Académique Documents
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Contents
1 Introduction
1.1 1.2 1.3 1.4 Background Basis of disclosures Media and location Verification
3
3 3 3 3
4
4 4 4 6 6
8 9
9 9
10 11
11 15 16 17 17
18 19
1 Introduction
1.1 Background
This document is published to provide information about N M Rothschild & Sons Limited (NMR) compliance with the public disclosure rules set out in the Financial Services Authority (FSA) Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) Chapter 11 Disclosure (Pillar 3). The rules enact requirements set out in the Basel II Accord, as implemented in the EU by the Capital Requirements Directive (CRD). The disclosure requirements complement the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) and aim to encourage market discipline by allowing market participants to assess key pieces of information on risk exposures and the risk assessment processes of the firm.
1.4 Verification
These disclosures have been approved by the Board of NMR. Unless otherwise indicated, information contained within this document has not been subject to external audit. The Pillar 3 disclosures have been prepared purely for the purpose of explaining the basis on which the NMR Group has prepared and disclosed certain capital requirements and information about the management of certain risks and for no other purpose. They do not constitute any form of financial statement and must not be relied upon in making any judgement on the NMR Group.
N M Rothschild & Sons Ltd | 3
Group ALCO
Indicates hard reporting line upwards in order to discharge delegated responsibility Indicates where the Committees perform a dual role with respect to NMR and other Group Boards
The NMR Board is responsible for setting and reviewing NMR governance arrangements and for establishing adequate, sound and appropriate risk management processes in line with UK legal and regulatory requirements. The Board discharges its responsibility through delegation, where appropriate, to committees. For efficiency, and to reflect the way that Rothschild businesses are organised on global lines, a matrix approach has been adopted, with some committees performing dual functions with respect to both NMR and an intermediate parent, Rothschild Continuation Holdings (RCH). The chairmen of all key committees are members of either the RCH or NMR Boards, which are attended by senior management of operating divisions. The main roles of the committees with responsibility for key risk management areas are as follows: The Group Management Committee (GMC) reports to the Board of RCH. Its purposes are to formulate strategy for the Rothschild groups businesses, to assess the delivery of that strategy, to ensure the proper and effective functioning of group governance structures, operating policies and procedures, to define the groups risk appetite and to be responsible for the management of risk. The Group Audit Committee. This committee of the Board of RCH supervises and reviews the Groups internal audit arrangements, liaises with the Groups external auditors and monitors the overall system and standards of internal control. The Group Risk Committee (GRC) of Rothschild Concordia SAS acts as the risk committee for the RCH Group. The GRC formulates policies and procedures which promote the proper identification, measurement, monitoring, and control of risk, and which reflect the Groups risk appetite. The Group Assets and Liabilities Committee (Group ALCO) reports to the GMC. It is responsible for ensuring that the Group has prudent funding and liquidity strategies, for the efficient management and deployment of capital resources within regulatory constraints and for the oversight of the management of the Groups other financial strategies and policies, including credit decisions. The Credit Committee. This committee authorises and reviews all credit exposures to new and existing counterparties. Exposures exceeding certain limits are subject to ratification by the Group ALCO. The New Client Acceptance Committee. This committee approves, from a reputational, money laundering and due diligence perspective, all new clients to be accepted by the Investment Banking business in the UK. The Banking Operational Risk Committee and the Operating Committee of the Global Investment Banking Committee are responsible for the monitoring and oversight of operational risk in Banking and Investment Banking businesses respectively.
Group Risk Framework The Three Lines of Defence for identifying, evaluating and managing risks
First Line of Defence
Comprises of the Boards of PO, RCB and RCH which: set the Groups risk appetite approve the strategy for managing risk and are responsible for the Groups system of internal control It is the responsibility of senior management of PO, RCB and RCH to support risk management best practices and to oversee the establishment and implementation of effective risk management systems
2.5.1
Operational risk
Operational risk, which is inherent in all business activities, is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. NMR has adopted the Basic Indicator Approach for calculating Pillar 1 capital requirements for operational risk.
2.5.2
Credit risk
Credit risk is the risk of loss resulting from exposure to customer or counterparty default. NMR has adopted the Standardised Approach for calculating Pillar 1 capital requirements for credit risk.
