Argus Stockbrokers Ltd

Transcription

1 Argus Stockbrokers Ltd DISCLOSURES IN ACCORDANCE WITH THE DIRECTIVE OF THE CYPRUS SECURITIES AND EXCHANGE COMMISSION FOR THE CAPITAL REQUIREMENTS OF INVESTMENT FIRMS AS AT 31 st DECEMBER 2013 MAY 2014

2 TABLE OF CONTENTS 1. INTRODUCTION RISK MANAGEMENT FRAMEWORK REGULATORY CAPITAL BASE CAPITAL REQUIREMENTS CREDIT RISK OPERATIONAL RISK MARKET AND LIQUIDITY RISK COMPLIANCE RISK REMUNERATION POLICY AND PRACTICES OPERATING ENVIRONMENT OF THE COMPANY

3 1. INTRODUCTION Regulatory Framework In accordance with paragraph 34 of Chapter 7 of the Directive DI (the Directive ) of 2012 of the Cyprus Securities and Exchange Commission ("CySEC") for the capital requirements of investment firms, the Company has an obligation to disclose key pieces of information about its regulatory capital base, and minimum capital required for management of risks. Argus Stockbrokers Ltd (the "Company") discloses the required information, based on the abovementioned Directive as at 31 st of December The disclosures are prepared based on the audited figures of the Company s financial statements and are presented on an individual basis. Principal Activities The Company is registered in Cyprus and is regulated by the CySEC. The principal activities of the Company are the transfer and execution of orders on behalf of third parties as a Cyprus Investment Firm, the management of client s investment portfolios and the provision of investment advice aimed at structuring their capital, the shaping of their business strategy and every matter that relates to their activity, as well as the provision of advices and services in the field of business concentration (mergers and acquisitions). During 2008, the Company obtained the right for safekeeping and administration of financial instruments, including custodianship and related services and for granting credits and loans to customers for transactions. The financial instruments for which provides services include the marketable values and portions of collective investments and titles of the finance market. Disclosure policy The Company publishes data on its capital adequacy on an annual basis and within five (5) months from the end of each financial year. The disclosures are prepared in a document other than the Audited Financial Statements of the Company and are uploaded on the Company s website. The disclosures are verified by the external auditors of the Company. The Company is responsible for submitting its external auditors verification report to CySEC. The disclosures are presented on an individual basis, in accordance with paragraph 2 of Chapter 2 of the Directive. 3

4 2. RISK MANAGEMENT FRAMEWORK The Board of the Directors has the overall responsibility for establishing and overseeing the risk management framework of the Company. The risk management policies of the Company are established to identify and analyze the Company s risks, to set appropriate risk limits and controls, and to monitor risks and compliance to limits. The Company s policies and risk management framework are reviewed regularly to reflect changes in market conditions and the Company's activities. The Company is exposed to the following risks arising from financial instruments: Credit risk Liquidity risk Market Risk Operational risk Compliance risk The risk management process is implemented by the Head of Quality Assurance and Compliance Officer, the Senior Management and the Board of Directors of the Company. Internal Capital Adequacy Assessment Process ( ICAAP ) The Company follows an internal process for assessing its capital adequacy ( ICAAP ) and prepares the ICAAP report in accordance with the Directives of the CySEC. During the evaluation process, the Company reviews the strategies and procedures followed in order to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the Company; and that is maintained on an ongoing basis, the amount, composition and distribution of the internal capital that is considered adequate to cover the nature and level of risks it has taken or might take the company. The Company has adopted the Minimum Capital Requirement Approach (Pillar 1+), whereby the Company determines the minimum capital required under the Pillar 1 methodology and subsequently adds additional capital in respect of risks that are either not covered or not adequately captured by the Company s Pillar 1 calculations. The ICAAP is determined using the following steps: identification / risk assessment measures to reduce / mitigate risk estimation of the requirements for extra capital (or not). At the same time for purposes of determining Pillar 2 capital requirements, the Company performs stress tests in its three-year budgets of the company. 4

