ILLIQUIDX Securities limited (“ILLIQUIDX”) Pillar 3 disclosures and remuneration disclosures

The Capital Requirements Directive 2013/36/EU (“CRD IV”) of the European Union establishes a revised regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain. In the United Kingdom, the Directive has been implemented by the Financial Conduct Authority (“FCA”) and the Prudential Regulatory Authority (“PRA”) since 1 April 2013 in its regulations through the General Prudential Sourcebook (‘GENPRU’) and the Prudential Sourcebook for Banks, IFPRU and the Regulation of the European Parliament and the Council on prudential requirements for credit institutions and investment firms (Regulation (EU) No 575/2013) and amending Regulation (EU) No 648/2012, together “EU CRR”.

The FCA framework consists of three ‘Pillars’:

  • Pillar 1 sets out the minimum capital amount that meets the firm’s credit, market and operational risk;
  • Pillar 2 requires the Firm to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to annual review by the FCA and PRA; and
  • Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position.

ILLIQUIDX is permitted to omit required disclosures if its management believes that the information is immaterial and that such omission would be unlikely to change or influence the decision of a reader relying on that information. The Firm has made no omissions on the grounds that it is immaterial, proprietary or confidential.


Scope and application

ILLIQUIDX is a Full Scope IFPRU 730K firm and does not form part of a consolidation group; it is not a Globally Systemic Important institution and is subject to IFPRU and the EU CRR. ILLIQUIDX has the permission to provide advisory and arranging services in addition to dealing on a principal and agency basis. The permissions allow the Firm to hold own account positions. The Firm has no permission to hold client money or safeguard client assets. The Firm mainly deals in fixed income, equities and other securities transactions, as well as bankruptcy claims. ILLIQUIDX also provides corporate finance advisory and arranging services. ILLIQUIDX deals with professional customers and eligible counterparties, and executes sell orders for retail clients.


Statement of risk appetite

ILLIQUIDX’ risk appetite is low by design and limited by its business model, by the products it trades and by dealing in general as a matched principal broker. The Firm also considers imposing trade volume limits on the basis of a counterparty’s creditworthiness.

Risk appetite is approved at Board level.


Risk management objectives and policies

Risk Management Objective

The Firm has a risk management objective to develop systems and controls to mitigate risk to within its risk appetite.


Governance Framework

The Board is the Governing Body of the Firm and has the daily management and oversight responsibility. It meets quarterly and is composed of:

  • Galina Alabatchka
  • Celestino Amore

The Board is responsible for the entire process of risk management, as well as forming its own opinion on the effectiveness of the process. In addition, the Board decides the Firm’s risk appetite or tolerance for risk and ensures that the Firm has implemented an effective, ongoing process to identify risks, to measure its potential impact and then to ensure that such risks are actively managed. Senior Management is accountable to the Board for designing, implementing and monitoring the process of risk management and implementing it into the day-to-day business activities of the Firm


Disclosures concerning Executive Committee

Number of directorships (excluding those held in respect of FIRM) held by members of Executive Committee

The number of outside directorships held by members of the Executive Committee is as follows:

  • Celestino Amore - 6
  • Galina Alabatchka - 3
Recruitment policy for selection of Executive Committee

The Firm will closely scrutinise any new additions to the management committee as and when they are appointed so that they may complement the business within its risk profile.

Policy on Diversity

The Firm complies with national legislation of diversity and does not discriminate on the basis of gender, sexual orientation religion or disability.

Risk Committee

Due to the size of the Firm a separate Risk Committee has not been set up.


Risk Framework

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

  • Regular meetings of management
  • A risk register for the firm
  • Periodic stress testing

ILLIQUIDX has identified the material risks below.


Credit risk (including counterparty risk)

Credit risk is determined pursuant to EU CRR Capital Requirement for Credit Risk, Chapter 1 and Chapter 2 specifically; Art 107, 111 – 122 and 134.

With regard to bank deposits, ILLIQUIDX deposits money with several approved reputable credit institutions for diversification purposes.

The Firm does not use the Internal Ratings Based Approach.


Market Risk

ILLIQUIDX’ market risk is its exposure to foreign exchange fluctuations, due to some assets and liabilities being denominated in currencies other than sterling, and a position risk requirement based on our own account positions in financial instruments.


Business Risk

The principal business risk assessment principally takes the form of a fall in execution business following a market downturn that leads to lower brokerage fees. To determine impact, the Firm regularly analyses various different economic scenarios to model the impact of economic downturns on its financial position. Senior management is seeking to add further revenue streams to limit impact.


