Pillar 3 Disclosures

 

1. Background

The European Union’s Capital Requirements Directive (“CRD”) came into effect on 1 January 2007 and introduced a set of revised regulatory capital adequacy standards and associated supervisory framework across the European Union based on the Basel II Accord.  The Basel II Accord comprises recommendations issued by the Basel Committee on Banking Supervision which aimed to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against various financial and operational risks.  The Financial Services Authority (“FSA”) implemented the CRD in the United Kingdom.   

The CRD uses the concept of three pillars that also form the basis of the Basel II Accord and extends the requirements to cover a wide range of financial institutions.  These three pillars are also embedded in the FSA’s rules that implement the CRD. 

Pillar 1 specifies the minimum capital resources Oxford University Endowment Management Limited (“the firm”) is required to hold.  In the case of the firm this is the highest of Euro 50,000, the sum of its market and credit risk requirements, and its Fixed Overhead Requirement (“FOR”).    In the case of the firm the latter is the highest as at the date of this disclosure.

Pillar 2 sets out the review process to be used by the firm and the FSA to determine whether additional capital should be held against any risks not adequately covered by Pillar 1.  Under Pillar 2 the firm is required to analyse a wide range of risks to its business and then consider whether the mitigation in place to address these risks is sufficient or whether additional capital in excess that available under Pillar 1 is required to provide a buffer against specific risks.  This procedure forms part of the firm’s Internal Capital Adequacy Assessment Process (“ICAAP”). 

Pillar 3 requires the firm to develop a set of disclosure requirements which enable market participants to assess information on the risks facing the firm, its capital resources and risk management procedures. 

This statement is published in accordance with the FSA rules concerning Pillar 3 disclosures

2. Scope of Disclosure

 The disclosures in this document are made in respect of Oxford University Endowment Management Limited, an investment management firm providing services to a number of funds comprising assets of the University of Oxford, its colleges and related entities.  The firm is authorised and regulated by the Financial Services Authority and is categorised as a Limited Licence €50,000 firm.  The firm is not permitted to hold client money or client assets.  The firm does not fall within the definition of a UK consolidation group and is thus not required to prepare disclosures on a consolidated basis.

3. Risk management objectives and policies

The firm’s approach to risk management is predicated on the need to manage the full range of risks facing the firm including credit, market, business, operational and liquidity.  The firm’s overriding aim in this area is to minimise the risks to the firm’s clients, its counterparties and other stakeholders and to ensure it remains in full compliance with regulatory and legal requirements. 

Operational Risk

The firm’s risk management framework incorporates an analysis of the impact of each risk on the business, the probability of each risk occurring and the procedures in place in mitigation.  This risk management framework is a core component of the firm’s high level systems and control arrangements and ensures all areas of the business are subject to senior management oversight.  The firm’s directors review all aspects of the business on a regular basis to ensure operational risks have been identified, recorded in the firm’s register of risks and effective controls put in place to mitigate the risks identified in order that the combination of the impact assessment and probability of each risk is kept to an acceptable level.  The risk management framework is supported by a wide range of real-time management information systems that monitor performance.  The firm has embedded within its business processes, at all levels, robust and effective risk management processes that are subject to regular appraisal.  These appraisals are supported and enhanced by compliance through its independent and risk orientated monitoring procedures, the output from which is communicated to senior management through regular reports including those from the firm’s independent compliance consultant. 

In order to ensure the firm has sufficient capital to cover some of these operational risks the company may be exposed to the firm also maintains insurance policies to cover a range of eventualities.  There is an annual review of all policies to ensure that the cover provided is sufficient.

Business Risk

The firm’s main business risk relates to a possible fall in assets under management as a result of turbulence in markets or substantial redemptions by investors and a consequent diminution in investment management fees.   

Liquidity risk

The risk that the business will be unable to meet its financial obligations as they fall due is not considered material for the purposes of this disclosure.  

Credit risk

The risk of the non-payment of investment management fees arising from the firm’s management of various funds is mitigated by the funds’ appointment of an independent administrator.  In the case of bank deposits, money is only deposited with highly rated approved counterparties.    

Market Risk

The firm’s market risk is not material as no assets or liabilities are denominated in currencies other than Sterling.  

4. Capital resources

As at 31^st July 2011 Oxford University Endowment Management Limited had £570,000 of authorised and paid up ordinary share capital as a core component of its Tier 1 capital.

The table below illustrates the current Tier 1 capital structure.

Capital Components	2011 £’000s
Tier 1
Share Capital	570
Audited Reserves	-37
Total Tier 1	533
The company has no Tier 2 or Tier 3 capital
Total Tier 1, 2 and 3 capital	533
Base Capital Requirement (€50,000)	44
Variable Capital Requirement	412
Surplus over Variable Capital Requirement	121

The firm has assessed its Pillar 2 requirements under the FSA rules and as a result of this assessment the firm has determined that no additional capital is required in excess of its Pillar 1 capital requirement.

Oxford University Endowment Management Limited
December 2011