authorised and regulated by the FCA as a a collective portfolio management investment firm and full scope AIFM. As such PSC calculates its capital requirement based upon three methodologies, each of which is discussed further below:

  • The higher of the base capital requirement and the capital requirements under GENPRU 2.1.45;
  • The requirements of the Pillar 2 Rule; and...
  • The requirements of AIFMD.

The CEO is responsible for the day to day management of the Group.

Risk within the Group is managed by use of the following:

  • Senior management is accountable for designing, implementing and monitoring the process of risk management and implementing it into the day-to-day business activities of the Firm;
  • The Board on behalf of the Firm has approved a risk appetite statement;
  • The Firm identifies the most material risks to its business and subjects them to scenario analyses and stress tests in order to assist in its risk management and capital planning;
  • The Group has implemented an operational risk event data collection procedure to ensure that all events, be they actual operational losses or near misses, are captured.

2.1 Capital Resources and Requirements

2.1.1 Capital Resources

2.1.1.1 Pillar 1

Pollen Street was authorised by the FCA on 16 May 2014 and holds regulatory capital resources of £1.7m, comprised solely of core Tier 1 capital.

The Firm has calculated its BIPRU capital resources in accordance with GENPRU 2.2. As a limited company its capital arrangements are as follows:

As at December 31 2015

£m

Eligible Members Capital

0.0

Audited Reserves

1.7

Hybrid Capital

-

Tier 2 Capital

-

Deductions

-

Total

1.7

Source: Pollen Street Capital

As a BIPRU firm, Pollen Street is required to maintain capital resources equal to or exceeding the higher of:

  • Base capital requirement of €125,000;
  • The sum of its market and credit risk requirements; or
  • The fixed overhead requirement (which is a quarter of the Firm’s fixed annual costs).

As at 1 November 2016, the Firm’s Pillar 1 capital requirement was £250,000.

On account of its classification as an AIFMD firm, in parallel with the BIPRU requirements above, Pollen Street is also required to maintain ‘own funds’ which equal or exceed the sum of:

  • The higher of:
    - The funds under management requirement; or
    - The fixed overhead requirement (which is a
    quarter of the Firm’s fixed annual costs); and
  • The professional indemnity requirement
  • As at 1 November 2016, the Firm’s Pillar 1 capital requirement was £310,000.

2.1.1.2 Pillar 2

The Firm has adopted the “Structured” approach to the calculation of its Pillar 2 Minimum Capital Requirement as outlined in the Committee of European Banking Supervisors Paper, 27 March 2006 which takes the higher of Pillar 1 and 2 as the Internal Capital Adequacy Assessment Process (“ICAAP”) capital requirement. It has assessed Business Risks by modelling the effect on its capital planning forecasts and assessed Operational Risk by considering if Pillar 2 capital is required taking into account the adequacy of its mitigation.

Since the Firm’s ICAAP has not identified capital to be held over and above the Pillar 1 requirement, the capital resources detailed above are considered adequate to continue to finance the Firm over the next year.

3.0 Risk Management

The Firm has established a Risk Management function (“RMF”), headed by the Firm’s Head of Risk to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The Firm’s Head of Risk oversees the performance of the Risk Management Function and reports to the Board on whether the Company remains within its risk appetite.

As risks are identified within the business, appropriate controls are put in place to mitigate these and compliance with them is monitored on a regular basis. The frequency of monitoring in respect of each risk area is determined by the significance of the risk. The Firm does not intend to take any risks with its own capital and ensures that risk taken within the portfolios that it provides advice to is closely monitored. The results of the compliance monitoring performed is reported to the Board by the Compliance Officer.

3.1 Operational Risk

The Firm places strong reliance on the operational procedures and controls that it has in place to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.

The Firm has identified a number of key operational risks. These relate to disruption of the office facilities, system failures, trade failures and failure of third party service providers. Appropriate policies are in place to mitigate against risks, including appropriate insurance policies and business continuity plans.

3.2 Credit Risk

The main credit risk to which the Firm is exposed is in respect to the failure of its debtors to meet their contractual obligations. Most the Firm’s receivables are related to investment management and advisory activities. The Firm believes its credit risk exposure is limited since the Firm’s revenue is ultimately related to management fees received from funds. These management fees are drawn throughout the year. Other credit exposures include bank deposits and office rental deposits.

