TFS-ICAP Limited
PILLAR 3 DISCLOSURES - 2020
1 INTRODUCTION
1.1 Background
A revised regulatory capital adequacy framework, Capital
Requirements Regulation ("CRR") and Capital Requirements Directive
("CRD"), together referred to as "CRD IV", came into effect on 1
January 2014.
CRD IV has been implemented in the UK for investment firms by
the Financial Conduct Authority ("FCA") Handbook, specifically the
Prudential Sourcebook for Investment Firms ("IFPRU").
The regulatory framework established by CRD IV consists of three
Pillars:
1. Pillar 1 sets out the minimum capital required to meet a
firm's credit, market and operational risk;
2. Pillar 2 requires a firm to establish an Internal Capital
Adequacy Assessment Process ("ICAAP") to establish whether its
Pillar 1 capital requirement is sufficient to cover all the risks
faced by the firm, and if not, to calculate the additional capital
required. The ICAAP is then subject to review by the, FCA through
the Supervisory Review and Evaluation Process ("SREP"); and
3. Pillar 3 requires a firm to disclose specific information
concerning its risk management policies and procedures, and its
regulatory capital adequacy position.
Articles 431 to 455 of Capital Requirements Regulation ("CRR")
set out the specific disclosure requirements and the purpose of
this document is for the UK incorporated, FCA regulated entity
TFS-ICAP Limited ("TFS-ICAP" or "the Firm") to meet these
requirements.
1.2 Disclosure Policy
In accordance with CRR Article 431(3) TFS-ICAP has adopted a
formal disclosure policy to comply with the disclosure requirements
and has policies for assessing the appropriateness of the
disclosures, including their verification and frequency.
Under CRR Article 432(1) an entity may omit one or more of the
required disclosures if the information is not material, that is
that the information would not be likely to change or influence the
decision of a user relying on that information for the purposes of
making an economic decision.
Under CRR Article 432(2) an entity may omit one of more of the
required disclosures if they would require the disclosure of any
information regarded as proprietary or confidential that is
information which would, respectively, undermine a competitive
position or breach an obligation of confidence between a firm and
its customers.
In accordance with CRR Articles 433 and 434, TFS-ICAP will
publish this disclosure at least annually on the traditionicap.com
website.
2 RISK MANAGMENT
2.1 Management and Control
TFS-ICAP is a joint venture between TFS2 SA, Nex International
Limited and Volbroker.com Ltd. These entities exercise combined
control over TFS-ICAP Limited.
TFS-ICAP is provided with administrative support services by
Tradition Management Services Limited ("TMS") under a services
agreement.
TFS-ICAP has created a governance and control framework that
sets out the way in which the formal Board and Committee structure
and approval systems operate. The framework covers policy, risk
appetite, business performance, limits setting, delegation of
levels of authority, capital management and assurance
mechanisms.
The governance and controls structure for TFS-ICAP is based on
the following lines of defence:
First line - process owners and the management functions which
have primary responsibility for the assessment and monitoring of
their own risks; and
Second line - support functions which provide the business
with specialist support in analysing risks and monitoring
controls.
The board of TFS-ICAP ("the Board") provides the following
governance and oversight:
Setting appropriate risk strategy and risk appetite;
Promoting internal risk culture and risk awareness;
Monitoring the implementation of the risk strategy;
Ensuring the independence of the control functions such as
Compliance and Risk Management; and
Verifying that independent control functions operate
correctly.
Details regarding members of the Board and their other UK
directorships are available from Companies House.
The Board is supported by a functional committee, the Oversight
and Management Committee. Its purpose is to consider any matters
relating to:
the support services provided by TMS to TFS-ICAP
risk and controls;
capital and liquidity;
regulation and compliance; and
culture and conduct.
The Oversight and Management Committee, which meets monthly, is
made up of representatives from senior management and Independent
Non-Executive Board members. Members of TMS as service provider are
invited to attend as required.
