Orthogonal Partners LLP Pillar 3 Disclosures
Orthogonal Partners LLP (‘OP LLP’) is an investment firm incorporated in the United Kingdom and authorised and regulated by the Financial Conduct Authority (‘FCA’).
Basel II came into effect in 2008 and is a revision of the existing framework, which aims to make the framework more risk sensitive and representative of modern risk management practices. There are four main components to the new framework:
- It is more sensitive to the risks that firms face: the new framework includes an explicit measure for operational risk and includes more risk-sensitive risk weightings against credit risk.
- It reflects improvements in firms’ risk-management practices, for example the internal ratings-based approach (IRB) allows firms to rely to a certain extent on their own estimates of credit risk.
- It provides incentives for firms to improve their risk-management practices, with more risk-sensitive risk weightings as firms adopt more sophisticated approaches to risk management.
- The new framework aims to leave the overall level of capital held by banks collectively broadly unchanged.
The new Basel Accord has been implemented in the European Union via the Capital Requirements Directive (CRD) governing the amount and nature of capital that must be maintained by credit institutions and investment firms. The new framework consists of three ‘pillars’.
Pillar 1 sets out the minimum regulatory capital requirement which predominantly comprises of credit risk and operational risk.
Pillar 2 covers management’s assessment of the additional capital resources required to cover the specific risks faced by the Company which would not be covered by pillar 1.
Pillar 3 requires firms operating under the Basel II framework to disclose the quantitative and qualitative information regarding their risk assessment process and capital resources and hence their capital adequacy.
In the UK, the directive has been implemented by the FCA in its regulations through the General Prudential Sourcebook (‘GENPRU’) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). The aim of Pillar 3 is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm’s capital, risk exposures and risk assessment processes adopted by OP LLP.
The following disclosures are made in conformance with BIPRU 11. This document contains the Pillar 3 disclosures for OP LLP. 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 or a reader relying on that information. In addition, we may omit required disclosures where we believe that the information is regarded as proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers and counterparties.
We have made no omissions on the grounds that it is immaterial, proprietary or confidential.
Frequency of disclosure
These disclosures are based on the last audit as at 31 December 2015. The next Pillar 3 report will be issued within the first four months of 2017 based on the year-end audited financial statements as at 31 December 2016.
Risk management procedure
OP LLP is governed by its Partners, who determine the 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 Partners undertake a detailed risk assessment in order to establish an accurate risk profile of OP LLP and to enable appropriate procedure to be implemented. Having identified the risks, the Partners ensure that adequate assessment of those identified risks are carried out in order to establish appropriate procedures to manage and mitigate these risks on an ongoing basis. The Partners meet both formally with the board members and informally on a regular basis to discuss cash flow, profitability, regulatory capital management, business review and risk management. The partners manage the firm’s business and have a template risk matrix to identify risks taking account of relevant laws, standards, and principles with the aim of operating a defined and transparent risk management framework. The risk matrix is reviewed frequently and updated as required.
Part of the risk management procedure is to identify and appoint specific areas of risk within the firm to the relevant experienced individual.
The Partners understand the nature of risks posed to the firm in the light of the FCA’s regulatory objectives as well as the firm’s business objectives. Having identified the risks, it is important for the Partners to ensure that adequate assessment of those risks identified is carried out in order to establish appropriate procedures to manage and mitigate these assessed risks. The effectiveness of implementation of such procedures should be monitored and recorded. Appropriate contingency plan for the identified risk must also be established and tested.
The procedure needs to be monitored regularly in order to verify its efficiency and effectiveness. The nature of the monitoring will depend upon the circumstances, such as the particular risk involved, the potential for the procedures not to be followed, and any warning signs that are evident. The monitoring process should set out the nature of the monitoring to be conducted and the frequency with which such monitoring is to be performed. It is important that specific monitoring tests be performed on a regular basis.
Where the monitoring process reveals failures in the procedure, it is important that the firm acts in a timely and appropriate manner to rectify the failures. Independent reviews of the procedure and its monitoring process should also take place at least annually or as frequently as required. Such independent reviews assist the Partners to:
determine the efficiency and effectiveness of the procedure;
verify that the relevant monitoring tests are being carried out in relation to the risks posed to the firm and also in relation to and in accordance with the procedure; and
identify enhancements which should be made to the procedure and to its monitoring process.
The FCA rules also require the firm to assess and monitor on a regular basis the risks it faces in order to ensure that such risks are managed effectively by the firm and to identify areas of weakness and non-compliance. Monitoring of risks must be performed on a regular basis for each area of the firm’s operations, and the results must be reported directly to the Partners for review to ensure prompt action to correct any deficiencies or breaches identified.
Managing Risk Events
The Partners recognise that it is inevitable that a risk event might occur. The manner in which such risk event will be managed will depend upon the nature of the risk event. Where the firm has drawn up a contingency plan, this should, of course be followed. However, the firm should be prepared to assess at each stage the effectiveness of the various elements of the contingency plan and be prepared to deviate from such plan, where it is appropriate to do so.
