Renaissance

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Renaissance

  1. 1. Renaissance Investment Management Renaissance Renaissance Investment Management Renaissance Capital (Cyprus) Limited Renaissance Capital Renaissance Capital Renaissance Capital REPORT ON DISCLOSURES REQUIRED Renaissance Capital UNDER THE DIRECTIVE OF CYPRUS Renaissance SECURITIES AND EXCHANGE COMMISSION Capital FOR THE CAPITAL REQUIREMENTS OF Renaissance Capital Renaissance CYPRIOT INVESTMENT FIRMS Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance Capital Renaissance
  2. 2. Contents page 1. Introduction .................................................................................................................................... 3 1.1. The purpose of this document .............................................................................................. 3 1.2. Background and regulatory context ..................................................................................... 3 2. Regulatory Capital ......................................................................................................................... 4 2.1. Definition .............................................................................................................................. 4 2.2. Own Funds of Renaissance Investment Management (Cyprus) Limited.............................. 4 3. Risk Management Objectives and Policies .................................................................................... 6 3.1. Risk Management Organisation ........................................................................................... 6 4. Capital Requirements .................................................................................................................... 9 5. Credit Risk Management ............................................................................................................. 11 5.1. Definition of Credit Risk...................................................................................................... 11 5.2. Credit Risk Management Procedures ................................................................................ 11 5.3. Credit Risk under Pillar I .................................................................................................... 12 5.4. Nominated External Credit Assessment Institutions for the application of the Standardised Approach ............................................................................................................... 12 5.5. Credit Risk Hedging and Mitigation Policies....................................................................... 13 5.6. Risk of Impairment ............................................................................................................. 13 6. Market Risk Management ............................................................................................................ 14 6.1. Market Risk Definition ........................................................................................................ 14 6.2. Market Risk Management Procedures ............................................................................... 14 7. Operational Risk Management .................................................................................................... 17 7.1. Definition of Operational Risk ............................................................................................. 17 7.2. Operational Risk Management ........................................................................................... 17 7.3. Operational Risk Management Procedures ....................................................................... 17 7.4. Internal Audit ...................................................................................................................... 17 7.5. Operational Risk under Pillar I ........................................................................................... 17 2 Renaissance Investment Management (Cyprus) Limited
  3. 3. [Type text] 1. Introduction 1.1. The purpose of this document Renaissance Investment Management (Cyprus) Limited (“RIMCY” or “Company”) holds a license from the Cyprus Securities and Exchange Commission (“CYSEC”), number KEPEY055/04 dated 22 December 2004, which permits the Company to operate as a Cyprus Investment Firm and to provide investment and ancillary services in relation to specific financial instruments. This Report has been prepared in accordance with the requirements of Directive DI144-2007-05 (“the Directive”) issued by CYSEC for the capital requirements of investment firms. The Directive transposes and implements into local legislation the European Union‟s Capital Requirements Directive 2006/48/EC and 2006/49/EC (“The CRD”). This Report should be read in conjunction with the audited financial statements of the Company for the year ended 31 December 2009 which contain supplementary information relating to the requirements of the above mentioned Directive. 