Text Box: SOTHIC CAPITAL MANAGEMENT LLP FSA Pillar 3 disclosure The Capital Requirements Directive (‘the Directive’) 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 Services Authority (‘FSA’) in its regulations through 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 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 FSA; and Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position. The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet their Pillar 3 obligations and is complimentary to the Firm's minimum capital requirement calculation ("Pillar 1") and the internal review of its capital adequacy ("Pillar 2").   The members are permitted to omit required disclosures if the members believe that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information. In addition, the members may omit required disclosures where the members believe that the information is regarded as proprietary or confidential. In their view, proprietary information is that which, if it were shared, would undermine their competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with their customers, suppliers and counterparties. The members have made no omissions on the grounds that it is immaterial, proprietary or confidential. Scope and application of the requirements Sothic Capital Management LLP (“the Firm”) is authorised and regulated by the Financial Services Authority and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a limited licence firm by the FSA for capital purposes. It is an investment management firm and as such has no trading book exposures. The Firm is not a member of a group and so is not required to prepare consolidated reporting for prudential purposes. Risk management The Firm is governed by its members (“Principals”) who determine its business strategy and risk appetite. They are also responsible for establishing and maintaining the Firm’s governance arrangements along with designing and implementing a risk management framework that recognises the risks that the business faces. The Principals manage the Firm’s risks business though a framework of policy and procedures having regard to relevant laws, standards, principles and rules (including FSA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required. The Principals have identified that business, operational, market and credit risks are the main areas of risk to which the Firm is exposed. Annually the Principals formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness. Where the Principals identify material risks they consider the financial impact of these risks as part of their business planning and capital management and conclude whether the amount of regulatory capital is adequate. Business risk The Principals also determine how the risks their business faces may be mitigated and assess on an ongoing basis the arrangements to manage those risks. The Principals meet on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, and business planning and risk management. Business risk arises from external sources such as changes to the economic situation or economic shock. It arises also from internal sources such as poor investment decisions or suboptimal capital allocation resulting in poor investment performance and subsequent damage to the Firm’s reputation. Notice periods on redemptions provide the Board with time to make appropriate decisions in respect of any additional capital needs if any such events arise. Various scenarios are modelled in order to assess the impact of adverse events on the Firm’s financial position and enable the Firm to monitor its business risk and to assist in its capital planning. Credit risk The Firm is not exposed to credit risk other than in respect of fees receivable and cash held on deposit at large international institutions. Management fees are drawn monthly for the fund and performance fees are taken annually. Consequently the Firm has a limited number of credit exposures in respect of which it uses the simplified standardised approach when calculating risk weighted exposures, in accordance with the provisions of BIPRU 3.5. Market risk The Firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP. The Firm calculates its foreign exchange risk by reference to the provisions of BIPRU 7.5. The Firm follows the standardised approach to market risk. Operational risk The Firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate operational risk. The Firm is small with a simple operational infrastructure. The Firm is subject to the Fixed Overhead Requirement and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk based capital required. Regulatory capital The Firm is a Limited Liability Partnership and its capital arrangements are established on its partnership deed. As of 31st April 2011, its capital is summarised as follows: Members’ capital: £515,000

 

Capital Item

£’000

Tier 1 capital less innovative tier 1 capital

515

Total tier 2, innovative tier 1 and tier 3 capital

0

Deductions from tier 1 and tier 2 capital

0

Total capital resources, net of deductions

515

 

As discussed above the firm is a limited licence firm and as such its capital requirements are the greater of:

Its base capital requirement of €50,000

The sum of its market and credit risk requirements; or

Its Fixed Overhead Requirement.

The members have identified credit risk exposure classes and the minimum capital requirements for market risk as being £49,000.

It is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements and hence market and credit risks are considered not to be material.

Remuneration

The Firm is a Remuneration Code Proportionality Tier 4 Firm and has applied the rules appropriate to its Proportionality Tier. The Governing Body is responsible for the Firm’s remuneration policy. All variable remuneration is adjusted in line with capital and liquidity requirements. For the year ending in March 2011:

 

Remuneration Code Staff remuneration by business area (BIPRU 11.5.18(6))

Business area                                            Total remuneration

 

Portfolio Management

£2,139,939

 

 

Aggregate quantitative variable remuneration by senior management and other Remuneration Code Staff (BIPRU 11.5.18(7))

Type of Remuneration Code Staff          Number of staff           Total Remuneration

Senior management

2

£1,132,146

Other Remuneration Code Staff

3

£1,007,793

Totals

5

£2,139,939