5 3. REGULATORY CAPITAL BASE The Company's capital base as at 31 December 2013 for regulatory purposes in accordance with the Directive is analysed in Table 1 below: Table 1: Regulatory Capital Base Own Funds Original Own Funds 31 December 2013 ( 000) Share Capital Retained Earnings (1.641) Gain/(Losses) of current year 45 Less: Intangible assets (20) Total Original Own Funds (Tier 1) 394 Additional Own Funds - Other Deductions - Total Own Funds 394 Share Capital On December 19, 2012, the Company proceeded with the conversion of its enhanced Capital Securities to Share Capital amounting to , corresponding to new shares. On 31 December 2013 the share capital of the Company consists of shares with a nominal value of 0,4275 each. Deductions from Original Own funs The Company deducts from its Original Own Funds the intangible assets which include computer software, patents and trademarks. Computer software is carried at cost less any accumulated amortisation and any accumulated impairment losses. Patents and trademarks are measured initially at purchase cost and are amortized using the straight line method over the estimated useful lives. 5

6 4. CAPITAL REQUIREMENTS Pillar 1 Minimum Capital Requirements The Company adopts the Standardised Approach for the calculation of its capital requirements for Credit and Market risk and the Basic Indicator Approach for Operational risk. The capital requirements of the Company as at 31st December 2013 for Pillar 1 purposes are analyzed as follows: Table 2: Pillar 1 Minimum Capital Requirements Type of Risk Minimum Capital Requirements ( 000) Credit 71 Operational 178 Market 5 Foreign Exchange Risk 5 Total Pillar 1 Capital requirements 254 The Capital Adequacy Ratio as at 31 December 2013 was 12,49%. 6

7 5. CREDIT RISK Credit Risk Definition Credit Risk arises when counterparties fail to meet their obligations towards the Company for the repayment of loans or other facilities. Management of Credit Risk For the effective management of credit risk, the Accounting department of the Company monitors the exposures of each client and informs them in case of any outstanding balance that is due and has to be collected. The company has procedures in place to ensure that sales of products and services are made to customers with an appropriate credit history and monitors on a continuous basis the aging profile of its receivables. Policy of the Company is to provide brokerage customers transactions only after ensuring that the corresponding client account has the required capital/deposit. The risk of not meeting the needs of brokerage transactions are non-existent due to the electronic system used by the Company, which does not permit the purchase of securities without the required capital. The Company does not provide credit facilities to customers except in very isolated cases. The criteria for granting credit and setting credit limits are clearly described in the Company's procedures. The credit assessment procedures followed, the collateral offered and the strict monitoring of accounts by the Company are considered as satisfactory measures for minimizing losses arising from credit risk. Additionally, the Company maintains reserves/provisions for potential losses from bad debts. During 2013, no additional provisions have been made. Note that credit limits are reviewed on regular basis by the Company and are adjusted accordingly. For purposes of evaluating exposures to central governments and central banks and exposures to credit or financial institutions, the company uses the credit ratings of Fitch. Minimum Capital Requirements For the calculation of minimum regulatory capital for credit risk, the Company follows the Standardised Method. Noted that as at 31 December 2013, the Company s exposure values before and after credit risk mitigations were equal, since the Company has not used any credit risk mitigation techniques. In addition, the company does not have any exposure to derivative instruments repurchase transactions, securities or commodities lending or borrowing transactions, hence the Company does not face Counterparty Credit Risk. 7

8 Table 3 presents information related with the Company s exposure values and the minimum capital requirements, for each exposure class. Table 3: Exposure values and minimum capital requirement per asset class ( 000) Asset Class Exposure Values before and after Credit Risk Mitigation Minimum Capital Requirements Institutions Corporates Retails 27 2 Collective Investment Undertakings 58 5 Past Due 8 1 High Risk Items Other Items 94 7 Total Table 4 presents the exposure values, before and after credit risk mitigation, broken down by credit quality step ( CQS ). Table 4: Exposure values broken down by CQS Asset Class Credit Quality Step Exposure Value Institutions (based on the credit rating of the country in which the institution operates) Corporates Without credit assessment 254 Retail Without credit assessment 27 Collective Investment Undertakings Without credit assessment 58 Past Due Without credit assessment 8 High Risk Items Without credit assessment Other Items Without credit assessment 94 Total