1.2. Background and regulatory context In 1988, the Basel Committee on Banking Supervision developed a set of rules (the Basel Capital Accord, or Basel I) regarding the capital adequacy requirements for Banks. The main focus of Basel I was on credit risk with banks being required to hold capital of at least 8% of their risk weighted assets and of their off the statement of financial position commitments. Additional rules relating to trading risk were added in 1996, in a European directive related to market risk. The need for a more risk sensitive approach to capital requirements, as well as the need to enhance the soundness and stability of the international banking system, led the Basel Committee on Banking Supervision to design a new worldwide framework known as Basel II. The new framework introduced a three pillar concept that seeks to align regulatory requirements with the economic principles of risk management. The Basel II framework is based on three mutually re-enforcing pillars: Pillar I defines the minimum regulatory capital requirements, based on principles, rules and methods specifying and measuring credit, market and operational risk. These requirements are covered by regulatory own funds, according to the rules and specifications of Pillar I. Pillar II addresses the internal processes for assessing overall capital adequacy in relation to risks (Internal Capital Adequacy Assessment Process – “ICAAP”). Pillar II also introduces the Supervisory Review & Evaluation Process (SREP), which assesses the internal capital adequacy of institutions. Pillar III deals with market discipline by developing a set of disclosure requirements, which allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes and hence the capital adequacy of institutions. In June 2006, the European Parliament and the Council published in the Official Journal of the European Union the CRD, which comprises of the following two directives: Directive 2006/48/EC on the taking up and pursuit of the business of institutions; and Directive 2006/49/EC on the capital adequacy of investment firms and institutions In December 2007 the above Directives were transposed into Cyprus law and CYSEC issued a series of circulars specifying the provisions of the above law and transposed the provisions of the CRD into the Directive (DI144-2007-05). Renaissance Investment Management (Cyprus) Limited 3
  4. 4. 2. Regulatory Capital 2.1. Definition The Pillar I regulatory capital of the Company is calculated on the basis of account balances computed and derived based on the adoption by the Company of International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and the requirements of the Cyprus Companies Law, Cap 113. The available regulatory capital is classified under two main categories: Original Own Funds (Tier 1 capital) Additional Own Funds (Tier 2 capital) 2.1.1. Original Own Funds Original Own funds of the Company include the following: Share Capital issued and fully paid Share Premium Audited reserves (excluding Revaluation Reserves) less proposed dividends 2.1.2. Additional Own Funds Additional Own Funds of the Company include the following: Subordinated Loans It is worth noting that subordinated loans are capped at 50% of Tier 1 capital. 2.2. Own Funds of Renaissance Investment Management (Cyprus) Limited The own funds of the Company as at 31 December 2009 were US$ 30,209 as shown below: (in thousands of USD) At 31 December 2009 Original Own Funds (Tier 1) Share Capital 22 Share Premium 2,480 Revenue Reserves 17,707 Deductions - Total Original Own Funds 20,209 Additional Own Funds (Tier 2) Subordinated Loan Capital 10,000 Deductions - Total Additional Own Funds 10,000 Total own funds 30,209 4 Renaissance Investment Management (Cyprus) Limited
  5. 5. [Type text] There are no deductions as at 31 December 2009 as there were no Free Deliveries and no investments in subsidiaries. At 30 Decemeber 2009, the Company sold its investment in Renaissance Investment Management (Dubai) Ltd to an external counterparty. 2.2.1. Original Own Funds Share Capital At 31 December 2009, the share capital of the Company comprised 11,000 ordinary shares with a nominal value of €1.71 each (Equivalent of US$2). 2.2.2. Additional Original Own Funds Subordinated loan The Company issued on 31 December, 2007, $10mln of Subordinated Loan to its immediate parent company Renaissance Capital Investment Management Limited (“RCIML”), bearing a floating interest rate of LIBOR plus 1%. The subordinated loan was repaid early on 26 January 2010, following the approval of CYSEC. Renaissance Investment Management (Cyprus) Limited 5
