Legal and Regulatory Statements
Pillar 3 Statement
Regulatory Context
Cube Capital LLP (“LLP”), is a limited liability partnership in the Cube group (“Cube Group”). LLP is authorised and regulated by the Financial Services Authority (“FSA”) and as such is required to publish certain details of its risks, capital and risk management in order to improve transparency and market discipline. Accordingly, LLP will be making this and certain other disclosures on the Cube Group website, at least annually. However, it should be noted that the information contained in these disclosures have not been audited and does not constitute any sort of financial statement and should not be relied upon in making any judgement on any member of the Cube Group.
Capital Requirement
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 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 capital requirement;
-
Pillar 2 requires the firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks that it may be exposed to.
-
Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline.
The rules in BIPRU 11 set out the provision for Pillar 3 disclosure.This document is designed to meet our Pillar 3 obligations.
The Pillar 3 disclosure document has been prepared by LLP in accordance with the requirements of BIPRU 11 and is verified by the senior management. Unless otherwise stated, all figures are as at the financial year-end.
We are permitted to omit required disclosures if we 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 for the purpose of making economic decisions about the firm. Where we have chosen to omit information because it is proprietary or confidential we have explained the omission and provided our reason.
The FSA categorises LLP as a ‘50k limited licence’ firm for capital purposes, and is not required to prepare consolidated reporting for prudential purposes. The ‘50k’ refers to a base capital requirement of Euro 50k. In order to meet the Basel II Pillar 1 minimum capital requirement, LLP must maintain capital resources equal to or in excess of its Variable Capital Requirement (being the higher of (i) the Fixed Overhead Requirement or (ii) the sum of the Credit Risk Capital and the Market Risk Capital Requirements). As a BIPRU limited licence firm, there is no need for LLP to calculate an Operation Risk Capital Requirement for Pillar 1 purposes.
Basel Pillar 2 requires LLP to ascertain whether it should hold additional capital against risks not covered in Pillar 1, such that LLP can meet its liabilities as they fall due. As required by the FSA, LLP has conducted a systematic Internal Capital Adequacy Assessment Process (“ICAAP”) in December 2010. In the event that this exercise was to produce a higher requirement than Pillar 1, LLP would need to maintain this higher requirement. Basel Pillar 3 requires LLP to disclose objectives and policies for each category of risk including strategies and processes to manage risks, risk management functional structure and arrangements, the scope and nature of risk reporting and measurement systems and policies for hedging and mitigating risks on a continuous basis.
Risk Management Framework
LLP’s partners determine its business strategy and risk appetite along with designing and implementing a risk management framework that recognizes the risks that the Cube Group’s business faces. The partners manage risks 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. A formal risk review is conducted at least quarterly and the ICAAP is reviewed on at least an annual basis (unless events warrant an interim review).
LLP’s partners meet on a regular basis and discuss current projections for profitability and regulatory capital management, business planning and risk management. These policies and procedures are updated as required. To the extent that the partners identify material risks, the financial impact of these risks are assessed as part of LLP’s business planning and capital management in order to determine whether the amount of regulatory capital is adequate.
The partners have identified that business, operational, market and credit risks are the main areas of risk to which LLP is (and other members of the Cube Group are) exposed.
LLP is small with a simple operational infrastructure. Operational risk (namely loss resulting from inadequate or failed internal processes, people and systems or from external events) is actively managed through a controls framework. LLP maintains comprehensive insurance policies. Data is backed up and is kept offsite.
LLP’s market risk is limited to foreign exchange risk on its accounts receivable in foreign currency. The Cube Group (from which LLP derives its income) also has credit risk from management and performance fees receivable from the funds under its management and cash held on deposit at large international credit and regulated institutions. LLP follows the standardized approach to market risk and the simplified standard approach to credit risk. LLP 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.
Appropriate action is taken where risks are identified which fall outside of the firm’s risk tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm’s mitigating controls.
Regulatory capital
LLP is a limited liability partnership and its capital arrangements are established in its Partnership Deed. Its regulatory capital as at 13 April 2011 is summarised as follows:
|
£,000 |
Members’ capital |
710 |
Total capital resources requirement |
651 |
Surplus |
59 |
We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial. It is LLP’s experience that the Fixed Overhead Requirement establishes its capital requirements and hence market and credit risks are considered not to be material.
The main features of the Firm’s capital resources for regulatory purposes are as follows:
|
11 April 2011 |
Tier 1 capital* |
710 |
Tier 2 capital |
- |
Tier 3 capital |
- |
Deductions from Tiers 1 and 2 |
- |
Total capital resources |
710 |
LLP is relatively small with a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management. The Firm follows the standardised approach to market risk and the simplified standard approach to credit risk. 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.
As discussed above the firm is a limited licence firm and as such its capital requirements are the greater of:
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Its base capital requirement of €50,000; or
-
The sum of its market and credit risk requirements; or
-
Its Fixed Overhead Requirement.
We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial.
It is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements.
Capital requirement
LLP’s Pillar 1 capital requirement has been determined by reference to the firm’s Fixed Overheads Requirement (“FOR”) and calculated in accordance with the FSA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.53. The requirement is based on the FOR since this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its base capital requirement of €0,0050.
The FOR is based on annual expenses net of variable costs deducted. LLP monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year.