9 Table 5 presents the average exposure over the year 2013 broken down by exposure classes. Table 5: Average exposure over the year 2013 broken down by exposure classes Asset Class Average Exposure Institutions 542 Corporates 318 Retails 17 Collective Investment Undertakings 58 Past Due 8 High Risk Items 84 Other Items 105 Total Table 6 presents the distribution of exposures, broken down by exposure class and by residual maturity. Table 6: Exposures by asset class and residual maturity ( 000) Up to 1 Year Over 1 Year Total Asset Class Institutions Corporates Retails Collective Investment Undertakings Past Due High Risk Items Other Items Total

10 Table 7 presents the movement of provisions for doubtful debts for 2013 and their accumulated amount as at 31 December Table 7: Provision for bad debts ( 000) Accumulated provision for doubtful debts as at 1 January Provisions for the year 0 Accumulated provision for doubtful debts as at 31 December The Company checks for evidence regarding the probability of not recovering the amounts due from trade and other receivables. In general, the provision for doubtful debts is determined based on the repayment history and financial situation of the debtor. If such evidence exists, the recoverable amounts and a respective provision for doubtful debts are calculated by the Company. The provision is recognized in the Company s income statement. The Company reviews its credit risk on a continuous basis and examines, regularly, the methodology and assumptions used for calculating the provision for bad debt. Table 8 gives an analysis of exposures (net of provisions) by geographical area and asset class as at 31 December Table 8: Exposures analysed by asset class and geographical area ( 000) Asset Class Cyprus Other European Countries Non European Countries Total Institutions Corporates Retails Collective Investment Undertakings Past Due Items High Risk Items Other Items Total

11 Table 9 presents the distribution of exposures, net of provision, broken down by asset class and economic sector as at 31 December Table 9: Exposures analysed by asset class and economic sector ( 000) Asset Class Credit/Financial Services Individuals Other Services Total Institutions Corporates Retails Collective Investment Undertakings Past Due Items High Risk Items Other Items Total OPERATIONAL RISK Operational Risk Definition Operational risk includes risks resulting from processing errors, losses from fraud or errors from systems malfunctions. Operational Risk Management Operational risk resulting from processing errors is maintained at low levels due to the automated operation of the Back Office, so that all of the acts of the day automatically recorded and printed the same day giving the necessary time to confirm their correctness. Operational risk arising from fraud or errors is low due to the process followed by the Company for approval of all expenses and issuance of checks. Before making any order or issuance of checks, the Accounting Department of the Company gets the approval of its Directors. The Company s costs are monitored on an ongoing basis by the Company s management team in order to avoid a possible error or fraud. Operational risk arising from failure to fulfill obligations to third parties (e.g. failure of clearing transactions by the custodian) is also very low, since before the final collaboration with the Custodian a qualitative assessment is performed on both the custodian and the client. Operational risk arising from system malfunctions is unpredictable, but is kept at very low levels due to the continued maintenance of component materials such as computers, modernize and upgrade their operating systems and software. Also, the company, backups on a daily basis all its data that 11

12 include all the electronic files, s and the website of the Company and the retention of these records for one or two weeks depending on their operational significance. The backup systems are operated by trained and qualified personnel on computer systems and network that are ready for immediate response to any problems created on computerised systems of the Company. The Company calculates the minimum capital requirement for operational risk using the Basic Indicator Approach. 7. MARKET AND LIQUIDITY RISK Definition of Market Risk Market risk arises from the potential change in the value of assets and liabilities due to changes in market conditions, and also includes interest rate risk and foreign exchange risk. The firm has established policies and procedures for the continuous monitoring, control and management of market risk. To manage the risk arising from fluctuations in interest rates and foreign currencies and the Euro (" ") various specialized methods are used. The Company is not significantly exposed to foreign exchange risk due to the limits set by the regulatory authority and the Company. The Company measures the minimum capital requirements for market risk using the Standardised Approach. During the year 2013, the Company had no trading book and the net position in foreign currencies was low. Market Risk Management To effectively manage market risk, the Company's portfolio is monitored on a continuous basis by the Investment Committee, using financial data and information. Financial data and information include the financial statements of companies, profit and loss accounts, financial and market research, dividend policies and corporate returns. In order to reduce market risk, the Investment Committee ensures that the investment in a particular issuer does not exceed the limits set by the Board. In addition, the Investment Committee has a duty to periodically review the investment portfolio on the sectors in which operate by the various issuers of investments held which are reviewed according to the economic situation in the country in which each issuer operates. The aim of the Investment Committee is to create a diversified portfolio that minimizes risk and maximizes performance. 12

