Pillar 3 disclosures Macquarie Capital (Europe) Limited March 2019 Macquarie Capital (Europe) Limited Pillar 3 Disclosures March 2019 macquarie.com This page has been left blank intentionally. Contents 1.0 Overview 2 2.0 Risk Management 3 3.0 Remuneration 5 4.0 Governance Arrangements 6 5.0 Capital Adequacy 8 6.0 Credit Risk Management 10 7.0 Market Risk Management 11 8.0 Operational Risk Management 14 9.0 Exposure classification and Credit Risk Mitigation 15 10.0 Leverage Ratio 19 11.0 Asset Encumberance 22 12.0 Capital Buffers 24 Disclosure 25 Appendix 1 26 1 Macquarie Capital (Europe) Limited Pillar 3 Disclosures March 2019 macquarie.com 1.0 Overview This disclosure is in relation to Macquarie Capital (Europe) Limited (“MCEL”). MCEL is a UK incorporated company, authorised by the Financial Conduct Authority (“FCA”) as a full scope investment firm, and is regulated under the Capital Requirements Directive IV (“CRD IV”) package (consisting Directive 2013/36/EU (“CRD”) and Regulation (EU) No 575/2013 (“CRR”) and as implemented in part by the FCA under the Prudential sourcebook for Investment Firms (“IFPRU”). These regulations are structured in line with Basel Committee’s three Pillars of supervision: Pillar 1 “minimum capital requirements”, Pillar 2 “supervisory review process” and Pillar 3 “market discipline”. MCEL is ultimately owned by Macquarie Group Limited (“MGL”). MGL is a large financial conglomerate, authorised and regulated by the Australian Prudential Regulation Authority (“APRA”) as the non-operating holding company of an Australian deposit-taking institution. MCEL is required to produce its Pillar 3 disclosures in accordance with Part 8 of CRR. These requirements are supplemented by the guidelines published by the European Banking Authority (“EBA”). This document sets out the Pillar 3 disclosures for MCEL as at 31 March 2019. The disclosures for MCEL are prepared on an individual basis or solo basis. 2 2.0 Risk Management All MGL subsidiaries, including MCEL, are subject to Macquarie’s risk management framework. This framework has been endorsed by the MCEL Board. Macquarie’s risk management framework consists of systems, structures, policies, processes, people and culture. It is through this framework that Macquarie is able to identify, measure, evaluate, monitor, report, manage and ultimately accept risk. Acceptance of risk is an integral part of Macquarie’s operations. Strong independent prudential management has been crucial to Macquarie’s success and stability over many years. The risk management framework assigns clear risk roles and responsibilities represented by the ‘three lines of defence’. Primary responsibility for risk management lies at the business level. This is the first line of defence. Part of the role of all business managers throughout Macquarie is to ensure they manage risks appropriately. The Risk Management Group (“RMG”) forms the second line of defence and independently assesses all material risks. The third line of defence, which includes internal audit, independently reviews and challenges Macquarie’s risk management controls, processes and systems. Macquarie’s core risk management principles have remained stable, and are applied by MCEL as follows: – Ownership of risk at the business level MCEL business heads are responsible for identifying risks within their businesses and operations and ensuring appropriate management. Before taking decisions, clear analysis of the risks is sought to ensure those taken are consistent with Macquarie and MCEL’s risk appetite and strategy. Furthermore, any proposed new business activity in MCEL will be subject to Macquarie’s New Product and Business Approval (“NPBA”) process. This process is an important aspect of Macquarie’s approach to risk management, providing a well-established framework for the identification and assessment of incremental risks arising. – Understanding worst case outcomes MCEL examines the consequences of worst case outcomes and determines whether these are acceptable. This approach is adopted for all material risk types and is often achieved by stress testing. Resultant limits effectively constrain positions where the current risk appears low but potential risk exists in extreme loss events. – Requirement for an independent signoff by risk management MCEL has a strong, independent RMG that is charged with signing off all material risk acceptance decisions. RMG's opinion is sought at an early stage in the decision making process. The approval document submitted to senior management includes independent input from RMG on risk and return. Additionally, the incremental impact of any proposed new activity on MCEL’s capital position, and hence ICAAP, will be assessed by RMG as part of this process. Where that impact is considered material, it will be reported to the MCEL Board. MCEL’s risk appetite is the degree of risk that MCEL is willing to accept in pursuit of its strategic objectives. This is detailed in MCEL’s Board approved Risk Appetite Statement (“RAS”), which describes: – MCEL’s risk appetite, being the nature and amount of risk