Operational Risk

Operational risk includes everything, from risk to the Firm’s high-level strategy to risk of administrative errors. ILLIQUIDX’ policy is to operate a robust and effective risk management process, embedded within the governance and management structures of its business.


Liquidity risk

At 31 March 2017, ILLIQUIDX held capital of £1,273,712. There was £1,231,937 cash in the business.

Under normal trading conditions liquidity risk is not generally an issue, however, liquidity risk could become an issue in the event of one of ILLIQUIDX’ settlement brokers or banks going into liquidation or in the event of a significant decrease or complete disappearance of volatility in the market.

Liquidity risk has been separately analysed in the ILLIQUIDX Liquidity Policy document, covering areas of the organisational structures for liquidity management, liquidity monitoring and management and early warning indicators and strategies followed by scenario analysis. ILLIQUIDX follows the rules and guidance as set out in BIPRU 12, in the managing of its liquidity risk. ILLIQUIDX has high levels of liquidity and no risk capital allowance has therefore been made for liquidity risk in the ICAAP.


Internal Capital Adequacy Assessment Process (“ICAAP”)

As required by the FCA rules, ILLIQUIDX has established an Internal Capital Adequacy Requirement Process. ILLIQUIDX monitors the adequacy of its capital and other resources relative to its risks on a regular basis. The Board of Directors reviews and approves the ICAAP document at least once a year.


Capital adequacy (own funds & leverage ratios)

CAPITAL SUMMARY 31/03/2017

£

Capital Adequacy - Own funds

 

Paid up capital instruments - issued ordinary share capital

1,203,750

Other reserves

Audited profit and loss account

69,961

 

__________

OWN FUNDS/TIER 1 CAPITAL/COMMON EQUITY TIER 1 CAPITAL

1,273,712

 

__________

Capital Adequacy - Risk Weighted Exposure Amounts

 

Institutions

Credit institutions

246,387

Other items

52,823

 

Operational risk (Basic indicator Approach)

 

5,662,188

Market risk (Foreign exchange)

1,431,620

Market Risk (Debt instruments)

429,663

 

__________

TOTAL RISK EXPOSURE AMOUNT

7,822,681

 

__________

Capital Adequacy - Ratios

 

CET1 Capital ratio

15.16%

Surplus(+)/Deficit(-) of CET1 capital

834,256

Tier 1 Capital ratio

15.16%

Surplus(+)/Deficit(-) of Tier 1 capital

716,916

Total capital ratio

15.16%

Surplus(+)/Deficit(-) of total capital

560,463

 

__________

Initial CAPITAL REQUIREMENT (€730K)

624,223

 

__________


Dislcosure: use of ECAI

Article 112 exposure ECAIs and ECA Exposure value Exposure value after Credit Risk Mitigation
exposures to central governments or central banks;
exposures to regional governments or local authorities;
exposures to public sector entities;
exposures to multilateral development banks;
exposures to international organisations;
exposures to institutions; Country 246,387 246,387
exposures to corporates;
retail exposures;
exposures secured by mortgages on immovable property;
exposures in default;
exposures associated with particularly high risk;
exposures in the form of covered bonds;
items representing securitisation positions;
exposures to institutions and corporates with a short-term credit assessment;
exposures in the form of units or shares in collective investment undertakings ("CIUs");
equity exposures;
other items. Country 52,823 52,823
Total 299,210 299,210


Pillar 3 Remuneration Disclosure

Decision-making process for remuneration policy

The Board is responsible for human resource issues connected to terms and conditions of employment, remuneration (fixed and variable) and benefits.


Remuneration disclosures for the year ended 31 March 2017

The Board determines remuneration policy taking full account of the firm’s business strategy, objectives, values and long-term interests of the firm. The Remuneration Policy encourages staff to improve how they undertake work rather than with a focus on how much revenue or profit they can make. This is based on the fact that most of the criteria which determine any variable remuneration are non-financial.

Remuneration Code Staff comprise staff that hold significant influence functions, are senior management, risk takers, staff who undertake controlled functions and employees receiving remuneration on par with senior management.


Pay-performance link

The pay performance link for Code Staff is made up of variable profits based on completed transactions by the relevant person, as well as on the profits of the Firm. Compensation levels are determined by a set of criteria for each Code Staff member and their responsibilities.

These criteria are performance measures linked to the quality of the work done with linkage to agreed financial targets. The performance component of the remuneration relates to a percentage of a Code Staff members’ transactional profit production, in addition to the total profit generation and overall financial performance of the Firm.


Code Staff remuneration

ILLIQUIDX has 2 Code Staff which are Senior Management. Aggregate remuneration in respect of Code Staff was £120,000.