13 Definition of Liquidity Risk Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Company has procedures with the object of minimizing such losses such as maintaining sufficient cash and other highly liquid current asset. Liquidity Risk Management Liquidity risk by endogenous factors is controllable, due to the daily monitoring of the Company s cash flows and the proper management by the Accounting Department. Also, each year, the Company assesses its liquidity for the following year in order to identify in early stage the possible capital shortfall. The policy of the Company is to maintain its bank accounts to levels that can meet the needs of the Company in the near future. Liquidity risk from external factors is not controllable, since it includes the inability of the secondary market to liquidate an investment, either from lack of depth to the particular investment or lack of marketability. 8. COMPLIANCE RISK Definition of Compliance Risk Compliance risk is the risk of financial loss, including loss of fines and other penalties resulting from non-compliance with laws and regulations of the state. Compliance Risk Management The risk is limited to a significant extent due to the supervision applied by the Compliance Officer, as well as by the monitoring controls applied by the Company. 13

14 9. REMUNERATION POLICY AND PRACTICES In accordance with paragraph 15 of Annex XII, Part 2, Part C of Directive DI of CySEC, investment firms are required to disclose to the public quality information in relation to remuneration policies and practices of the Company and quantitative information on remuneration of those members of staff whose professional activities have a material impact on the risk profile of the Company. Those categories of staff should at least include senior management, risk takers, persons engaged in control functions and any employee whose total remuneration, including the planned discretionary pension benefits, is in the same remuneration bracket as with senior management and risk takers. The policy of the Company takes into account the nature, scale and complexity of its activities. Remuneration Policy In general the remunerations of all staff is fixed, and reflect the level and responsibility of everyone and don t give incentives to increased business risks for the Company from both staff and the senior management of the Company. The control function staff is remunerated in relation to their individual responsibilities and objectives and not in relation to the performance of the control function units of the Company. Persons engaged in control functions include mainly those engaged in Internal Audit, Risk Management and Regulatory Compliance. Note that Internal Audit is outsourced. Remuneration Categories Type of remunerations/benefits: Fixed remunerations Contributions to the social security fund and other funds Contributions to the social cohesion fund Contributions to the provident fund Other benefits (e.g. travelling expenses) Fixed remunerations are determined in accordance with the level of each employee of the Company. Contributions and benefits to the provident fund, social cohesion fund and social security fund are subject to the statutes of the respective fund. 14

15 Table 10 provides an aggregate analysis of remunerations during the year Table 10: Total Remuneration ('000) Number of Beneficiaries Fixed Salary Floating Remuneration (Other Benefits) Total Remuneration Board Members of which: Non executive Non executive independent Executive Senior Management (not included in the category above) Total staff costs Wages and salaries (not included in the above categories) Total Aggregate quantitative information on remuneration of staff members, broken down by business area are presented in Table 11. Table 11: Remuneration break down per Business Area ( 000) Business Area Number of Beneficiaries Fixed Salary Floating Remuneration (Other Benefits) Total Remuneration s Reception transmission and execution of orders Control function Analysis and portfolio management Others Total The average number of employees employed by the Company during the year 2013 was

