York Capital Management Europe (UK) Advisors, LLP
Pillar 3 Risk Disclosure
Year Ended 31 December 2018
York Capital Management Europe (UK) Advisors, LLP (YCM UK or the Partnership) is an investment manager, incorporated in the UK, authorized and regulated by the FCA and is a solo regulated BIPRU firm. YCM UK is required by the FCA to disclose information relating to the capital it holds and each material category of risk it faces in order to assist users of its accounts and to encourage market discipline. The Partnership is controlled by its designated members, with York Capital Management UK Advisors Limited (YCM UK Ltd), a company incorporated in the United Kingdom, holding the majority of the capital of the Partnership. YCM UK Ltd is in turn a wholly-owned subsidiary of YCM Master Holdings II, L.P. (YCMMII), a Delaware limited liability partnership in the United States of America (U.S.A.). The principal activity of the Partnership is that of providing certain investment advisory, trade execution and administrative services to York Capital Management (US) Advisors, L.P. (YCM US Advisors), a Delaware limited liability partnership in the U.S.A. that is a subsidiary of YCMMII.
The Capital Requirements Directive (CRD) created a revised regulatory capital framework across Europe covering how much capital financial services firms must retain. In the United Kingdom, rules and guidance are provided in the General Prudential Sourcebook (GENPRU) and the Prudential Sourcebook for Banks, Building Societies and Investments Firms (BIPRU).
The FCA framework consists of three “Pillars”:
- Pillar 1 sets out the minimum capital requirements that companies need to retain to meet their credit, market and operational risk;
- Pillar 2 deals with the Internal Capital Adequacy Assessment Process (ICAAP) and requires companies to assess whether their Pillar 1 capital is adequate to meet their risks or whether further capital is required ;
- Pillar 3 requires companies to develop a set of disclosures which will allow market participants to assess key information about its underlying risks, risk management controls and capital position. These disclosures are seen as complimentary to Pillar 1 and Pillar 2.
Rule 11 of BIPRU sets out the provisions for Pillar 3 disclosure. The rules provide that companies may omit one or more of the required disclosures if such omission is regarded as immaterial. Information is considered material if its omission or misstatement could change or influence the decision of a user relying on the information. In addition, companies may also omit one or more of the required disclosures where such information is regarded as proprietary or confidential. The Partnership believes that the disclosure of this document meets its obligation with respect to Pillar 3. This document is updated on an annual basis and disclosed on the public website, https://www.yorkcapital.com/RegulatoryDisclosures/Pillar3.html. This disclosure document has not been audited.
Capital Resources and Requirements
As at 31 December 2018 the Partnership held regulatory capital resources of £2,598,623, comprised mostly of core Tier 1 capital of members’ original capital contributions.
The Partnership’s 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 (FOR).
As at 31 December 2018 the Partnership’s Pillar 1 capital requirement was £1,602,000. This has been determined by reference to the fixed overhead requirement.
Satisfaction of Capital Requirements
The firm has adopted the “Structured” approach to the calculation of its Pillar 2 Minimum Capital Requirement as outlined in the Committee of European Banking Supervisors Paper, 27 March 2006 which takes the higher of Pillar 1 and 2 as the ICAAP capital requirement. It has assessed Business Risks by modeling the effect on its capital planning forecasts and assessed Operational Risk by considering if Pillar 2 capital is required taking into account the adequacy of its mitigation.
Since the Partnership’s Internal Capital Adequacy Assessment Process (ICAAP or Pillar 2) process has not identified capital to be held over and above the Pillar 1 requirement, the capital resources detailed above are considered adequate to continue to finance the Partnership over the next year. No additional capital injections are considered necessary and the Partnership expects to continue to be profitable.
The Partnership has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the Partnership’s members.
As risks are identified within the business, appropriate controls are put in place to mitigate these and compliance with them is monitored on a regular basis. The frequency of monitoring in respect of each risk area is determined by the significance of the risk. The Partnership does not intend to take any risks with its own capital and ensures that risk taken within the portfolios that it provides advice to is closely monitored. The results of the compliance monitoring performed is reported to the partners by the Chief Compliance Officer.
Specific risks applicable to the Partnership come under the headings of business, operational, credit and market risks.
The Partnership’s revenue is dependent on the performance of assets under management of the funds in which YCM US Advisors acts as an investment advisor. The main risks the Partnership faces are events leading to a significant fall in the level of these assets under management, which include negative conditions in the global financial markets and economic conditions throughout the world. The Partnership has a significant amount of discretionary expenses and in the event of significant declines in revenue, the Partnership will reduce discretionary spending to ensure sufficient funds are available to cover all other expenses of the business. The Partnership’s parent may also provide additional financial support to the Partnership where necessary. Other business risks identified include: Fraud by employees, Key Man Risk, and Market Abuse. The Firm feels as though these risks have been appropriately considered and mitigated through its policies and procedures within its current control environment and as such deem these additional business risks as low.
The Partnership places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.