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2.5.3
Liquidity risk is the risk that the Group does not have sufficient financial resources available to meet its obligations as they fall due, or that the Group is unable to meet regulatory prudential liquidity ratios. The Group performs liquidity stress testing based on a range of adverse scenarios, and has a contingency funding plan which is maintained with the objective of ensuring that the Group has access to sufficient resources to meet obligations as they fall due if these scenarios occur. Stressed liquidity profiles are reviewed by Group ALCO.
2.5.4
Market risk
Market risk arises as a result of the NMR Groups activities in interest rate, currency, equity and debt markets and comprises interest rate, foreign exchange, equity and debt position risk. Exposure to market risk in the trading book is small in relation to capital as can be seen in section 4.2. Trading activities are focused on servicing client requirements rather than on proprietary risk-taking. NMR monitors interest rate risk in the non-trading book, and performs stress tests on the exposures. This is discussed in section 7.
2.5.5
Other risks which are, or may be, material arise in the normal conduct of our business. Such risks, which include concentration risk, securitisation risk, business risk, pension obligation risk and residual risk, are identified and managed as part of the overall risk controls and are taken into account in the Boards periodic assessment of capital adequacy. There is additional information regarding credit risks in the 2010 Annual Report (pages 62 - 69); other information regarding liquidity and funding risks and market risks is also included (pages 69 - 76).
3 Capital Resources
During the year ended 31 March 2010, NMR and the individual entities within the NMR Group complied with all of the externally imposed capital requirements to which they were subject. The table below summarises the composition of regulatory capital for the NMR solo consolidated group, as reported to the FSA, as at 31 March:
Notes Tier 1 Capital Called up share capital Share premium account Retained earnings and other reserves Intangible assets Pension fund valuation adjustment Total Tier 1 Capital Tier 2 Capital Perpetual subordinated debt Collective provisions Other Deductions Total Tier 2 Capital Tier 1 & 2 Capital Deductions from total of tier 1 and tier 2 capital Capital Resources 4 124.3 34.4 0.2 158.9 633.1 (161.4) 471.7 270.9 23.3 (8.2) 286.0 683.5 (161.1) 522.4 1 2 3 57.7 97.9 265.7 (4.9) 57.8 474.2 57.7 97.9 235.4 (5.1) 11.6 397.5 2010 m 2009 m
Notes: 1. Retained earnings and other reserves exclude gains or losses on cashflow hedges and non equity available-for-sale assets. 2. Intangible assets include intellectual property rights and goodwill and are not a qualifying asset for regulatory capital purposes. 3. Under FSA rules any pension fund surpluses (IAS 19 basis) are deducted from reserves. Deficits either remain deducted or are replaced by the value of 5 years of additional funding required to eliminate the accounting deficit. 4. Deductions from the total of tier 1 and tier 2 capital principally arise from equity or loan investments in/to subsidiaries or other related parties.
4 Capital Adequacy
4.1 Overview
As part of its statutory duties the FSA sets out the minimum capital requirements for UK regulated financial institutions. An institutions minimum regulatory capital is a combination of the requirements derived from Pillar 1 and Pillar 2 rules. Pillar 1 sets out the minimum capital required to meet credit, market and operational risk. Pillar 2 lays out a supervisory review process to evaluate an institutions own internal process to assess its own capital needs including capital for risks not covered by Pillar 1. Regulatory capital is monitored closely and formally reported weekly to senior executives. An annual Internal Capital Adequacy Assessment Process (ICAAP) is undertaken to review the risks and capital requirements of the business over a rolling five year planning cycle. The ICAAP is subject to FSA review. NMRs risk management processes are designed to ensure that all risks are identified and that they are covered by capital or other appropriate measures.