Some of the issues likely to be considered when managing a risk event include:-
identifying the nature of the professional advice that the Partners will need to take from its professional advisers;
keeping the FCA informed of matters;
notifying insurers, where relevant;
considering how any adverse market and/or media attention may be managed with a view to minimising any potential reputational risk;
considering how to manage relationships with clients, including those not directly affected by the risk event; and
managing the risk of potential litigation arising from the risk event.
Once the Partners have identified the risk events that might occur it is necessary then to plan how the firm will manage these risk events if and when they do arise. Ideally all risks that have been identified should have a contingency plan. The contingency plan should:-
- identify the actions that need to be taken in response to the risk event;
- identify the individual responsible for a particular area of risk within the firm;
- provide adequate authority for each individual to perform those aspects of the contingency plan for which he/she is responsible;
- provide the resources necessary to perform the contingency plan; and
- aim at mitigating the loss suffered by the firm by the risk event.
It is important that, so far as possible, the contingency plan is also put into practice in a test scenario. It is only when the contingency plan is put into practice that any potential deficiencies in the plan become apparent. It is equally important that access to the contingency plan, and its performance, is not materially impaired by any IT systems failure.
BIPRU 11.5.2 Disclosure: Scope of application of directive requirements
OP LLP is incorporated in the United Kingdom and authorised and regulated by the FCA. The firm is classified as a BIPRU Limited Licence firm with base capital requirement of €125k.
A Limited Licence firm means a CAD investment firm that is not authorised to deal in investments for its own account or underwrite or place financial instruments on a firm commitment basis.
OP LLP is authorised by the FCA only to undertake Regulated Activities with or for Professional Clients and Eligible Counterparties.
OP LLP is not part of a consolidated group for prudential purposes
BIPRU 11.5.3 Disclosure: Capital Resources
OP LLP is a Limited Liability Partnership. The partnership capital of OP LLP is made up of capital contributions from the partners. The profit and loss account and other reserves include the verified profit to 31 December 2015. Where applicable the current year losses are also taken into account. The capital therefore all qualifies as Tier 1 capital. The firms capital position as at 31 December 2015 is summarised as follows:
Core tier one capital
Total tier one capital after deductions
Upper tier two capital
Lower tier two capital
Total tier two capital after deductions
Total tier one capital plus tier two capital after deductions
Total tier three capital
Total capital resources after deductions
OP LLP is a small firm with simple operating infrastructure. The firm has no market risk as it does not trade on its own account and credit risk is the firm’s cash at the bank. OP LLP follows the simplified standardised approach to credit risk. The firm is subject to the Fixed Overhead Requirement (‘FOR’) and is not required to calculate an operational risk capital.
The firm is a limited licence firm and as such, its capital requirement is the greater of:
Its base capital requirement of €125,000
The sum of its market and credit risk requirements (combined provide the firm’s risk capital calculation), or
We have identified limited credit risk exposures that are less than the base capital requirement. Our FOR is also less than our base capital requirement, therefore we always maintain a minimum capital amount of €125,000.
BIPRU 11.5.4 Compliance with BIPRU 3, BIPRU 4, BIPRU 6, BIPRU 7, BIPRU 10 and the overall Pillar 2 rule
Under Pillar 2 of the CRD, OP LLP is required to enact an Internal Capital Adequacy Assessment Process (ICAAP). This is an on-going process. The ICAAP document is presented to the Partners for formal review and then approved by the board annually. The data and assumptions used in the assessment of risk and capital adequacy are continually assessed and updated. This is formally done once a year. The capital resources are updated on a quarterly basis. However, should new risks materialise or be identified by the firm, these risks will be incorporated into the overall process.
The Partners have identified that business, operational, credit and concentration risk are the main areas of risk to which the firm is exposed.
BIPRU 11.5.5 Retail exposures
OP LLP is not authorised to act on behalf of Retail Clients, therefore the company does not have any retail exposure.
BIPRU 11.5.6 Equity exposures
OP LLP does not have any equity exposures.
BIPRU 11.5.7 Counterparty credit risk exposures and BIPRU 11.5.8 credit risk and dilution risk
OP LLP adopts the simplified standardised approach to credit risk.
Credit risk is defined as the risk a borrower or counterparty will fail to meet its obligations.
The firm has the following exposures:-
- To our clients not settling management and performance fees
- UK authorised banks in relation to deposits held with them
Procedures in place to mitigate the risks are:
- Performing credit checks and completing due diligence checks at the outset of entering into material contracts
- Developing close working relationships with clients to maintain detailed understanding of their financial strength and exposures
- Periodic monitoring of the financial strength of the banks and spreading the risk
- Contractual arrangements in relation to the payment of management fees and monitoring payments against agreed payment arrangements.
BIPRU 11.5.9 Value adjustments and provisions
This section is not applicable.
BIPRU 11.5.10 Company’s calculating risk weighted amounts in accordance with the standardised approach
OP LLP adopts the simplified standardised approach to credit risk. As a limited licence firm that has only incidental credit exposures. It would be costly to establish the systems needed to include the credit assessments of ECAIs and export credit agencies in our regulatory capital calculations.
