Pillar 3 Disclosures

THE NAYA PILLAR 3 DISCLOSURES

August 2015

The Pillar 3 disclosure of Naya Management LLP (“Naya” or the Firm”) is authorised by the Financial Conduct Authority (“FCA”) as a Full-scope UK Alternative Investment Fund Manager. The regulatory capital framework applicable to Naya is that which has been established by both the Capital Requirements Directive (“CRD”) and the Alternative Investment Fund Managers Directive (“AIFMD”).

Naya Management LLP was authorised by the Financial Conduct Authority as full scope UK alternative investment fund manager until 14th December 2015 when the firm changed its legal status to Naya Capital Management UK Limited. The Pillar 3 disclosure refers to the period prior to the change in legal status.
The Pillar 3 disclosure of Naya is set out below as required by the Financial Conduct Authority’s (“FCA”) “Prudential Sourcebook for Banks, Building Societies and Investment Firms” (BIPRU) specifically BIPRU 11. The regulatory aim of the disclosures is to improve market discipline.

Naya makes Pillar 3 disclosures annually, via its website.. This information contained in this disclosure is accurate as at 31 December 2014. The information contained in this document has not been audited by Naya’s external auditors and does not constitute any form of financial statement.

Introduction

The Firm is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements.

The Firm is categorised by the FCA, for capital purposes. as a Collective Portfolio Management Investment (“CPMI”) firm. It is an investment management firm and has no trading book exposures. The Firm is not required to prepare consolidated reporting for prudential purposes.

Materiality

Certain information relating to BIPRU 11.5 has been omitted on the basis that it has been deemed to be immaterial or confidential. The Firm regards information as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.

Confidentiality

The Firm regards information as proprietary if sharing that information with the public would undermine its competitive position. Proprietary information may include information on products or systems which, if shared with competitors, would render the Firm’s investments therein less valuable. Further, the Firm must regard information as confidential if there are obligations to customers or other counterparty relationships binding the Firm to confidentiality. In the event that any such information is omitted, we shall disclose such and explain the grounds why it has not been disclosed.

Capital resources Requirement

The prudential framework for investment management firms consists of three “pillars”:

  • Pillar 1 – sets out the minimum capital requirements for the investment manager;
  • Pillar 2 – deals with the Internal Capital Adequacy Assessment Process (“ICAAP”) undertaken by the Firm to assess the adequacy of capital held in relation to its material risks; and
  • Pillar 3 – requires the Firm to publicly disclose its policies on risk management, capital resources and capital requirements.

As a CPMI firm, the Pillar 1 capital requirement is calculated as the higher of the:

  • Fixed Overhead Requirement (“FOR”);
  • Base Capital Requirement of €125,000; or
  • The funds under management requirement (the sum of the Firm’s base own funds requirements of €125k plus 0.02% of the amount by which the Firm’s funds under management (related to Alternative Investment Funds) exceed €250m); and

Whichever is the applicable of:

  • The professional negligence capital requirement (“additional own funds requirement”); or
  • The professional indemnity insurance (“PII”) capital requirement

As a CPMI firm Naya must also maintain capital resources in excess of the variable capital requirement (being the higher of the FOR and the sum of the credit risk and market risk capital requirements) as they relate to the Firm’s non-AIFMD business. Naya calculates the credit risk applicable to its non-AIFM activities under the simplified approach.

The Firm has deemed the FOR to be the higher and this is therefore used for the Pillar 1 calculation.

Capital resources

The main features of the Firm’s Capital Resources are as follows:

Capital Item £’000s
Tier 1 capital less innovative tier 1 capital 760
Tier 2 capital 760
Tier 3 capital 0
Total capital resources, net of deductions 760

Risk management objectives & policies

Due to the nature, size and complexity of the Firm, Naya does not have an independent risk management function, however the Senior Partnership Group (“SPG”) has appointed the Chief Operating Officer as the Risk Officer of Naya. The SPG which consists of the Head of Research, the Chief Executive, and the Chief Operating Officer are responsible for the day to day management of the firm. In addition, they ensure that Naya has implemented an effective, on-going process to identify risks, to measure its potential impact against a broad set of assumptions and then to ensure that such risks are actively managed.
The Risk Officer has the necessary authority, access to all relevant information and regular contact with other members of the SPG in order to provide them with updates so that they can take prompt remedial action where needed. The Risk Officer is a member of the Investment Manager’s Risk Committee.
A review is conducted at least annually of the effectiveness of Naya’s system of internal controls. The review covers all material controls, including financial, operational and compliance controls.

Naya has clearly documented policies and procedures, which are designed to minimise risks to the Firm and all staff are required to confirm that they have read and understood them.
Naya undertakes an Internal Capital Adequacy Assessment Process (“ICAAP”), at least annually, which is the process through which it determines that it is able to identify and manage its key risks on an on going basis and that it has sufficient capital in respect of such risks. The process is forward looking and is an integral part of the management of the Firm.
The Firm’s ICAAP includes an assessment of the design and performance of the internal controls in place to mitigate risks, the probability of the risk occurring, the potential financial and reputational impact, and the adequacy of the Firm’s capital base.
If necessary the Firm would allocate extra capital to the relevant risk, but this has not been deemed necessary. The Firm has concluded that its Tier 1 capital is sufficient to cover its Pillar 1 and Pillar 2 requirements.