The Firm does not have a dedicated Risk Committee but risk is an
agenda item at each quarterly Board meeting. The CRO presents a
risk report, with associated management information, to the Board
at each quarterly meeting.
2.2 TFS-ICAP - Governance and Control Framework
The governance framework is based upon the concept of internal
lines of defence against risk. This concept aims to ensure that
accountability for the management of risk is embedded in day-to-day
management.
The First Line of Defence
The first line of defence consists of operations and business
process owners across the Firm who have primary responsibility for
their Risk and Control Self-Assessment ("RCSA"). They act as risk
owners with a responsibility to be proactive in reducing the
likelihood and severity of incidents, including establishing
appropriate risk controls and ensuring that when incidents occur
they are recorded, reported and remediated where appropriate.
The day-to-day management of certain controls are delegated to a
number of support functions which support the first line of defence
business and operational management. These support functions
include, but are not limited to: Finance, IT, Legal, HR, Facilities
and Front Office Risk and Control ("FORC").
The Second Line of Defence
The second line of defence consists of the risk and control
functions that establish overarching systems and processes to
assess, monitor and minimise risks across the Firm, overseeing the
effectiveness of the first line risk management and control
environment, and where necessary defining additional controls,
mitigation or other risk management measures. The second line is
responsible for challenging and formally reviewing the
effectiveness of the first line in managing the risks that it
incurs and owns.
This role is primarily performed by the control functions and
senior managers described below:
Risk Function - The Chief Risk Officer has a reporting line to
the Board. The Risk Function is responsible for the measurement,
monitoring and reporting of risks within TFS-ICAP and for driving
the development of risk management capability and the Firm's
Enterprise-wide Risk Management Framework.
Compliance Function - The Chief Compliance Officer has a
reporting line to the Board. The objective of compliance is to
monitor adherence to all regulatory rules and requirements and to
ensure that all regulatory issues are effectively monitored and
managed.
The Firm does not have an Internal Audit function which the
Board considers to be appropriate given the straight-forward
nature, small scale and lack of complexity of TFS-ICAP's
activity.
2.3 Risk Management
The objectives of enterprise-wide risk management for TFS-ICAP
are:
To identify and assess the risks inherent within the Firm's
activities;
To identify, implement, assess and monitor mitigation
strategies in order to reduce TFS-ICAP's risk exposure;
To alert the Board of any substantive threats to its risk
appetite;
To identify, record and analyse risk events;
To monitor key risks and report on their threat levels;
To ensure that issues identified internally or by third
parties are recorded, remediated, escalated and reported;
To ensure that the various components of the Enterprise-wide
Risk Management Framework are integrated and cohesive);
To provide senior management with risk-related information in
order to encourage risk-informed decision making;
To embed a robust risk management culture within TFS-ICAP;
and
To contribute to the risk-based quantification of regulatory
capital and to the continuous improvement of the management of the
Firm's capital requirements.
2.4 Risk Categorisation and Profile
Risk categories of relevance for TFS-ICAP include the
following:
i. Credit Risk
The Finance Function assesses and manages the cash held with
banks and the commission receivables from customers in order to
assess and monitor overdue receivables. Where recovery of all or
part of amounts due is in doubt, Finance is responsible for
establishing provisions so that balance sheet values fairly reflect
potential credit losses. The Finance Function has an agreed
methodology that is used and is aligned with applicable accounting
and regulatory requirements.
TFS-ICAP has an inherent concentration risk within its debtor
profile. The exposure to concentration risk is managed through
monitoring overdue client debtor balances and taking action.
TFS-ICAP has not experienced any significant credit losses. The
universe of core clients of TFS-ICAP is primarily comprised of
banks and financial institutions.
ii. Market Risk
TFS-ICAP is exposed to foreign currency risk that arises through
its normal operating activities, which generate receivables and
payables in foreign currencies. In addition to GBP, revenue is
principally earned in EUR and USD and to a lesser degree in other
currencies. Foreign currency risk is analysed and managed by the
Finance Function; the risk is minimised by conversion of currency
balances into GBP as appropriate, as well as the use of FX forward
contracts to hedge residual exposures.
iii. Operational Risk
TFS-ICAP follows the Basel Committee definition for operational
risk - the risk of loss caused by human error, ineffective or
inadequately designed processes, system failure or improper conduct
(including criminal activity).
