Docstoc

Capital Requirements Directive

Document Sample
Capital Requirements Directive Powered By Docstoc
					Pillar 3 Disclosure
Background

The 2006 Capital Requirements Directive („the CRD‟) of the European Union created a
revised regulatory 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 FSA 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 firm-specific risks not covered by Pillar 1; and
      Pillar 3 requires us to publish certain details of our risks and risk management
       process.

The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This must be done in
accordance with a formal disclosure document. The disclosure of this document is
intended to meet Chi-X Europe Ltd‟s („Chi-X‟) obligation with respect to Pillar 3.

We are permitted to omit required disclosures if we believe that the information is
immaterial. In addition, we may omit disclosures where we believe that the information
is proprietary or confidential.

Scope and Application of the Requirements

Chi-X is a private limited company, incorporated under the laws of England and Wales.

Chi-X is authorised and regulated by the FSA. It is classified as a BIPRU limited license
firm under the CRD. Chi-X‟s primary activity is to operate a multilateral trading facility.
Chi-X is also authorised to perform a number of additional activities, however it is not
authorised to trade for its own account and does nor hold client monies.

Chi-X does not form part of a group of companies.




                                            1
Risk Management Process

Chi-X is governed by a Board of Directors. This is supported by an Executive
Committee led by the Chief Executive Officer (“CEO”), which is made up of senior
members of the management team, and also the Risk and Compliance Committee, which
is made up of members of the Board and management team with a focus on Risk and
Compliance. The CEO and the Executive Committee are primarily responsible for
assessing how risks faced by the firm on a day to day basis are dealt with.

Our risk management policy reflects the FSA requirement that adequate financial
resources and adequate systems and controls are necessary for the effective management
of risks. Chi-X Board and management determine the firm‟s business strategy and risk
appetite in conjunction with designing and implementing a risk framework that
recognizes the risks that the business faces. They determine how those risks may be
mitigated and assess on an ongoing basis the arrangements to manage those risks, both in
terms of organisation structure and procedures and controls. They also regularly review
the adequacy of the firm‟s internal capital to support the current and future activities of
the business.

The risk appetite at Chi-X is low.

The main categories of risk that are pertinent to Chi-X include: Operational, Business,
Market, and Credit risk.

Operational Risk:

The majority of risks faced by Chi-X are operational in nature, which is where most of
our risk management efforts are focused. Operational risks generally relate to the risks
associated with failed internal processes, people or systems. The risks inherent to Chi-
X‟s activities include general operational risks, such as strategy, reputation and budgeting
and planning, and also issues specific to Chi-X, including technology issues, such as
hardware, software and communication issues. Chi-X places a high degree of focus on
operational controls to manage and mitigate these risks.

Business Risk:

Business risks faced by Chi-X include competitive position and regulatory risk. Chi-X
places a high degree of focus on these risks to ensure that they are managed and mitigated
as much as possible.

Market Risk:

Chi-X does not take trading positions. However, Chi-X has some exposure to market risk
through changes in FX rates, because its charges are based on the value of transactions in
their underlying currency, however Chi-X primarily bills in GBP. Chi-X actively
mitigates FX risk through currency hedges.

                                             2
Credit Risk:

Chi-X‟s credit risk is low as the firm is not involved with the clearing or settlement of
trades. Its credit risk is solely for the fees charged. This risk is actively mitigated,
including through diversification of debtors and credit controls.

The firm calculates its credit risk by taking 100% of trade debtors.

Cash at bank is charged at 1.6%. This is the credit risk component, calculated at 8% of
the risk weighted exposure amount (in accordance with BIPRU 3.1.5). The risk weighted
exposure is calculated with a risk weighting of 20%, in accordance with BIPRU3.5.5.

Capital Resources

All capital is held as ordinary shares. The “A” shares are voting shares, are freely
transferable and entitle the holder to appoint directors. The “B” and “C” shares are non-
voting, can only be transferred subject to certain conditions and do not entitle the holder
to appoint directors. All outstanding “B” shares were converted to “A” shares at a one to
one ratio on 31 December 2009.

Fixed Overheads Requirement

This figure represents one quarter of the firm‟s fixed expenditure, calculated in
accordance with criteria specified in GENPRU 2.1.54.




                                             3
Tier One Capital
                                                        FY 2010      FY 2009
                                                         £’000s       £’000s
         Share Capital– Ordinary “A” Shares              33,483       33,483
         Share Capital – Ordinary “C” Shares              1,811       1,811
         Share Premium Account                           17,407       17,407
         Reserve for own shares                          -1,539       -1,902
         P&L Reserve                                    -14,444      -15,242
         Tier One Capital Resources                      36,718       35,557

The Chi-X Financial Year end is 31st December.

Pillar One Surpluses

In accordance with GENPRU 2.145 the Capital Resources Requirement („CRR‟ or „Pillar
1‟) is calculated as the higher of the fixed overheads requirement and the sum of credit
risk exposure and the market risk capital requirement. Chi-X‟s surplus capital can be
summarised as follows:

                                                        FY 2010      FY 2009
                                                         £’000s       £’000s
         Tier One Capital Resources                      35,920       35,557
         Standardised Credit Risk Exposure               3,211        3,211
         Market Risk Exposure                              62           38
         Total Credit and Market Risk                    2,684        3,249
         Fixed Overheads Requirement                     2,327        1,812
         Total Pillar 1 Requirement                      2,746        3,249
         Pillar 1 Surplus                                33,174       32,308
         Pillar 1 Surplus Ratio (Surplus over capital
         Requirement)                                    1308%        994%




                                               4