  6. 6. 3. Risk Management Objectives and Policies 3.1. Risk Management Organisation Risk management of Renaissance Investment Management (“RIM”) Group as a whole and RIMCY in particular is a continuous process aimed to the following objectives: - Provide reasonable protection from key risks RIM Group or RIMCY in particular is exposed to; - Provide adequate estimates of exposure to risks - Ensure continuous development and improvement of risk management framework. In general the approach to risk management process of RIMCY as well as the methodology itself is inherited from the Renaissance Group. The Risk Management Framework provides guidance to adopt a holistic approach to managing risk. The application of the Framework helps better understand the nature of risk, and to manage it more systematically. The framework consists of the following elements: Figure: RIMCY Risk Management Framework Renaissance Group Guidelines RIMCY Risk Strategy and Appetite RIMCY Risk Management Methodology RIMCY Risk Governance and Organization RIMCY Risk Management Process - Renaissance Group guidelines – basic principles inherited from Renaissance Group and applied in RIMCY. - RIMCY Risk Strategy and Appetite – Risk Strategy is a part of business strategy, and it defines the target state of RIMCY‟s risk management. Risk appetite is an overall risk tolerance level set by the RIMCY Board of Directors and by RIM Group. - RIMCY Risk Management Methodology – a set of methods applied for managing and measuring risks. - RIMCY Risk Governance and Organization is a hierarchical structure that governs decision-making in the field of risk management. It includes the organizational structure of risk management as well as a set of rules, instructions, policies, procedures. - RIMCY Risk Management Process is an ongoing process of well-defined steps which, when taken in sequence, enable risk management with sufficient level of assurance as well as continuous improvement of RIMCY risk management framework. The following 5 steps can be defined within the process: Risk identification, Risk assessment, Risk mitigation, Reporting, Evaluation of the framework. The Board of Directors (“BoD”) has the ultimate responsibility for the risk appetite of the Company and the monitoring of risks on a regular basis. Additionally, the BoD is responsible for monitoring the capital adequacy of the Company. 6 Renaissance Investment Management (Cyprus) Limited
  7. 7. [Type text] The BoD has appointed a Risk Management Committee, with the following responsibilities: a) Facilitate regular communication and coordination between the Company and the Group Risk Function and Risk Committee on risk issues impacting the Company and the Group; b) Promote a consistent risk management oversight at the local entity level; c) Provide regular reporting to the BoD of the Company; d) Local ratification and approval of limit excesses approved by the Group Risk Committee. The local Risk Management function has available to it the following reports: 1) Risk Dashboard: This is a report issued daily which summarizes the total risk exposures and provides details/action taken for any breach in internal limits of Renaissance Group. Monitoring of this report provides an overview of potential exposures for the Company. The report sets out Value-at-Risk (“VaR”) and Stress test values for Market Risk, analyzed within product groups. It also provides an analysis of the positions in various markets. Crucially, there is substantial information on collateral management and an analysis of counterparty exposure. 2) Suspense Trade Report: this is issued daily and provides an analysis of trades in suspense for more than 1 day. The report provides details of such suspense in excess of 1 day which have / have not received appropriate approval based on the global risk management approval limit structure; 3) RIMCY and Group Key Risk Indicator (“KRI”) Report: This report captures the local and global key operational risk indicators and is issued monthly. The information set out in this report is of crucial importance for our monitoring of operational risk. Key metrics reviewed relate to operational risk categories as follows: i. Derivatives Documentation risk; ii. Failing Settlement risk; iii. Client and Counterparty (“CP”) Failing Settlement risk; iv. Cash processing risk; v. Trade capture risk; vi. Suspense trade risk; vii. Market risk; viii. Credit risk; ix. Collateral management risk; x. Information Technology (“IT”) Risk; xi. Processing capacity (over-the-counter (“OTC”) and exchange traded) risk; xii. Incidents risk; xiii. Staff retention risk; xiv. Timely Regulatory reporting risk; xv. Breach of Know-Your-Client (“KYC”) procedures risk. 4) Risk Committee reports: these enable the Company to identify the major actions / risk concerns being addressed at a Group level and the potential impact of these at Company level. The Company is also able to ratify, through this process at local Risk Committee level, the limits / excesses approved at Group level; 5) Other operational risk reports such as the reports on unallocated cash, unsigned clients trade confirmations, outstanding payments and trade date discrepancies, as well as reports on clients in margin liquidation. 3.1.1. Internal Capital Adequacy Assessment Process (ICAAP) During 2009, the Risk Management Department started developing the ICAAP on the basis of the Directive of CYSEC for the capital requirements of investment firms”. The ICAAP project helped develop a group-wide Renaissance Investment Management (Cyprus) Limited 7
