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Pillar 3

Alchemy Group
2011

Background

The 2006 Capital Requirements Directive ('the Directive') of the European Union created a revised regulatory capital framework across Europe based on the provisions of the Basel 2 Capital Accord. This was implemented in the United Kingdom through changes to the Financial Services Authority ('FSA') Handbook of Rules and Guidance, and specifically through the creation of the General Prudential Sourcebook ('GENPRU') and the Prudential Sourcebook for Banks, Building Societies and Investment Firms ('BIPRU').

 

The new framework consists of three 'pillars':

  • Pillar 1 sets out the minimum capital requirements that we are required to meet for credit, market and operational risk;
  • Pillar 2 requires us, and the FSA, to take a view on whether additional capital should be held against capital risks not covered by Pillar 1; and
  • Pillar 3 requires us to publish certain details of our risks, capital and risk management process.

 

BIPRU requires that a firm subject to the provisions of the Directive must disclose, as appropriate, the relevant information required under Pillar 3.

In this document we disclose information in accordance with the following BIPRU11.5 rules unless it is has been determined as immaterial or of a proprietary or confidential nature:

  • BIPRU 11.5.1R on our risk management objectives and policies;
  • BIPRU 11.5.2R on the scope of application of directive requirements;
  • BIPRU 11.5.3R on our capital resources;
  • BIPRU 11.5.4R (subsections 1, 2, 4(a)(iv) and (vi) and 4(b)(ii)) on our compliance with the rules in BIPRU and on Pillar 2 requirements; and
  • BIPRU 11.5.12R (subsections 1(d) and (f) and 2(b)) on market risk.

 

Scope and application of Directive requirements

The disclosures in this document are made in respect of Alchemy Special Opportunities LLP (?ASOP?), which is authorised and regulated by the United Kingdom's Financial Services Authority.

Risk management objectives and policies

Our risk management policy reflects the FSA requirement that we must manage a number of different categories of risk. These include: operational, market, investment, credit, insurance, liquidity and group risk. In respect of this disclosure it is the first three of these risks that are relevant; however, further information on all these risks is set out below.

Insurance, liquidity and group risk
In practice, ASOP has no significant insurance risk (policies are underwritten by highly rated counterparties) and very little liquidity or group risk. These three risks are not considered material for the purposes of this disclosure.

Credit risk
ASOP does not provide credit to clients we are not subject to significant credit risk. With regard to bank deposits, we only deposit money with approved counterparties on agreed terms. As mentioned above, insurance counterparty credit risk is assessed before policies are renewed. For trade debtors, balances are continually monitored and chased where appropriate. Should uncertainty be raised about a counterparty's creditworthiness then the CFO, in conjunction with the partners, may look to withdraw credit.

Operational Risk
Most of our risk management efforts are focused on operational risk. This encompasses everything, from the risk of ensuring regulatory compliance to the risk of administrative errors. Our policy is to operate a robust and effective risk management process, embedded within the governance and management structure of our business. The CFO reports on Risk Management at the monthly partners meetings and a formal annual risk review is also conducted as part of the Capital Adequacy assessment. Potential and actual operational risks are identified and controls put in place to mitigate them.

Market Risk
Under Pillar 1, our market risk is limited to our exposure to small foreign exchange fluctuations, due to some assets and liabilities being denominated in currencies other than sterling. Under Pillar 2, we have also considered changes in the market rate terms and conditions of investments made into funds which the group advises or manages, although variation of these is thought unlikely.

Investment Risk
Our Pillar 2 investment risk assessment principally takes the form of a significant fall in the level of assets which ASOP manages, following poor investment performance. The effect of this decline would be to lead to lower management fee income and profitability. To mitigate our investment risk, ASOP looks to hire only the highest quality investment staff and adheres to strict investment review processes to ensure that sufficient due diligence is undertaken.

Capital resources
The value of members' capital and regulatory capital contributions is £0.7 million at 1st July 2011. Our capital resources comprise of core Tier 1 capital only and therefore there are no other items or deductions.

In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), our capital requirement has been determined as being our fixed overhead requirement and not the sum of our credit risk capital requirement and our market risk capital requirement. Our Pillar 1 fixed overhead requirement, based on our forecast expenses, has been calculated as being £0.6 million for the year to 30 June 2012. The forecast expenditure and the resulting capital requirement are monitored on a monthly basis by the CFO.

Compliance with rules in BIPRU and Pillar 2 rule requirements
Our overall approach to assessing the adequacy of our internal capital is set out in our Internal Capital Adequacy Assessment Process (ICAAP).

The ICAAP process involves separate consideration of risks to our capital combined with stress testing using scenario analysis to model changes in our income and expenses caused by various potential risks over a 4-year time horizon.

Our Pillar 2 capital requirement has been assessed as increasing to £0.8 million by 30 June 2014, which is our own assessment of the minimum amount of capital that we believe is adequate against the risks identified. We are therefore forecasting to increase the level of regulatory capital contributions from the members over the coming years to ensure that we maintain the minimum regulatory capital requirement.