5 Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group Operational Risk Policy defines roles, responsibilities and accountabilities across the Group for the identification, measurement, monitoring and reporting of operational risks. Risk maps are developed by each business and support unit. The nature of NMRs businesses means that operational risks are most effectively mitigated through the application of rigorous internal procedures and processes, with a particular emphasis on client take-on, identification of conflicts of interest, projectspecific appointment letters, formal approval of new products and quality controls in transaction implementation. This is supported by a programme of training on NMRs procedures and regulatory and compliance issues. NMR manages its operational risks through a variety of techniques, including monitoring of incidents, internal controls, training and various risk mitigation techniques, such as insurance and business continuity planning. One of the objectives of the Group Operational Risk Policy is to ensure that operational risk is managed and reported consistently across the Group. Senior management of each business and support unit are required to: identify the key operational risks in their business; describe the controls in place to mitigate these risks; and assess the potential impact of each risk, and the likelihood of an event occurring (after taking account of mitigants in place). Senior management of operating entities are required to identify, escalate and report operational risk incidents and control weaknesses which give rise to or potentially give rise to financial loss or reputation damage.
6 Credit Risk
Credit risk arises from all exposures to clients and counterparties relating to the Groups lending, trading and investment activities. Limits on credit risk are set by the Group Management Committee and by the Credit Committee. The Credit Committee reviews concentrations and makes recommendations on credit decisions to the Group ALCO. Credit risk limits are set, where appropriate, in respect of exposures to individual clients or counterparties to industry sectors and to countries. Exposure to credit risk is managed by detailed analysis of client and counterparty creditworthiness prior to entering into an exposure, and by continued monitoring thereafter. A significant proportion of the Groups lending exposures is secured on property or other assets; the Group monitors the value of any collateral obtained. The Group also uses netting agreements to restrict credit exposure to counterparties. For internal monitoring purposes, credit exposure on loans and debt securities is measured as the principal amount outstanding plus accrued interest. Credit exposure on derivatives is measured as the current replacement value plus an allowance for the potential change in replacement value. NMRs nominated external credit assessment institutions are Standard & Poors, Moodys and Fitch.
6.1.2
The Group monitors concentrations of credit risk by geographic location and by industry sector. The tables below show an analysis of credit risk by location and by sector as at 31 March 2010. The location for loans and advances is determined by reference to the location of the borrower, and debt securities are recorded based on the location of the issuer of the security. The sector analysis is based on Global Industry Classification Standards and includes derivative financial instruments, loans and advances to banks, loans and advances to customers, debt securities, commitments and guarantees and credit default swaps.
UK m
North America m 57.3 113.4 170.7 Corporates m 44.9 160.6 124.2 157.0 78.4 18.6 189.8 12.3 86.0 11.0 8.5 891.3
Total m 916.2 20.2 358.5 891.3 489.2 216.7 2,892.1 Total m 44.9 160.6 124.2 157.0 78.4 18.6 708.3 554.8 86.0 14.4 936.4 8.5 2,892.1
Central governments or central banks Regional governments or local authorities Institutions Corporates Secured on real estate property Securitisation positions Total Asset Class Exposure by Industry
916.2 20.2 94.1 317.0 474.4 88.9 1,910.8 Sovereigns & government orgs m 936.4 936.4
Secured on Securitisation real estate positions m 489.2 489.2 m 160.0 53.3 3.4 216.7
Energy Materials Industrials Consumer discretionary Consumer staples Health care Financial Real estate IT and telecoms Utilities Governments Private persons Total
6.1.3
The table below sets out an analysis of credit risk by maturity as at 31 March 2010. Residual maturity of exposures is based on contractual maturity dates and not expected or behaviourally adjusted dates. Cash flows payable or receivable over the life of the exposure are not included.