BIPRU 11.5.11 Company’s risk weighted exposure amounts in accordance with internal rating based (IRB) approach
OP LLP does not have specialised lending exposures or equity exposures.
BIPRU 11.5.12 Market risk
OP LLP does not trade on its own account and therefore does not create any market risk requirements in respect of its own business.
BIPRU 11.5.13 Disclosure: Use of Value at Risk (VaR) model for calculation of market risk capital requirement
OP LLP does not use the VaR model for calculation of market risk, as the firm does not trade on its own account and therefore does not create any market risk.
BIPRU 11.5.14 Operational risk
Operational risk is defined as a risk or loss or damage (financial, regulatory or reputational) resulting from inadequate or failed internal process, people or systems, or from external causes (whether deliberate, accidental or natural).
OP LLP key risk exposures:
- Financial management and control
- Information Technology
- Third party outsourcing
- Legal and regulatory
The Partners have identified relevant risks and produced a risk matrix and conflict of interest matrix, listing the risks, issues and steps taken to mitigate the risks to enable the Partners to monitor the ongoing operational and compliance risks. These form part of our ICAAP. Any weakness and potential failures are reported at the board meetings.
Responsibility for each of these risk categories is allocated to a risk owner, all of whom are Partners or members of staff reporting to the CEO or Compliance Officer. The steps taken to mitigate the risks are; retaining Kinetic Partners as compliance consultants, having a comprehensive compliance manual, providing all staff with annual compliance training, AML and KYC checks performed on new clients, standardised procedures subject to independent oversight, record keeping demonstrating the performance of systems and controls, timetable of all regulatory filings, robust and timely accounting and financial review process.
BIPRU 11.5.15 Disclosure: Non-trading book exposures in equities
OP LLP does not have any non-trading book exposures in equities.
BIPRU 11.5.16 Disclosures: Exposures to interest rate risks in the non-trading book
OP LLP has no exposure to interest rate risk and does not anticipate any future risk.
The firm has no borrowings nor does it anticipate any future borrowings other than the occasional short term overdraft. Therefore interest rate fluctuations will not materially affect the company in this respect.
BIPRU 11.5.17 Securitisation
The firm is not involved in the securitisation of assets.
BIPRU 11.5.18 Remuneration
Orthogonal Partners LLP is a limited liability partnership owned by the three founding partners who also work full-time within the partnership. The three partners have invested equity capital into the partnership. No partner shall have the right directly or indirectly to withdraw or receive back any part of the equity capital amount standing to the credit of their capital account except upon termination and dissolution of the LLP and with the permission from the Financial Conduct Authority.
The three partners of Orthogonal Partners LLP are Approved Persons with allocated controlled functions and as such are individuals who perform significant influence and are classified as Remuneration Code Staff.
The firm consists of the three founding partners, Romek Pawlowicz, Daniel Gore, Ahmet Ismael plus two employees.
Orthogonal Partners LLP is classified as a tier four firm and has adopted a proportioned approach to the remuneration policy. The managing board will review the general principles of the remuneration policy annually.
Decision making and the managing board
Orthogonal Partners LLP has a very straight forward business model and has adequate strategies, policies, processes and systems for its size. Due to the size of the firm, it is not considered appropriate to have a remuneration committee. The decision making and oversight for determining the remuneration policy is maintained by the managing board at quarterly/annually board meetings.
Staff remuneration is set by the founding partners and approved by the managing board. The managing board consists of the three founding partners and three external independent members. The external independent members act as the external governance of the firm.
Due to the size of the firm, the control functions are performed by the three partners. The partner’s remuneration comes from the annual profit of the partnership. The partner’s rights to profit share not falling within the definition of remuneration for remuneration code purposes.
LLP remuneration profit share
The Remuneration Code Staff as noted above are the three partners of Orthogonal Partners LLP. The partners work full-time for the firm and therefore all the profits are split between the partners. The partnership’s income comprises management fees received from its managed funds.
It is our understanding that the FCA have confirmed that CF4′s need to be included in a firm’s Code Staff list but the approach to proportionality means that the partners do not necessarily have to apply the FCA rules on remuneration structures. This is also based on the firm being classified as a tier four firm and the firm’s supervision and governance in place.
Remuneration as defined in the CEBS guideline on Remuneration Policies and Practices states that remuneration can be divided into either fixed remuneration (payments or benefits without consideration of any performance criteria) or variable remuneration (additional payments or benefits depending on performance or other contractual criteria).
The partners receive a fixed pre arranged base profit share, agreed annually by the board. The remaining partnership profit is allocated to the three partners after the partnership accounts have been audited by Deloitte LLP. Although as a tier four firm and not subject to the deferral of remuneration, the partners have in place that the additional profit allocation in excess of the base profit share is held within the firm and used to pay future year partner tax liabilities.
The firm will always ensure there is sufficient funds to comply with the firms FCA capital adequacy requirements.
The full remuneration policy is available at 9 Queen Anne Street, London, W1G 9HW.