that Macquarie is willing to accept in pursuit of its strategic objectives – the risks MCEL is not willing to accept; – the processes that MCEL has established to maintain and monitor compliance with risk appetite; and – the timing and process for review of MCEL’s risk appetite. Business divisions operating through MCEL are required to act in adherence with the MCEL RAS. On an annual basis, the MCEL RAS is presented to MCEL Board who review the risk management arrangements for MCEL, including the appropriateness of risk appetite for MCEL, which are used to embed, set and monitor risk appetite for MCEL’s material risks. The MCEL Board has formally adopted the MCEL RAS. MCEL has adopted a range of principles which govern the firm’s overall approach to risk acceptance. These principles are taken into consideration by all businesses and control functions when the firm considers accepting risk in pursuit of MCEL’s strategic objectives. These principles are consistent with the wider Macquarie Group Risk Appetite principles. MCEL’s risk appetite reflects that it only has appetite to accept risks that are consistent with the following principles which apply across the Macquarie Group: ‘Risk taking must be consistent with What We Stand For and our Code of Conduct’ MCEL only has appetite for taking risks in a manner which is consistent with the core principles expressed in Macquarie’s What We Stand For and Macquarie’s Code of Conduct. Opportunity, accountability and integrity are the principles which form the basis of all our actions. MCEL seeks to establish and maintain an appropriate and effective risk culture. This is the foundation of Macquarie’s risk management framework and is critical to MCEL’s success. We demonstrate our established risk culture by the way we behave every day. 3 Macquarie Capital (Europe) Limited Pillar 3 Disclosures March 2019 macquarie.com 2.0 Risk Management continued Risks must be consistent with our strategic intent MCEL only has appetite for risks which are consistent with its strategic intent. Risks must be well understood All risks are comprehensively understood before being accepted. Risks are owned at the business level and all material risk acceptance decisions are independently signed off by RMG. Risks must generate returns in proportion to their risk MCEL only has appetite for risks where the financial or other returns are commensurate with the risks – both expected and unexpected. A risk and return analysis is performed for all businesses and transactions, which includes an assessment of worst-case outcomes. Further information on Macquarie’s risk management framework can be found in the Macquarie Group Limited’s 2019 Financial Statements at: – www.macquarie.com.au/mgl/au/about-macquarie-group/investor-relations/financial-disclosure/ financial-reports/macquarie-group-limited-mqg – www.macquarie.com/uk/about/company/risk-management-at-macquarie Regular reports are produced covering compliance, prudential, market, and operational risks to facilitate the ongoing monitoring of key risks and ensuring that any breaches, are escalated to the appropriate level of management. Regular reports are also produced to monitor the liquidity and capital position of MCEL, including total capital ratios, liquid assets and large exposures. The risk information is included in a Risk Management Group report which is presented at the quarterly MCEL Board meetings in order to facilitate the information flow on risk to the management body. MCEL’s management body provides feedback on reporting and its content on an ongoing basis and this is particularly considered when new business lines are commenced. In addition, the annual board evaluation process includes consideration of the appropriateness of Board papers. Additionally, MCEL’s overall risk profile is assessed through the comprehensive risk assessment process as part of MCEL’s Internal Capital Adequacy Assessment Process (“ICAAP”) which is reviewed, challenged and approved by the MCEL Board at least annually as part of the business planning cycle, or following any significant change to the business strategy and/or risk profile of MCEL. ICAAP MCEL’s ICAAP is prepared in accordance with Article 73 of the CRD, as implemented in IFPRU 2.2 of the FCA Handbook. The ICAAP sets out the means by which MCEL identifies and manages its key risks, and also details the required level of regulatory capital for MCEL to meet its regulatory minimum (and internal target) requirements over a three year forecast period in both base and stress cases. The ICAAP is part of MCEL’s overall risk management framework. Its key features include: – comprehensive risk assessment process; – internal assessment of capital adequacy; – financial and capital forecasts; – business strategy and growth plans; – the impact of a three year downturn stress scenario; and – wind down analysis. MCEL’s ICAAP summary document is reviewed, challenged and approved by the MCEL Board. 4 3.0 Remuneration Please refer to MCEL’s Pillar 3 Remuneration Disclosures for information on MCEL’s remuneration policy and practices.