Some of the pertinent operational risks facing TFS-ICAP are
summarised by Basel Category as follows:
|
Basel Event-Type Category (Level 1)
|
TLG Example Risks
|
|
1 Internal Fraud
|
Fraudulent transfer of funds from bank, clearing or settlement
account; Bribery and/or Collusion
|
|
2 External Fraud
|
Fraudulent access to systems and data (external); Fraudulent
transfer of funds (external)
|
|
3 Employment Practices and Workplace Safety
|
Departure of key staff or a whole team; Discrimination or
Harassment
|
|
4 Clients, Products, and Business Practice
|
Market abuse; Billing not in accordance with agreed rates; New
product failure
|
|
5 Damage to Physical Assets
|
Damage to critical building or other infrastructure and
assets
|
|
6 Business Disruption and Systems Failures
|
Failure, alteration , disruption or interruption to utility
services; System or Application is unavailable
|
|
7 Execution, Delivery, and Process Management
|
Error or difference on trade; Breach of contractual relationship
or other obligation to a supplier
|
TFS-ICAP quantifies its exposures to the operational risk events
by taking into consideration historical loss experience and
relevant external loss data. TFS-ICAP can experience operational
risk losses in its day-today business from errors, penalties and
differences in broking activities which are considered normal in a
wholesale brokerage business.
Operational risk incidents are collected in the enterprise-wide
risk management system (OneSumX) thus creating a database for
analysis.
TFS-ICAP seeks to minimise operational risks by putting in place
robust internal risk management and business controls. TFS-ICAP
uses the compliance function to reinforce and oversee the operation
of these controls. TFS-ICAP also aims to minimise operational risk
at all times through a robust control and operational
infrastructure governed by an operational risk management framework
that includes:
measuring risk and assessment of the risk mitigation in place:
achieved through the application of a regular risk and control
self-assessment, and scenario analysis which forms part of the
annual capital quantification process; and
on-going management and monitoring of risks: achieved through
management information reporting on incidents, KRIs and risk
appetite.
Historical losses associated with operational risk events are
well within TFS-ICAP's minimum regulatory capital requirement for
operational risk.
iv. Regulatory Risk
Whilst TFS-ICAP management remain ultimately responsible for
overall compliance with legal and regulatory requirements, the
Compliance Function has the day-to-day responsibility for ensuring
that an appropriate regulatory risk framework is in place and that
regulatory risk is identified, assessed and managed. The scope for
regulatory risk covers the risk of material loss, reputational
damage or liability arising from a failure to comply with the
requirements of the Firm's lead regulator, the Financial Conduct
Authority, other regulatory bodies and related codes of best
practice that oversee regulated financial services businesses.
TFS-ICAP is subject to legal and regulatory obligations designed
to restrict the ability of criminals to launder the proceeds of
their crimes through the financial system. The Compliance Function
also has the supervisory and advisory responsibility for ensuring
that appropriate organisational arrangements are in place to
undertake and monitor Anti Money Laundering activities.
v. Strategic/Business Risk
TFS-ICAP is exposed to risk arising from changes in its business
environment, including the risk that it may not be able to carry
out its business plans and its desired strategy. These risks are
material, as failed entry to new markets and products, failed
acquisitions or late adoption of technology can be costly.
vi. Liquidity Risk
Liquidity risk is the risk that TFS-ICAP is not able to meet its
liabilities as they fall due, is unable to maintain access to
effective and stable sources of funding, or that in order to meet
liabilities it is obliged to sell assets at prices that lead to
mark-to-market losses.
Balance sheet liquidity risk arises from changes in the profile
of the Firm's current assets and liabilities (its working capital).
