Brevan Howard Asset Management LLP
Pillar 3 Disclosure 31
December 2009
The following disclosures
are provided pursuant to the Pillar 3 disclosure rules as laid out by the
Financial Services Authority (“FSA”) in section 11 of its Prudential sourcebook
for Banks, Building Societies and Investment Firms (“BIPRU”). The BIPRU Pillar 3 disclosure rules implement
the European Union’s Capital Requirements Directive (“CRD”) which came into
effect on 1 January 2007. The CRD set out regulatory capital adequacy standards
and the associated supervisory framework across the European Union based on the
Basel II recommendations of the Basel Committee on Banking Supervision. The
regulatory aim of the disclosures is to improve market discipline.
The prudential
framework for investment management firms consists of three “pillars”:
The FSA
rules provide that disclosures are only required where the information would be
considered material to a user relying on that information to make economic
decisions. Brevan Howard Asset Management LLP (the “Firm”) is a solo
The disclosures
below are the required Pillar 3 disclosures and apply solely to the Firm. The
disclosures do not apply to the funds managed by the Firm, which are exposed to
different risks.
The Pillar 3
disclosure is made annually usually as-of the Firm’s Accounting Reference Date
(“ARD”) or more frequently as required under BIPRU 11.4.4. During 2009, the
Firm’s ARD was changed from 31 July to 31 March and therefore an updated
disclosure will be made as-of 31 March 2010.
Although the Firm
believes the risk management framework outlined herein is appropriate for the
size and complexity of the Firm and that the Firm’s capital is adequate to meet
the risks assessed, it can not guarantee that this will actually be the case in
the event any particular risk arises. There are some unlikely risks with
unusually high impact which may require additional capital or may cause the Firm
to fail should they arise.
Risk management framework
The Firm has established a risk management framework
to identify, measure, monitor, report and where appropriate, mitigate risks.
The risk management framework covers risks which impact the Firm as an
investment manager (typically operational risks) as well as those which impact
the funds it manages (typically portfolio or investment risks, such as market,
credit, liquidity, counterparty and funding risks). Risks identified through
the operation of the risk management framework are assessed as part of the
Firm’s ICAAP and Pillar 2 process.
Governance
The Firm is a
Limited Liability Partnership which has a Board of Partners (“Board”) as its governing
body. The Board has delegated the oversight of certain governance, risk
management, and control responsibilities to three sub-committees; the Risk
Oversight Committee, the Liquidity Oversight Committee and the Controls
Oversight Committee.
The Risk Oversight
Committee meets weekly to review reports prepared by the Chief Risk Officer
covering risk exposures, positions and analysis across a number of different
dimensions. The overarching objective of
the committee is to ensure that the funds are managed appropriately and within
agreed parameters. In addition, the
committee identifies, and if necessary mitigates, inappropriate tail risks or
hidden risks which could jeopardise the fund’s future.
The Liquidity
Oversight Committee meets monthly to review the liquidity of the various funds
managed by the Firm. The Committee
considers market liquidity, concentration, financing, unencumbered assets,
leverage, number of open derivatives, counterparty risk – all of which are
factors which could impede an orderly liquidation of positions or cause a
sudden loss of value in addition to losses due to market risk.
The Controls
Oversight Committee meets quarterly and is the forum in which the Firm reviews
operational risks and the processes in place to control them. The Firm defines operational risk as the risk
of loss resulting from inadequate or failed internal processes, people and
systems or from external events.
The risk
management framework is subject to regular review by external consultants who
report their findings and recommendations to the Controls Oversight Committee.
Internal Capital Adequacy Assessment Process (“ICAAP”)
The Firm’s ICAAP
includes an assessment of the design and performance of the internal controls
in place to mitigate risks, the probability of the risk occurring, the
potential financial and reputational impact, and the adequacy of the Firm’s
capital base. The ICAAP is reviewed
approximately every 6 months by the Firm’s Controls Oversight Committee and is
formally approved by the Board on at least an annual basis.
Risk identification,
reporting and monitoring
The risk management framework sets out the responsibilities and
escalation procedures for the identification, monitoring, and management of
risks.
Specific personnel are assigned
responsibility for the risks across the Firm’s offices and business units. The Firm’s Chief Operating Officer takes
overall responsibility, with the assistance of a dedicated business risk
manager, for identifying material risks to the Firm and putting appropriate
mitigating controls in place.
Risks and mitigating controls are periodically
reassessed, taking into account the Firm’s risk appetite. Actions are taken to improve the control
framework when risks are identified which fall outside of the Firm’s risk appetite,
or when weaknesses are identified in the Firm’s mitigating controls.
The Controls Oversight Committee reviews the quality
of the control framework and the controls in place, and where necessary, sets mitigating
actions and ensures they are taken forward.