  8. 8. economic capital framework with knowledge transfer between departments and locations. It includes a thorough analysis of the Company‟s business model, legal and trading structures, revenue sources, cost drivers, liquidity and capital sources. An internal risk assessment exercise was held with key risks identified, themes analyzed and risk maps created. Stress scenarios were developed and all the different risk types were identified and quantified. The ICAAP Manual is the first part of the ICAAP documentation. The purpose of the ICAAP Manual is to present a detailed description of the methodology for the calculation of the required regulatory capital in combination with a comprehensive description and analysis of existing processes and approaches for risk management within the Company. The second part of the ICAAP documentation is the ICAAP Report. The ICAAP Report contains the output of the risk methodology together with proposed actions and any applicable recommendations to management for decision making to mitigate risk. The intention has been for the ICAAP report to act as a decision making tool for management. Following the recent reorganization of Renaissance Capital Investment Management (parent company) whereby the business of investment management has been split into asset management (with the name “Renaissance Asset Management”) and wealth management (with the name “Renaissance Wealth Management”), RIMCY‟s activities will focus on the latter. Following this development, the ICAAP documentation will need further refinement to accurately reflect the business and risks of the wealth management division. After the necessary changes it will be presented to the BoD for approval and submitted to CYSEC by end of 2010. 8 Renaissance Investment Management (Cyprus) Limited
  9. 9. [Type text] 4. Capital Requirements The Company applies the following approaches for calculating Pillar I capital requirements: a. The Standardised Approach for credit risk b. The Mark-to-Market approach for counterparty credit risk c. The Standardised Approach for market risk d. The Basic Indicator approach for operational risk e. The Simple approach for credit risk mitigation The Minimum Capital approach is followed (Pillar I+) for Pillar II purposes. Until the finalisation of the ICAAP takes place, the BoD has taken the decision to put in place an internal soft limit as minimum Capital Adequacy Ratio of 14% in order to safeguard the Company against any risks not covered by Pillar I calculations. All Company risks are monitored on a daily basis and maximum limits for each different type of risk have been put in place, which are being monitored daily ensuring that enough capital is left to safeguard the Company against any risks not covered by Pillar I. The additional capital deemed necessary for Pillar II purposes is 50% of the maximum limit per Risk line for Pillar I purposes. The Capital Requirements of the Company derive from the maximum capital requirements of the Pillar I and Pillar II approaches. All Company risks are monitored on a daily basis and maximum limits for each different type of risk have been put in place ensuring that enough capital is left to safeguard the Company against any risks covered by Pillar I and Pillar II. (in thousands of USD) At 31 December 2009 Pillar I Pillar II Total Capital Total Capital Requirements 2,637 3,955 3,955 The analysis of the above capital requirements under Pillar I and Pillar II is presented in the tables below: Renaissance Investment Management (Cyprus) Limited 9
  10. 10. (in thousands of USD) At 31 December 2009 Pillar I Pillar II Risk Market Risk Traded Debt Instruments - - Equities risk 218 327 Commodities risk - - Foreign exchange risk 86 129 Total Market Risk 304 456 Credit Risk Counterparty risk 576 863 Settlement/Delivery risk - - Large exposures risk - - Total Credit Risk 576 863 Operational risk 1,757 2,636 Total Capital Requirement 2,637 3,955 10 Renaissance Investment Management (Cyprus) Limited