These may result from changes in foreign exchange rates, the rate
at which receivables are collected or payables are settled,
unexpected costs for example from a broker error or operational
failure, or from changes in financing arrangements. Balance sheet
liquidity risk is monitored and managed by the Finance
Function.
2.5 Board statement on risk management arrangements
The Board confirms that the risk management arrangements of
TFS-ICAP provide assurance that the risk management systems put in
place are adequate with regard to the Firm's profile and
strategy.
2.6 Board statement on risk profile
TFS-ICAP does not perform any proprietary trading and its risk
profile centres on arranging options trades for clients, operating
an Organised Trading Facility ("OTF") and providing data. It is
exposed to operational risk of interruption to or inaccuracy or
incompleteness in provision of these services. The business
strategy is predicated on delivering excellent client service and
maintaining client trust. The Board adopts a conservative approach
and sets low tolerance for risks that could materially impact the
business strategy.
3 OVERVIEW
3.1 Business Activity
As a wholesale broker TFS-ICAP operates as an intermediary in
the financial markets facilitating the trading activity of
customers, particularly commercial and investment banks, in
derivative products, principally options. The broking activity
covers options across a range of asset classes, currencies and
geographies.
TFS-ICAP provides brokerage services on an arranging basis.
Supporting its voice broking activity, TFS-ICAP also provides
customers with access to the Volbroker electronic broking system
and operates the Tradition-NEX Currency Options OTF Trading
Platform.
In addition to its brokerage services, TFS-ICAP offers a variety
of market information services through its market data division
which provides real-time price information to clients and data
providers.
3.2 Regulatory Classification
TFS-ICAP is a Limited Licence firm, as defined under CRR Article
95(1) and is an IFPRU 730k firm as defined under IFPRU 1.1.11.
3.3 Internal Capital Adequacy Assessment Process
Capital is managed through budgeting, forecasting and monthly
entity capital reporting. The Firm's Internal Capital Adequacy
Assessment process document ("ICAAP") is reviewed annually by the
Board.
Scenario analysis is performed to assess the potential impact of
identified risks to the Firm's business model. The Board maintains
robust governance processes to maintain capital resources that are
prudent and appropriate to the aggregate anticipated risks of its
business activities.
4 OWN FUNDS AND OWN FUNDS REQUIREMENTS
Outlined in the following sections are the own funds (capital
resources) and own funds requirements (regulatory capital
requirements) for TFS-ICAP.
4.1 Capital Ratios
Under CRR, TFS-ICAP must, at all times, satisfy the following
own funds requirements:
a) Common Equity Tier 1 capital ratio of 4.5%
b) Tier 1 capital ratio of 6%
c) Total capital ratio of 8%.
CRR requires these ratios to be calculated using total exposure
amounts, which are equivalent to the Pillar 1 requirements
multiplied by a factor of 12.5.
At 31 December 2019, the total own funds, own funds requirements
and capital ratios of TFS-ICAP were as follows:
|
Own funds as at 31 December 2019
|
TFS-ICAP
(£'000)
|
|
|
|
|
Common equity Tier 1 capital
|
9,305
|
|
Tier 1 capital
|
9,305
|
|
Tier 2 capital
|
1,400
|
|
Own funds/ Total capital resources
|
10,705
|
|
|
|
|
Own funds requirement as at 31 December
2019
|
TFS-ICAP
(£'000)
|
|
Credit risk exposure amount
|
6,078
|
|
Market risk exposure amount
|
328
|
|
Settlement risk exposure amount
|
0
|
|
Fixed overhead risk exposure amount
|
39,394
|
|
Total Risk Weighted Assets (RWA)
|
39,394
|
|
|
|
|
Pillar 1 Capital Requirement*
|
3,152
|
|
|
|
|
Capital ratios based on Pillar 1
|
|
|
Common equity Tier 1 capital ratio ( 4.5% minimum)
|
23.62%
|
|
Tier 1 capital ratio ( 6% minimum)
|
23.62%
|
|
Total capital ratio ( 8% minimum)
|
27.17%
|
*The Pillar 1 capital requirement for TFS-ICAP as a limited
licence firm is the higher of the sum of credit risk and market
risk exposures, and the fixed overhead risk exposure.