The specific
types of risks faced by the Firm are;
The Firm takes into account identified
risks and their possible impact when planning its possible Capital requirements.
Operational
risk
Operational risk is defined as the risk of loss resulting from
inadequate or failed internal processes, people and systems or from external
events. The Firm seeks to minimize operational risk through a controls
framework, particularly when engaging in new business ventures, launching new
funds, or trading new products. The Firm considers risks which may impact the
Firm directly or indirectly. The more significant operational risks facing the
Firm include mis-pricing of a fund Net Asset Value, failure of an
administrator, catastrophic systems failure, and negligence in the execution of
fund management services.
Business risk
Business risk arises from
external sources such as changes to the economic environment or one-off economic
shocks, and also from internal sources such as poor investment decisions or
suboptimal allocation of capital resulting in poor investment performance and
damage to the Firm’s reputation.
Various different
scenarios are modelled in order to assess the impact of adverse economic
conditions on the Firm’s financial position.
This enables the Firm to monitor its business risk and to assist in its
capital planning. The Firm is managed prudently
and holds sufficient capital to withstand adverse changes in the business
environment. The notice periods on fund redemptions provide the Firm with
warning of any material impact on its management fee income, and allow the Board
time to make appropriate decisions in respect of any additional capital needs.
Credit risk
The Firm is
exposed to credit risk in respect of fees which are due but not yet received
and cash it holds on deposit. These risks are not considered to be material. Management
fees are paid monthly by the funds being managed, whilst performance fees are crystallised
and paid annually or semi-annually as applicable. The Firm has a limited number of credit
exposures and, in accordance with the provisions of BIPRU 3.5, uses the
simplified standardised approach when calculating risk weighted exposures.
Liquidity risk
The Firm maintains sufficient cash to meet its working
capital requirements and other immediate cash requirements that can reasonably
be foreseen. The Firm also holds additional reserves to meet unforeseen capital
needs. Potential liquidity requirements are reviewed on a weekly basis. Liquidity
risk is not considered material for the purposes of this disclosure.
Market risk
The Firm does not
use its own capital to provide seed capital for funds and therefore is not
exposed to market risks in the funds.
However, some of its fee income is received in currencies other than British
Pound Sterling, and the Firm is therefore exposed to foreign exchange risk. The
Firm calculates its foreign exchange risk by reference to the provisions of BIPRU
7.5. Foreign exchange risk is not
considered to be material for the purposes of this disclosure.
Capital adequacy
The Firm takes a prudent approach to the management of
its capital base and ensures that at all times it has sufficient capital to
meet its Capital Requirement. This is
formally verified on a weekly basis.
Future changes in the Firm’s capital requirements are forecast over a one
year time frame and reassessed monthly.
The Firm has also
concluded, as part of its ICAAP, that it has adequate capital under its Pillar
1 requirement to face its key risks, that its capital resources are sufficient
to support its operations over the next year, and that no additional injections
of capital are necessary.
The amount and
type of capital resources of Brevan Howard Asset Management LLP as at 30 November
2009 is set out in the table below:
|
RESOURCES |
|
£ Million |
|
Tier One Capital |
Members capital
and audited reserves |
44 |
|
|
|
|
|
Less deductions |
Material
holdings |
(2) |
|
|
|
|
|
Total |
|
42 |
Minimum capital requirements
The Firm’s Pillar
1 capital requirement is calculated in accordance with GENPRU 2.1.53-59 for a BIPRU €50,000 limited licence firm as the higher of
the Fixed Overhead Requirement, the sum of market and credit risk requirements,
and the base capital requirement of €50,000, as set out in the table below:
|
CAPITAL REQUIREMENTS |
|
£ Million |
|
Fixed Overhead
Requirement (A) |
25% of
non-variable annual expenses |
13 |
|
Individual
Capital Guidance: additional capital in excess of Pillar I |
7 |
|
|
|
20 |
|
|
|
|
|
|
Market risk (B) |
8% of net open
positions |
< 1 |
|
|
|
|
|
Credit risk (C) |
8% of exposures |
< 1 |
|
|
|
|
|
Base capital
requirement (D) |
Sterling
equivalent of €50k |
< 1 |
|
|
|
|
|
Total |
Higher of A, B+C, or D |
20 |
The Fixed Overhead
Requirement of £13m equates to one quarter of the Firm’s annual expenses
excluding variable costs. On 20th October 2009, the FSA provided
Individual Capital Guidance to the Firm, to which the Firm agreed, which required
the Firm to hold capital resources of at least 150% of the Fixed Overhead
Requirement. This amount determines the
Firm’s regulatory capital requirement, which as-of 30 November 2009 was £20 million.