Asset Class Exposure by Residual Maturity Central governments or central banks Regional governments or local authorities Institutions Corporates Secured on real estate property Securitisation positions Total < 1 year m 811.1 8.4 283.6 292.2 159.3 1,554.6 1-5 years m 105.1 11.3 74.9 363.8 329.4 13.5 898.0 >5 years m 0.5 235.3 0.5 203.2 439.5 Total m 916.2 20.2 358.5 891.3 489.2 216.7 2,892.1
6.1.4
NMR uses external credit assessments provided by Standard & Poors, Moodys and Fitch for all exposure classes. These are all used, where available, to assign exposures a credit quality step and calculate credit risk capital requirements under the standardised approach. The following tables provide, for material segments only, an analysis of exposures by credit quality steps as at 31 March 2010:
Central Governments or Central Banks Credit Quality Step (CQS) 1 Total Institutions Credit Quality Step (CQS) 1 2 3 4 5 6 Unrated Total Corporates Credit Quality Step (CQS) 1 2 3 4 5 6 Unrated Total Risk weight % 20% 50% 100% 100% 150% 150% 100%/150% Risk weight % 20% 50% 100% 100% 150% 150% 100%/150% Risk weight % 0% Exposure m 916.2 916.2 Exposure m 129.5 152.8 28.9 13.4 3.8 30.1 358.5 Exposure m 42.0 85.9 43.2 11.4 50.6 2.0 664.2 899.3 Exposure After Credit Risk Mitigation m 916.2 916.2 Exposure After Credit Risk Mitigation m 129.5 152.8 28.9 13.4 3.8 30.1 358.5 Exposure After Credit Risk Mitigation m 42.0 85.9 43.2 11.4 50.6 2.0 656.2 891.3
Secured on Real Estate Property Credit Quality Step (CQS) 1 2 3 4 5 6 Unrated Total
Exposure After Credit Risk Mitigation m 107.9 31.6 59.5 5.1 6.0 6.6 216.7
An exposure is deemed past due when any part of interest or principal remains unpaid for a period of 90 days following its due date. Financial assets which have had their terms renegotiated are not treated as past due. NMRs policy is to avoid entering into contracts that contain provisions to provide collateral based on a downgrade in its credit rating. Accordingly, should NMR suffer a downgrade in its credit rating, the amount of collateral to be provided is considered to be immaterial. The geographic spread of impaired exposures as at 31 March 2010 was as follows (excludes collective provisions):
Gross exposure m UK and Europe North America Other 122.0 34.4 4.0 160.4
Past due but not impaired exposures as at 31 March 2010 amounted to 54.2m, all of which were in UK and Europe.
Gross Positive Fair Value of contracts m Banking Book Trading Book Total 12.7 4.4 17.1
6.5 Securitisation
NMRs primary securitisation focus is on arranging and managing securitisation vehicles on behalf of third party investors. This may involve the transfer of some assets from NMR itself but these are immaterial in both the context of NMRs and the securitisation vehicles balance sheet. NMR does not underwrite or provide liquidity support to these vehicles. NMR may invest in both its arranged and managed vehicles and third party securitisations. The table below sets out NMRs investments in securitisations as at 31 March 2010:
Investment in Securitisations Residential mortgage backed securities Commercial mortgage backed securities Other asset backed securities Collateralised debt obligations/collateral loan obligations: traditional synthetic Total 47.0 2.4 216.7 Amounts retained/purchased m 105.5 58.4 3.4
This table includes all non-trading book interest rate risk, including that within the treasury and banking businesses and also the structural interest rate exposure that arises from the reinvestment of shareholders funds.
Entity Five Arrows Finance Limited and subsidiaries Rothschilds Continuation Finance PLC Shield Trust Limited NMR Leasing Limited NC Investments Limited Shield MBCA Limited Lanebridge Holdings Limited and subsidiaries Rothschild Australia Holdings Limited and subsidiaries Mist Two Limited Rothschild Europe BV a nd subsidiaries Quintus European Mezzanine Fund Limited Partnership Rothschild & Cie Banque N M Rothschild Europe Partnership Rothschild Europe SNC Other immaterial entities
Relationship to the Company Subsidiaries Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiaries Subsidiaries Subsidiary Subsidiaries Associated undertaking Associated undertaking Joint venture Joint venture Subsidiaries
Description
Regulatory treatment Full consolidation Full consolidation Full consideration Full consolidation Full consolidation Deduction Deduction Deduction Deduction Deduction Deduction Deduction Deduction Deduction Deduction
Asset finance businesses Full Financing company Investment holding company Investment holding company Investment holding company Investment holding company Property investment management Full Full Full Full Full Full
Investment banking Full and investment holding Investment holding company Investment banking firms Investment vehicle Banking Investment banking advice Investment banking advice Full Full Equity accounting Equity accounting Proportionally consolidated Proportionally consolidated Full