The Partnership has identified a number of key operational risks. These relate to disruption of the office facilities, system failures, trade failures and failure of third party service providers. Appropriate policies are in place to mitigate against risks, including appropriate insurance policies and business continuity plans.
The main credit risk to which the Partnership is exposed is in respect to the failure of its debtors to meet their contractual obligations. The majority of the Partnership’s receivable is related to investment advisory service provided to YCM US Advisors. The Partnership believes its credit risk exposure to YCM US Advisors is limited since the Partnership’s revenue is ultimately related to management fees received from funds that are managed by the Partnership’s affiliates. These management fees are drawn throughout the year from the funds managed. Other credit exposures include bank deposits and office rental deposits.
The Partnership undertakes periodic impairment reviews of its receivables. All amounts due to the Partnership are current and none have been overdue during the year. As such, due to the low risk of non-payment from its parent company and other counterparties, management is of the opinion that no provision is necessary. A financial asset is overdue when the counterparty has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.
The Partnership has adopted the standardised approach to credit risk, and therefore follows the provision within BIPRU 3 standardised credit risk of the FCA handbook. The Partnership applies a credit risk capital component of 8% to its non-trading book risk weighted exposure. As the Partnership does not make use of an external credit rating agency, it is obligated to use a risk weight of 100% to all non-trading book credit exposures, except cash and cash equivalents which are held by investment grade firms and currently attract a risk weighting of 20%.
The table below sets forth the Partnership’s credit exposures and corresponding capital resource requirements as at 31 December 2018:
|Credit Exposure||Capital Resource Requirement|
|Tangible fixed assets||£282,807||£23,000|
|Prepayments & accrued income||£461,898||£38,000|
|Other debtors – due within one year||£1,009,073||£81,000|
|Other debtors – due after more than one year||£890,370||£71,000|
|Cash at bank and in hand||£9,631,248||£154,000|
The geographic distribution and residual maturity breakdown of all exposures are as follow:
|Description||Within 12 Months||1 – 5 Years||More than 5 Years||Total|
|Tangible fixed assets||£ -||£ -||£282,807||£282,807|
|Prepayments & accrued income||461,898||–||–||461,898|
|Cash at bank and in hand||9,631,248||–||–||9,631,248|
|Total United Kingdom||£10,093,146||–||£1,173,177||£11,266,323|
Since the Partnership holds no trading book positions on its own account, the key market risk relates to fluctuations in foreign exchange in respect to the value of its asset management fee revenues, which is denominated in U.S. dollars. The Partnership’s exposure to foreign currency risk is not significant. Since the settlement of debtor balances take place without undue delay, the timing of the amount becoming payable and subsequently being paid is such that it is not considered to present a material risk to the Partnership. Market risk is assessed primarily within Pillar 1, utilising the “Basic Method”, as prescribed. As at 31 December 2018 the Partnership’s market risk was £9,518.
YCM UK has adopted a remuneration policy and procedures that comply with the requirements of chapter 19C of the FCA’s Senior Management Arrangements, Systems and Controls Sourcebook (SYSC), as interpreted in accordance with the FCA’s guidance publication entitled “General Guidance on Proportionality: The Remuneration Code (SYSC 19C) & Pillar 3 Disclosures on Remuneration (BIPRU 11)” and subsequent items of guidance issued by the FCA, including its document entitled “Frequently Asked Questions on the Remuneration Code”.
As a BIPRU limited licence firm, YCM UK falls within proportionality tier 3. The Partnership has concluded, on the basis of its size and the nature, scale and complexity of its legal structure and business that it does not need to appoint a remuneration committee. Instead, the YCM UK Partnership Board, in consultation with the YCM UK Executive Committee, sets, and oversees compliance with, the Partnership’s remuneration policy including reviewing the terms of the policy at least annually.
As at 31 December 2018, YCM UK currently sets the variable remuneration of its partners and staff in a manner which takes into account partner and firm performance, by reference to individual performance, performance of the Partnership, and the overall results of the York Global Group. As permitted for firms falling within proportionality tier 3, YCM UK takes into account the specific nature of its own activities (including the fee based nature of its revenues) in conducting any ex-ante risk adjustments to awards of variable remuneration and, given the nature of its business, has disapplied the requirement under the Remuneration Code to make ex-post risk adjustments.
YCM UK only has one “business area”, namely its investment management business. All of the Partnership’s Code Staff fall into the “senior management” category of Code Staff for the purposes of the Remuneration Code. The aggregate “remuneration” (as defined in the FCA Rules) awarded to the firm’s Code Staff during the financial year ending on the accounting reference date was £10,514,456.
UK Financial Reporting Council’s Stewardship Code
FCA COBS Rule 2.2.3R requires FCA authorised firms to disclose whether they conform to the requirements of the UK Financial Reporting Council’s Stewardship Code (the Stewardship Code). Adherence to the Stewardship Code is voluntary. The funds in which the Partnership provides investment advisory primarily pursue a long trading strategy, which involves a wide variety of investment products and timeframes. Therefore, while the Partnership supports the principles of the Stewardship Code, it does not consider it appropriate to conform to the Stewardship Code at this time.