  11. 11. [Type text] 5. Credit Risk Management 5.1. Definition of Credit Risk Credit risk is the risk that the Company suffers losses as a result of customers and/or counterparties defaulting on their contractual obligations. This risk primarily arises from client and counterparty trading activities, finance activities and treasury operations. It may also arise as a result of a downgrade in the credit ratings of issuers of bonds, which will induce a reduction in the value of the assets of the Company. 5.2. Credit Risk Management Procedures The principles which underpin the Firm, and in extent the Company‟s Credit risk responsibilities and procedures are as follows:  The Firm operates within a well-defined robust credit granting criteria;  The Firm has a clearly established process in place for approving new credits as well as the amendments and review of existing trade limits;  Credit Risk must set trading limits before counterparties can begin trading;  Only authorised personnel can approve trade limits, formal agreement must be provided by Renaissance Group‟s Credit Committee and/or the Risk Committee;  The Firm has processes in place to monitor whether trade limits have been exceeded; and  The Firm has in place a clearly defined escalation process for managing and resolving any trade limit breaches. The Company runs counterparty risk through the whole range of its activities. This counterparty risk is monitored against limits on a Firmwide basis. It is also separately monitored and reported daily at Company level. The local approach entails monitoring the global individual counterparty limits and utilizations as effectively also „local‟ limits and utilizations and, through close collaboration between the local Risk Management Unit and the Group Risk Management department, any breaches are assessed. Implementation of Basel II The Company has elected to adopt Basel II as of September 2008. Basel II allows three methods for calculating the level of risk – weighted exposures for credit risk: the Standardised Approach, The Foundation and the Advanced Internal Ratings-based (“IRB”) Approach. The Standardised Approach for calculating the minimum capital requirement for credit risk requires the classification of exposures into specific asset classes, and utilises specific risk-weights, which vary depending on the asset class and credit rating of the exposure. The Foundation and Advanced IRB Approaches require the use of models developed internally by banks and regulated investment firms for calculating the minimum capital requirement for credit risk and need the prior approval of CYSEC in order to be implemented. At the same time, a system for measuring the capital adequacy of the Company and performing stress scenarios was implemented, in accordance with the requirements of the new capital adequacy framework. Additionally, Basel II proposes two methods for recognising collaterals (Credit Risk Mitigation Techniques); the Simple and the Comprehensive Approach. The Company has applied the Simple Approach. Renaissance Investment Management (Cyprus) Limited 11
  12. 12. 5.3. Credit Risk under Pillar I The minimum capital requirements of Pillar I are calculated by exposure using a Minimum Capital Adequacy Ratio of 8% as defined by the Directive. The following table denotes average exposures per asset class with respect to credit risk. (in thousands of USD) Exposures Exposures 31 1 January December Average 2009 2009 Exposures Central Governments and Central Banks - - - Corporates 160 1,046 603 Institutions 50,757 30,743 40,750 Other Items 894 - 447 Total 51,811 31,789 41,800 The asset classes and risk-weighted amounts of the Company, based on the Standardised Approach, are presented below. (in thousands of USD) At 31 December 2009 Risk- Minimum weighted Capital Assets Requirement Corporates 1,046 84 Institutions 6,149 492 Total 7,195 576 5.4. Nominated External Credit Assessment Institutions for the application of the Standardised Approach For the purposes of applying the Standardised Approach, the nominated External Credit Assessment Institutions (“ECAI”), which are recognised by CYSEC, are Fitch Ratings, Standard and Poor's Rating Services, and Moody's Investor Service. The Company has decided to use the ratings of all three ECAI in the following manner: a) If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment is used to determine the risk weight for that item; b) If two credit assessments are available from nominated ECAIs and the two correspond to different weights for a rated item, the higher risk weight is assigned; c) If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights are referred to. If the two lowest risk weights are different, the higher risk weight is assigned. If the two lowest risk weights are the same, that risk weight is assigned. 12 Renaissance Investment Management (Cyprus) Limited