Remuneration Code Statement
Remuneration code disclosure
LLP is authorised and regulated by the Financial Services Authority as a Limited Licence Firm and so, it is subject to FSA Rules on remuneration. These are contained in the FSA's Remuneration Code located in the SYSC Sourcebook of the FSA’s Handbook. The Remuneration Code (“the RemCode”) covers an individual’s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two.
Our policy is designed to ensure that we comply with the RemCode and our compensation arrangements:
1. are consistent with and promotes sound and effective risk management;
2. do not encourage excessive risk taking;
3. include measures to avoid conflicts of interest; and
4. are in line with the Firm's business strategy, objectives, values and long-term interests.
Proportionality
Enshrined in the European remuneration provisions is the principle of proportionality. The FSA have sought to apply proportionality in the first instance by categorising firms into 4 tiers. The Firm falls within the FSA's fourth proportionality tier and as such this disclosure is made in line with the requirements for a Tier 4 Firm.
The Cube Group has a Remuneration Committee comprising the Group’s founding members, senior management and members of the Group’s risk management committee. The Remuneration Committee is mandated to administer and implement the Group’s remuneration policy, which aims to ensure that the Group’s employees are appropriately incentivised, while at the same time promoting effective and responsible risk management. Cube Group employees are remunerated with an annual fixed salary, and a discretionary bonus which may be a greater proportion of total remuneration than fixed salary, but is not necessarily the case. The aggregate amount of the discretionary bonus pool for the Cube Group as a whole is determined annually by reference to the Cube Group’s net profits in that year, having regard to prudent business practices, current and future risks identified in the Cube Group’s latest written risk review and the long term interests of the Cube Group as a whole. The bonus pool is allocated between individuals by reference to balanced principles based on business unit and individual financial and non-financial performance criteria. The detailed individual performance criteria established by the Remuneration Committee include management of risks, financial discipline, contribution to Cube Group prospects, reputation and returns, management of resources and effective team management.
Aggregate fixed and variable remuneration for Cube Capital LLP’s “Code Staff” (being persons designated by the Remuneration Committee as Cube Capital LLP senior management and members of staff who have a material impact on the Cube Group’s risk profile) in the year ended 31 December 2010 was US$2,584k. Total Cube Group staff as at 31st December 2010 was [52].
For the year ended 31 December 2010, total remuneration was as follows:
Business Area |
Fixed Remuneration |
Variable Remuneration |
Total Remuneration |
Hedge Funds |
US$285k |
US$446K |
US$731k |
Senior management |
US$160k |
US$334k |
US$494k |
Other Code Staff |
US$125k |
US$112k |
US$237k |
Fund of Funds |
US$1,291k |
US$1,192k |
US$2,483k |
Senior management |
US$570k |
US$557k |
US$1,127k |
Other Code Staff |
US$721k |
US$635k |
US$1,355k |
Real Estate |
US$490k |
US$61k |
US$551k |
Senior management |
US$196k |
|
US$196k |
Other Code Staff |
US$294k |
US$61k |
US$355k |
Operations |
US$684k |
US$752k |
US$1,436k |
Senior management |
US$392k |
US$613k |
US$1,005k |
Other Code Staff |
US$292k |
US$139k |
US$431k |
Totals |
US$2,750k |
US$2,451k |
US$5,201k |
All variable remuneration was paid in cash, save that Code Staff are required to invest 50% of any variable bonus received in excess of US$100,000 into Cube managed funds.
The UK Stewardship Code
Under Rule 2.2.3R of the FSA’s Conduct of Business Sourcebook, LLP is required to include on this website a disclosure about the nature of its commitment to the UK Financial Reporting Council's UK Stewardship Code (the "Code") or, where it does not commit to the Code, its alternative investment strategy. The Code is a voluntary code and sets out a number of principles relating to engagement by investors with UK equity issuers. Investors that commit to the Code can either comply with it in full or choose not to comply with aspects of the Code, in which case they are required to explain their non-compliance.
As a fiduciary and alternative investment fund manager, LLP has a duty to act in the best interests of all investors and our aim is to protect and enhance returns in line with a fund’s investment guidelines and objectives and any specific risk tolerances specified within a fund’s Offering Memorandum.
The Cube Group pursues a number of different investment strategies, including investing in global equities. Various members of the Cube Group invest in a variety of asset classes and in a variety of jurisdictions globally. When we feel it is necessary we take a global approach to engagement with issuers and their management in all of the jurisdictions in which we invest and consequently, we do not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction. Where relevant, we have arrangements in place to receive details of forthcoming corporate meetings. These details are provided to the relevant fund management teams who are given the opportunity to consider whether to vote or abstain. We do not make use of automated voting services provided by third parties. Our aim as a fiduciary is to consider stewardship issues on a case by case basis, making bespoke decisions in the best interests of investors in light of a particular circumstance and the fund’s mandate in question. Accordingly, while LLP supports the objectives that underlie the Code, it has chosen not to commit to the Code.
Cube is a member of the investor chapter of the Hedge Funds Standards Board and it supports the HFSB best practice standards. As a FSA authorised firm and a HFSB signatory, we have adopted a Conflicts of Interest Policy which is available on request.
Cube Capital LLP Privacy Policy
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