The Firm undertakes periodic impairment reviews of its receivables. All amounts due to the Firm are current and none have been overdue during the year. As such, due to the low risk of non-payment from its counterparties, management is of the opinion that no provision is necessary. A financial asset is overdue when the counterparty has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.

GENPRU 2.1.46 states that “When a collective portfolio management investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only in respect of designated investment business. For this purpose managing an AIF or managing a UCITS is excluded from designated investment business.” Pollen Street Capital does not undertake any designated investment activity other than managing an AIF and so is not required to hold credit risk capital.

3.3 Market Risk

Since the Firm holds no trading book positions on its own account, and its primary bank account is in GBP and the majority of its fee income is converted to GBP at the first opportunity, the Firm’s exposure to foreign currency risk is not significant. Since the settlement of debtor balances take place without undue delay, the timing of the amount becoming payable and subsequently being paid is such that it is not considered to present a material risk to the Firm. The Firm is therefore of the opinion that market risk is not a material risk to the Firm.

GENPRU 2.1.46 states that “When a collective portfolio management investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only in respect of designated investment business. For this purpose managing an AIF or managing a UCITS is excluded from designated investment business.” Pollen Street Capital does not undertake any designated investment activity other than managing an AIF and so is not required to hold credit risk and market risk capital.

3.4 Liquidity Risk

Liquidity risk is the risk that the Firm does not have adequate liquid assets to meet its obligations as they fall due. As the firm does not have material illiquid assets, this risk is not considered to be material.

3.5 Securitisation Risk

Securitisation risk is the risk that the capital resources held by the firm in respect of assets it has securitised are insufficient. The firm is not exposed to any securitisation vehicles and is therefore not exposed to securitisation risk.

3.6 Insurance Risk

Insurance risk is the risk that insurance liabilities occur at a different time or in a different quantum to that expected. The firm does not undertake insurance activities and is therefore not exposed to insurance risk.

3.7 Pension Obligation Risk

Pension obligation risk is the risk that the firm is required to make contractual or non-contractual contributions to a pension scheme. The firm does not operate a defined benefit pension scheme and does not have any pension obligations. The firm is therefore not exposed to pension obligation risk.

3.8 Concentration Risk

Concentration risk is the risk arising from the firm having a large exposure to a particular counterparty, market or collateral type. The firm does not undertake lending activities as principal and is therefore not exposed to concentration risk.

3.9 Residual Risk

Residual risk is the risk that the firm’s credit mitigation techniques are ineffective. The firm does not undertake credit activities and hence does not have any credit mitigation techniques. The firm is therefore not exposed to residual risk.

3.10 Business Risk

Business risk is the risk that the firm is may not be able to carry out its business plan or strategy. In analysing the impact of this risk, the Firm has considered a variety of stress tests covering different scenarios and has concluded the capital held under pillar 1 adequately covers these risks.

3.11 Interest Rate Risk

Interest rate risk is the risk that the firm’s income or expenses vary as a result of prevailing interest rates. The firm does not have any borrowings and earns an immaterial amount of interest income from its treasury balances. However, the firm derives a portion of its performance fees from AIFs whose income, and hence the Firm’s fees, may depend on interest. The firm considers this to be part of the overall business risk of the firm and so has captured this as business risk. The firm is therefore not materially exposed to further interest rate risk.

3.12 Other Risks

No other risks have been identified.

4.0 Remuneration Code

The Firm has adopted a remuneration policy and procedures that comply with the requirements for remuneration management in accordance with the FCA AIFM remuneration code (SYSC 19B) of the FCA’s Senior Management Arrangements, Systems and Controls Sourcebook (“SYSC”), and in accordance with ESMA’s Guidelines on sound remuneration policies. The Firm has considered all the proportionality elements in line with the FCA Guidance and, pursuant to this application, has disapplied certain provisions of the code where relevant.

The remuneration policy is reviewed by the Firm’s Remuneration Committee.

 

PSC Eaglewood Europe LLP

Capital Requirements Directive - Pillar 3 Disclosures

1.0 Background

The European Union’s Capital Requirements Directive (“CRD”) came into effect on 1 January 2007 and introduced a set of revised regulatory capital adequacy standards and associated supervisory framework across the European Union based on the Basel II Accord. The Basel II Accord comprises recommendations issued by the Basel Committee on Banking Supervision which aimed to create an international standard that banking regulators can use when creating regulations about the amount of capital banks need to put aside to guard against various financial and operational risks. The predecessor of the Financial Conduct Authority (the “FCA”) implemented the CRD in the United Kingdom.