  13. 13. [Type text] 5.5. Credit Risk Hedging and Mitigation Policies As noted above, the Company‟s policy is to have a clear established process in place for providing and amending credit limits. The table below presents exposure values before and after credit risk mitigation, corresponding to the credit quality bands. The values after credit risk mitigation are presented net of eligible financial collaterals and other eligible non-financial collaterals and after conversion of the net off the statement of financial position items to on the statement of financial position items. (in thousands of USD) Exposure values Exposure values before credit risk after credit risk Credit Quality b ands mitigation mitigation 20% 30,743 30,743 100% 1,046 1,046 Total 31,789 31,789 The Company‟s policies and procedures for on and off the statement of financial position netting are in compliance with the relevant directives of the supervisory authorities. The Company did not have any exposures secured by financial collaterals. 5.6. Risk of Impairment Past due items are defined as all loans and advances where the counterparty has failed to make a payment when it is contractually due. At the reporting date, the Company assesses whether there is any objective evidence that such a balance is impaired. Such a balance would be impaired if it is demonstrated that the Company‟s ability to collect part or the entire amount is uncertain. Objective evidence that financial assets are impaired can include default by a borrower, restructuring of an advance on terms that the Company would not consider, indications that the counterparty will enter bankruptcy and the disappearance of an active market for the collateral of the amount. The carrying amounts of the Company‟s advances/balances are reviewed at each reporting date to determine whether there is an indication of impairment. As at 31 December 2009, the Company did not have any past due items, and there were no indications that any balances would be impaired. Renaissance Investment Management (Cyprus) Limited 13
  14. 14. 6. Market Risk Management 6.1. Market Risk Definition Market Risk is the risk associated with changes in market prices, such as interest rate changes, changes in equity and debt traded instruments and foreign exchange, which may eventually impact the Company‟s net income or the value of the Company‟s assets and liabilities. 6.2. Market Risk Management Procedures With respect to market risk, the Firm developed a VaR and stress test model of which the outputs are used in the day-to-day risk monitoring and limit control. The stress test results are also used to decide on macro- hedging strategies. Furthermore, the Firm‟s Risk Management function has developed sophisticated tools to analyze the risk of derivatives and fixed income books. On VaR and stress testing, methodology papers are available. In summary, our VaR model is based on a split of the overall Trading Book between Equity and Commodity financial instruments, Fixed Income financial instruments and Foreign Exchange (“FX”) financial instruments. The principles underpinning the current VaR model are outlined below and are explained in detail in the Value at Risk Methodology document. Note that this model is reviewed and adjusted as necessary in order to best capture market risk arising from the positions held in the Company‟s books at any given time. 6.2.1. Equity and Commodity Financial Instruments Currently, RIMCY‟s portfolio consists of the following products: cash stocks, futures and forwards, total return swaps, European and American vanilla options, digital options and combinations of thereof. Total return swaps are divided into equity leg and fixed income leg, the former is treated as position in a stock, the latter is included into Fixed Income portfolio. To calculate equity and commodity VaR, a Monte Carlo method is used to simulate 1-day price changes of all positions. Stock and indices are modelled as correlated Geometric Brownian Motions (GBMs). This setting falls under the assumption of log- normality for the stock prices distribution, though necessary adjustment is made for so called “fat tails” effect. The simulated prices are sourced for the full revaluation of derivative instruments in the portfolio. Finally, the 99th percentile of simulated portfolio value loss distribution is chosen as the cash equity and commodity VaR number for the portfolio. The parameter “holding period” was chosen in accordance with average holding period of the instruments in trading portfolio in RIMCY based on expert judgments. A statistical model of 1-day price movements consists of several components, each of them is considered below in detail: Instrument Model component Spot, underlying stocks and indices Historical price volatilities and correlations Futures, forwards Historical volatilities and correlations of implied interest rates Options Historical volatilities of implied volatilities 6.2.2. Fixed Income Financial Instruments RIMCY‟s debt trading book contains of various credit quality bonds as well as interest rate derivatives: interest rate futures/swaps, bonds futures, total return swaps (TRS) and credit default swaps (CDS). The main assumptions of the Interest Rate VaR model are:  Fluctuations of all key point values of zero curves are 100% correlated and normally distributed (this is typical for so-called 1 factor Interest Rate Models such as Vasichek and Hull/White); 14 Renaissance Investment Management (Cyprus) Limited