16 10. OPERATING ENVIRONMENT OF THE COMPANY The Cyprus economy has been adversely affected from the crisis in the Cyprus banking system in conjunction with the inability of the Republic of Cyprus to borrow from international markets. As a result, the Republic of Cyprus entered into negotiations with the European Commission, the European Central Bank and the International Monetary Fund ( Troika ), for financial support, which resulted in an agreement and decision of the Eurogroup on 25 March The programme included the immediate restructuring of the two largest banks in Cyprus though a bail-in process. During 2013 the Cyprus economy recorded further reduction in the Gross Domestic Product. Following the positive outcome of the first and second quarterly reviews of the Cyprus economic programme by the Troika, during 2013, the Eurogroup endorsed the disbursement of the further scheduled tranches of financial assistance to Cyprus. The uncertain economic conditions in Cyprus, the unavailability of financing, the impairment loss incurred on bank deposits and the imposed restrictions on banking transactions together with the current instability of the banking system and the ongoing economic recession, have affected: the ability of the Company to obtain new borrowings or re-finance its existing borrowings at terms and conditions similar to those applied to previous transactions the ability of the Company's trade and other debtors to repay the amounts due to the Company the ability of the Company to enter into contracts for the development of new property units the cash flow forecasts of the Company's management in relation to the impairment assessment for financial and non-financial assets The economic conditions disclosed above together with the impact of the results of the Eurogroup decision of 25 March 2013 for Cyprus may have an adverse impact on the Company's debtors (inability to meet their obligations towards the Company), suppliers (inability to continue trading), valuation of real estate, bankers (inability to provide adequate finance), and revenue (decreased demand for the Company's products or services due to decreased purchasing power by consumers). The Company's management has assessed whether any impairment provisions are deemed necessary for the Company's financial assets carried at amortised cost taken into account the economic situation and outlook at the end of the reporting period. Provisions for trade receivables are determined using the incurred loss model required by the applicable accounting standards. These standards require recognition of impairment losses for receivables that arose from past events and prohibit recognition of impairment losses that could arise from future events, no matter how likely those future events are. The Company's management is unable to predict all developments which could have an impact on the Cyprus economy and consequently, what effect, if any, they could have on the future financial performance, cash flows and financial position of the Company. On the basis of the evaluation performed, the Company's management has concluded that no provisions or impairment charges are necessary. The Company's management believes that it takes all the necessary measures to maintain the viability of the Company and the development of its business in the current business and economic environment. 16

17 The negotiations between the Republic of Cyprus, the Eurogroup, the European Central Bank and the International Monetary Fund ( Troika ) for obtaining financial support, reached an agreement on 25 March 2013 on the key elements necessary for a future macroeconomic adjustment programme which includes the provision of financial assistance to the Republic of Cyprus of up to 10 billion. The programme aims to address the exceptional economic challenges that Cyprus is facing and to restore the viability of the financial sector, with the view of restoring sustainable economic growth and sound public finances over the coming years. The Eurogroup decision on Cyprus includes plans for the restructuring of the financial sector and safeguards deposits below in accordance with European Union legislation. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatizations. On 12 April 2013 the Eurogroup welcomed the agreement that has been reached between Cyprus and the Troika institutions regarding the macroeconomic adjustment programme for Cyprus. The necessary procedures required for formal adoption by the Board of Directors of the European Stability Mechanism and the ratification by Member States of the euro area was completed. Following the completion of the above procedures, the first tranche of the financing of the Republic of Cyprus was released in line with the provisions of the Memorandum. On 22 March 2013 the House of Representatives voted legislation relating to capital controls affecting transactions executed through banking institutions operating in Cyprus. The extent and duration of the capital controls is decided by the Minister of Finance and the Governor of the Central Bank of Cyprus and were enforced on 28 March The temporary restrictive measures, with respect to banking and cash transactions include restrictions on cash withdrawals, the encashment of cheques and the transfers of funds to other credit institutions in Cyprus and abroad. They also provide for the compulsory partial renewal of certain maturing deposits. On 29 March 2013 the Central Bank of Cyprus issued decrees relating to Laiki Bank and Bank of Cyprus, implementing measures for these two banks under the Resolution of Credit and Other Institutions Law of On the basis of the relevant decrees, Laiki Bank was placed into resolution. What remained in Laiki Bank were mainly the uninsured deposits and assets outside Cyprus. The assets of Laiki Bank in Cyprus, the insured deposits and the Eurosystem financing have been transferred to Bank of Cyprus, with compensation for the value of the net assets transferred, the issue of shares by Bank of Cyprus to Laiki Bank. The recapitalization process for the Bank of Cyprus was completed in accordance with the relevant decrees of the Resolution Authority through bail-in, that is through the partial conversion of uninsured deposits into shares. In addition, the holders of shares and debt instruments in Bank of Cyprus on 29 March 2013 have contributed to the recapitalization of Bank of Cyprus through the absorption of losses. Following the positive outcome of the first and second quarterly reviews of the Cyprus economic programme by the European Commission, the European Central Bank and the International Monetary Fund, during 2013, the Eurogroup endorsed the disbursement of the scheduled tranches of financial assistance to Cyprus. 17