5 NON-APPLICABLE DISCLOSURES
The following disclosures specified in CRR are not applicable to
TFS-ICAP:
- Article 440 - TFS-ICAP is not currently required to hold any
capital buffer;
- Article 441 - TFS-ICAP is not designated an institution of
global systemic importance;
- Article 449 - TFS-ICAP does not securitise assets;
- Article 451 - TFS-ICAP is not currently required to comply
with the leverage ratio requirements;
- Article 452 - TFS-ICAP is not subject to the standardised
approach to credit risk, not the IRB approach for Pillar 1 credit
risk charge;
- Article 454 - No TFS-ICAP has not adopted the AMA approach for
calculating operational risk exposure (as the Firm is not subject
to a Pillar 1 operational risk charge); and
- Article 455 - TFS-ICAP does not use an internal model to
calculate Pillar 1 market risk exposure.
6 REMUNERATION
Pillar 3 Disclosures on Remuneration - 2019
In accordance with the CRR Article 450 a firm must disclose, at
least annually, information regarding its remuneration policy and
practices for those categories of staff whose professional
activities have a material impact on its risk profile. The
following disclosure for TFS-ICAP provides the information required
and that applicable for the Remuneration Code Proportionality level
three firms.
1. Information concerning the decision-making process used for
determining the remuneration policy, including if applicable,
information about the composition and the mandate of a remuneration
committee, the external consultant whose services have been used
for the determination of the remuneration policy and the role of
the relevant stakeholders
TFS-ICAP's remuneration policy sets out the policies, practices
and procedures applicable to all TFS-ICAP employees designed to
discourage excessive risk taking behaviour and ensure remuneration
is consistent and commensurate to performance.
TFS-ICAP's Board is entrusted with reviewing the operation and
effectiveness of the remuneration policy for the Firm.
During 2019 TFS-ICAP did not use the services of an external
consultant in determining its remuneration policy.
2. Information on the link between pay and performance
Composition of remuneration
The remuneration paid to TFS-ICAP employees comprises fixed
salary, variable pay in the form of bonuses, non-contributory
pension and benefits in kind.
General performance review
All members of staff are subject to a performance review in
connection with the setting and adjustment of remuneration.
Performance is assessed by reference to appraisals, compliance with
internal HR and Compliance policies and regulation and contractual
performance clauses.
In addition, from time to time, an independent benchmarking
exercise is carried out to ensure that TFS-ICAP compensation and
benefits packages are appropriate and in line with industry
peers.
Bonuses
Discretionary - Monthly/quarterly/biannual/annual (depending on
the contractual provision) bonuses are allocated by senior
management. Factors considered include the employee's ability,
performance and conduct, his/her personal contribution (often
within a team environment), the profitability of the employee's
particular desk or business area (if applicable), and the overall
profitability of the firm.
Formulaic - Many broking staff receive variable remuneration
pursuant to a contractually-specified formula. Such formulae are
devised pursuant to experience and market practice, and are the
subject of regular review.
Management percentage - So as to incentivise good management,
certain front office managers receive whole or part of their
variable remuneration based on the profitability of the business
area(s) for which they have responsibility. The calculations are
based on net profits (following deduction of all attributed costs)
and are paid out at the frequency of the broking staff in their
business area(s). Senior management performance is also rewarded in
the context of the strength or weakness of TFS-ICAP's performance
in the relevant period and anticipated market conditions.
3. Aggregate quantitative information on remuneration, broken
down by business area
Broking staff: £11.2m (2019 £13.3m)
Non-broking staff are employed and remunerated in Tradition
Management Services Limited; proportionate costs are recharged
under the terms of the outsourced services contract between the
Firm and TMS.
4. Aggregate quantitative information on remuneration, broken
down by senior management and members of staff whose actions have a
material impact on the risk profile of the firm
Remuneration Code staff: £4.5m (2019: £1.0m)