  15. 15. [Type text]  Fluctuations of class z-spreads are normally distributed and 0% correlated with its corresponding zero- coupon risk free curve;  All z-spreads in the credit pool are 100 % correlated with each other;  Linear derivatives (futures, forwards, Total Return Swaps, Credit Default Swaps) are replicated by positions in bonds. It should be noted, that the VaR approach deviates slightly from the more standard methodology with regardsto the use of correlation matrix. Nevertheless it is chosen because correlation between individual bond price changes usually is very high, in the range of 70-90%; as a result, assumption of 100% bond price correlation results in a more conservative “upper bound estimate”. 6.2.3. Foreign Exchange Risk FX risk is calculated using variance-covariance method. Logarithms of daily currency rate changes are assumed to be normally distributed. FX rate volatilities and correlation matrix are computed based on historical two-year series (equally-weighted). Correlated Value-at-Risk is then calculated for FX-risk bearing securities at 99% confidence level. 6.2.4. Aggregated VaR After the quantification of risks on a “stand-alone-basis” results are aggregated to quantify the final capital requirements in each scenario. Due to many uncertainties related to pair wise correlations between the different risk types of Market Risk the most conservative approach was selected to allocate correlations across scenarios based on expert opinions and the descriptions of the scenarios themselves. 6.2.5. Basel II Implementation for Market Risk – Pillar I According to Basel II, there are three approaches available for the calculation of the capital requirements for market risk: a) The Standardised Approach b) The IRB Approach c) The Combined Approach (combination of the previous two approaches) The Company has decided to adopt the Standardised Approach, whereby the capital requirement is estimated by risk category based on predetermined models. The table below presents the capital requirements in the trading book, by risk category: Renaissance Investment Management (Cyprus) Limited 15
  16. 16. (in thousands of USD) Capital Requirement Position Risk Traded Debt Instruments: Specific Risk - General Risk - Total Traded Debt Instruments - Equity Risk Specific Risk 72 General Risk 146 Total Equity Risk 218 Foreign Exchange Risk 86 Total 304 16 Renaissance Investment Management (Cyprus) Limited
  17. 17. [Type text] 7. Operational Risk Management 7.1. Definition of Operational Risk Operational risk is the risk of loss arising from inadequate or failed internal procedures, human behaviour and systems or from external events. Operational risk includes legal risk but excludes strategic and reputation risk. 7.2. Operational Risk Management Operational risk is managed at a Group and a Company level. It provides guidance and advice to the Company‟s business lines and acts as a means of communication to and from the business lines and the BoD. 7.3. Operational Risk Management Procedures With respect to operational risk, the following methodologies have been implemented with the objective to identify, measure, assess, monitor, control, mitigate and report on the operational risks assumed by the Company:  Incident Management: material incidents of operational risk losses, near misses and gains are reported upon, investigated and followed-up  Key Risk Indicators (“KRI‟s”): various indicators as set out in section 3.1.2are monitored on a weekly and/or monthly basis, on a global basis and are available to the Company as a means of assessing the impact of various KRI‟s on the Company‟s operational risk. A monthly management report specific to the Cyprus location of the Company‟s is also produced;  Risk Assessment: active participation including assessment and monitoring of the risks in the introduction of new products, systems and businesses  Risk review: various reviews performed on key control weaknesses in existing processes / key controls. 7.4. Internal Audit The Internal Audit Department advises the BoD on the suitability of the Operational Risk Management Procedures. Internal Audit also monitors the implementation of the strategy and policy management of the Company‟s operational risks. 7.5. Operational Risk under Pillar I The Company is using the Basic Indicator Approach for calculating the amount of capital required under Pillar I and Basel II. Renaissance Investment Management (Cyprus) Limited 17

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