The CRD uses the concept of three pillars that also form the basis of the Basel II Accord and extends the requirements to cover a wide range of financial institutions. These three pillars are also embedded in the FCA’s rules that implement the CRD.

  • Pillar 1 specifies the minimum capital resources which PSC Eaglewood Europe LLP (the “firm”) is required to hold. For the firm this is the higher of the sum of its market and credit risk requirements and its fixed overhead requirement.
  • Pillar 2 sets out the review process to be used to determine whether additional capital should be held by the firm against any risks not adequately covered by Pillar 1. Under Pillar 2 the firm is required to analyse a wide range of risks to its business and then consider whether the mitigation in place to address these risks is sufficient or whether additional capital in excess of that available under Pillar 1 is required to provide a buffer against specific risks. This procedure forms part of the firm’s Internal Capital Adequacy Assessment Process (“ICAAP”) which is performed at least annually.
  • Pillar 3 requires the firm to develop a set of disclosures which enable market participants to assess information on the risks facing the firm, its capital resources and risk management procedures.

1.1 Scope of disclosure

PSC Eaglewood Europe LLP is an investment management firm providing services to a listed fund. PSC Eaglewood Europe LLP is authorised and regulated by the Financial Conduct Authority. Its FCA Part IV permission does not allow it to hold client money nor may it deal in investments as principal.

2.0 Risk management objectives and policies

The firm’s approach to risk management is predicated on the need to manage the full range of risks facing the firm including operational, business, liquidity, credit and market risks including those that may arise as a result of its affiliation with a company in the US. The firm’s overriding aim in this area is to minimise the risks to the firm’s clients, its counterparties and other stakeholders and to ensure it remains in full compliance with regulatory and legal requirements.

The firm’s risk management framework incorporates an analysis of the impact of each material risk on the business, the probability of each risk occurring and the procedures in place in mitigation. This risk management framework is a core component of the firm’s high level systems and controls arrangements and ensures all areas of the business are subject to oversight.

2.1 Risk Appetite

The firm has employed guidelines for each risk type set out in the FCA Handbook of Rules and Guidance in order to evaluate each of the major risks it faces having regard to the relevance of each such risk type to it and its business. The firm has a low overall risk appetite with a maximum level of “medium” for certain risks. Where specific risks are determined as outside the risk parameters acceptable to the firm, enhanced controls and monitoring (which may include more frequent monitoring) have been designed and implemented in order to bring such risks within the firm's risk appetite.

2.2 Credit Risk

Credit risk represents the risk that the firm is unable to realise the value of its assets and is calculated under FCA rules as 8% of the aggregated sum fully covered under Pillar 1.

2.3 Market Risk

The firm’s market risk is limited to exposure to foreign exchange fluctuations as a result of certain assets and liabilities being denominated in currencies other than sterling. The firm’s exposure to currency risk is actively controlled through sales of foreign exchange and/or the adoption of hedging strategies.

2.4 Operational Risk

Operational risk is defined by the firm as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The firm’s risk management framework emphasises operational risk and its senior management reviews all aspects of the business on a regular basis to ensure operational risks have been identified and effective controls put in place to mitigate the risks identified so the combination of the impact assessment and probability of each risk is kept to an acceptable level.

The risk management framework is supported by a wide range of real-time management information systems that monitor performance against key performance indicators. The firm has embedded within its business processes, at all levels, risk management processes that are subject to regular appraisal. These appraisals are supported and enhanced by independent and risk orientated monitoring procedures, the output from which is communicated through the regulatory framework via regular reports.

2.5 Business Risk

Business risk is the risk of loss inherent in the firm’s operating, business and industry environment. Business risks remain under regular review given macro-economic, geopolitical and industry uncertainties.

2.6 Liquidity Risk

Liquidity risk represents the risk that the firm either does not have available sufficient financial resources to enable it to meet its obligations as they fall due or the firm is not able to secure such resources on reasonable terms. The risks attendant to the firm’s involvement with other entities with which it is associated are closely monitored. The firm maintains sufficient surplus cash to meet its working and regulatory capital needs, in addition to being in excess of the amount needed to fund an orderly and immediate wind-down of the firm’s regulated activities, should that become necessary. The risk that the business will be unable to meet its financial obligations as they fall due is not considered material for the purposes of this disclosure.