Risks

Below we consider, for each separate category of risk, the strategies and processes to manage the risks:

Operational Risk

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. This risk has been assessed as material and has been considered further in the Firm’s ICAAP.

Market Risk

Market risk is the risk of any impact upon the Firm’s financial condition due to fluctuations in values of, or income from, assets or in interest or exchange rates. Naya does not maintain a trading book, therefore the only market risk to which the Firm is exposed is foreign exchange risk on accounts receivable, which is not assessed to be material.

Credit & Counterparty Risk

Credit risk is defined as the risk of loss caused by the failure of a counterparty to perform its contractual obligations. A factor which may contribute to increased credit risk is concentration of assets held with a single counterparty. Given the nature of the relationship between Naya and its client(s), it is very unlikely that there is any credit risk. If the fund failed to meet its obligations to Naya this would either indicate that the relationship was irreparably damaged or the fund was not in the financial position to meets its obligation. In these circumstances it is likely that Naya would wind down.

Business Risk

Business risk is any risk to the firm arising from changes in its business, including the risk that the firm may not be able to carry out its business plan and its desired strategy. This has been assessed as a material risk and has been considered further in the Firm’s ICAAP.

Liquidity Risk

Liquidity risk is defined as the risk that the Firm, although solvent, either does not have sufficient available resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. The Firm conducts, at least annually, a liquidity assessment to ensure that it meets the liquidity requirements in BIPRU 12.

Securitisation Risk

Securitisation risk is the risk that the capital resources held by a firm in respect of assets which it has securitised are inadequate having regard to the economic substance of the transaction, including the degree of risk transfer achieved. Naya does not securitise assets, therefore, the risk is considered to be nil.

Insurance Risk

Insurance Risk is the inherent uncertainty as to the occurrence, amount and timing of insurance liabilities. Naya does not undertake any insurance business.

Reputational Risk

Reputational risk is defined as the risk of damage to the Firm’s reputation that could lead to negative publicity, costly litigation, a decline in the customer base or the exit of key employees and therefore directly or indirectly to a loss of revenue. This risk applies to the Firm and has been considered further in the Firm’s ICAAP.

Pension Obligation Risk

Pension obligation risk is defined as the risk to a firm caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). It also means the risk that the firm will make payments or other contribution to or with respect to a pension scheme because of a moral obligation or because the firm considers that it needs to do so for some other reason. Naya does not run a defined benefit pension scheme. Consequently this risk has been assessed as being nil.

Interest Rate Risk arising from non-trading book activities

Interest rate risk is defined as the potential for losses or gains from fluctuations in interest rates. Naya does not have any debt and does not rely on cash in the bank to generate income. Therefore it is not relevant.

Concentration Risk

Concentration risk is defined as exposure to sectoral, geographic, liability and asset concentrations. The Firm does not trade on its own account and has no principal positions. Therefore it is not exposed to concentration risk.

Residual Risk

Residual risk is the risk of loss arising from Naya’s exposure to residual risks that may result from the partial performance or failure of credit risk mitigation techniques for reasons that are unconnected with their intrinsic value, e.g. the risk that credit risk mitigation techniques used by the firm prove less effective than expected. The Firm does not use credit risk mitigation techniques therefore this risk is not applicable.

Group Risk

Group risk is defined as the risk that the financial position of a firm may be adversely affected by its relationships (financial or non-financial) with other entities in the same group or by risks which may affect the financial position of the whole group, for example reputational contagion. Naya is not part of a group, therefore this risk is not applicable.

Remuneration

Naya must comply with the remuneration rules as set out in Article 14 of the Alternative Investment Fund Managers Directive (“AIFMD”) and SYSC 19B of the FCA Handbook (“the AIFM Remuneration Code), as well as SYSC 19C (“the BIPRU Remuneration Code”). The purpose of the Code is to ensure that firms have risk focused remuneration policies, which are consistent with and promote effective risk management and do not expose themselves to excessive risk. We have reviewed all existing employment contracts to ensure they comply with the Code.

The SPG is responsible for setting the Remuneration Policy Statement for all staff. The Remuneration Code can be applied in a proportionate way. As such the SPG has determined that the following rules are not proportionate to Naya and have not implemented these detailed rules:

SYSC 19B 1.17 – Retained units, shares and other instruments;

SYSC 19B.1.18 – Deferral; and

SYSC 19B.1.19, 19B 1.20 – Performance adjustment

Variable remuneration is not based solely on the financial performance of the individual. The SPG also considered the individuals overall (non-financial) performance to the whole team and the overall results of the AIFs, other managed account and the Firm. The performance of the individual is assessed over the entire year.

FCA guidance makes clear that for a firm such as Naya, which is a full-scope UK AIFM that is also a BIPRU firm, that where it complies with the requirements of SYSC 19B it will also comply with SYSC 19C and that the FCA will not require the firm to demonstrate compliance with SYSC 19C separately.

Given the nature and small size of our business, remuneration for all personnel is set by the Naya’s SPG. Naya formally reviews the performance of all Partners and employees and based thereon determines for each the overall level of remuneration and the split of that between base salary, bonus according to the LLP Agreement and any discretionary additions in compliance with the FCA Rules on remuneration. Given that Naya has only one business area, investment management, all remuneration disclosed in our audited financial statements is from this business area.