3.0 Capital resources

3.1 Pillar 1

The firm’s capital resources are comprised of tier 1 capital. Tier 1 consists of share premium.

The main features of the firm’s resources as at 28 February 2017 are as follows:

Capital Item

£’000s

Tier 1 capital

3,594

Total tier 2 and tier 3 capital

0.0

Deductions from tier 1 and tier 2 capital

0.0

Total capital resources, net of deductions

3,594

As at 28 February 2017, 3016 of retained losses were included in tier 1 capital. The fixed overheads requirement has been determined as the capital required to be held under Pillar 1.

3.2 Pillar 2

Capital required under Pillar 2 is the sum of the capital required under Pillar 1 plus any additional capital required to be maintained against risks not adequately covered by Pillar 1 capital. The firm’s overall approach to assessing the adequacy of its internal capital is set out in its ICAAP. The ICAAP involves consideration of a range of risks faced by the firm and determines the level of capital needed to cover these risks. The level of capital required by the firm to cover identified risks is a function of their impact and probability and risk mitigation controls in place. The firm believes it has taken a prudent approach to its Pillar 2 calculations and that both its capital resources and their solvency are sufficient to meet the firm’s operational and other risk requirements and that these capital resources are also adequate to support its operations without any need for additional injections of capital over the period considered within the business plan forecasts contained within the ICAAP. Stress and scenario tests performed during the ICAAP support the firm's view that it holds adequate additional capital under Pillar 2.

4.0 FCA Remuneration Code (the “Code”)

PSC Eaglewood Europe LLP has completed this section of the Pillar 3 disclosure document on the basis that it is a full scope AIFM BIPRU (i.e. Collective Portfolio Management Investment “CPMI”) firm that is subject to the remuneration rules set out in SYSC 19B and SYSC 19C and is eligible to apply principles of proportionality. Under SYSC 19C1.1A, PSC Eaglewood Europe LLP is only required to demonstrate compliance with SYSC 19B. This disclosure relates to the 12 month period ended 28 February 2017.

The remuneration policy is the responsibility of the Remuneration Committee of PSC Eaglewood Ltd. The Remuneration Committee oversees the remuneration governance framework and ensures that remuneration arrangements are consistent with, and promote, effective risk management.

The Remuneration Committee considers remuneration in the context of a wider agenda including retention, recruitment, motivation and talent development and the external market environment. It also receives updates on regulatory developments and general remuneration issues, as well as market and benchmarking data.

The Remuneration Committee sets and monitors the remuneration policy standards and monitors compliance with them. Members of the Remuneration Committee determine the amount and composition of the total remuneration paid under this policy with additional input provided by the compliance, human resources and finance functions.

4.1 Information on the link between pay and performance

The components of total remuneration (which comprise base salary, variable bonus and benefits) are considered and are balanced appropriately having regard to the role fulfilled by each particular individual.

Firm, business area and individual performance are the significant contributors to the determination of variable bonus awards. The principal objective in determining variable bonus awards is to reward individual performance whilst ensuring that such payments are warranted given business results. In this context performance can include financial and non-financial measures, risk measures and other relevant factors. There is a focus on differentiation so that any rewards are determined according to the contribution of individuals and teams. Bonus pools and individual awards are subject to the governance of the Remuneration Committee and it is possible that in any year no variable bonus will be awarded.

The payment of a significant proportion of the performance award for those in receipt of a variable compensation award above a level set at the discretion of the Remuneration Committee may be required to be deferred and the sum involved invested in funds managed by the firm which vest at a future point in time. The purpose of these deferral arrangements with respect to certain individuals is to support a performance culture where employees recognise the importance of sustainable (and sustained) firm and individual performance. This arrangement encourages sound risk management whilst aligning the longer-term interests of participants with those of investors.

PSC Eaglewood Europe LLP only has one "business area", namely its asset management business. All of the firm’s relevant staff fall into the "senior management" category (in accordance with applicable FCA guidance, the firm does not have any "risk takers").

DISCLAIMER

Information contained in this document has not been audited by the firm’s external auditors and does not constitute any form of financial statement and should not be relied upon in making any judgement on the firm. The risks identified in this disclosure may not include all of the risks the firm faces. Reliance should not be placed on these disclosures as to the effectiveness or otherwise of the firm’s internal control environment.