Extracted Text
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Paris Orleans SCA
Pillar 3 disclosures for the financial year ended
31 March 2012
MI ROTHSCHILD
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Contents
I. Scope 3
2 Risk Management 4
3. Regulatory Ratios 6
4. Regulatory Capital 7
5. Capital Adequacy 8
6. Credit Risk 9
7. Market Risk 14
8. Operational risk 15
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I. Scope
1.1 Introduction 1.3 Corporate reorganisation
This document is published to provide information about Paris On 4 April 2012, the Group announced an important step
Orleans SCA's ("PO') compliance with the public disclosure in its continued development.The aim of this reorganisation
rules set out in the Order of 20 February 2007 relating to was to simplify the Group structure and improve day-to-day
minimum capital requirements (known as "Pillar 3" requirements management, and involved two phases:
as set out in the Basel II Accord and its European transposition • the first being the acquisition of certain shares previously
by the Capital Requirement Directive ("CFtD")). PO is
held by third parties in certain subsidiaries (RCS, Financiere
registered within the list of Financial Companies supervised by
Rabelais and Rothschilds Continuation Holdings) of PO, in
the Autorite de Contrale Prudentiel ("ACP"). exchange for 38.4 million new ordinary shares in PO,
The Pillar 3 disclosure requirement complement the minimum
■ the second involving the conversion of PO into a French
capital requirements ("Pillar 1") and the supervisory review partnership limited by shares (societe en commandite
process ("Pillar 2') and aim to encourage market discipline by
par actions).
allowing market participants to assess key pieces of information
on the risk exposures and the risk assessment processes of PO. This reorganisation was approved at the Extraordinary General
Meeting of shareholders on 8 June 2012. PO Gestion SAS
("PO Gestion"). the managing partner of PO, is chaired by the
Group's longstanding Chairman, David de Rothschild, alongside
1.2 Basis of disclosure Chief Executive Officers. Nigel Higgins and Olivier Pecoux
These risk disclosures are made in respect of PO and its
subsidiary undertakings (together"the Group" or "the PO
Group"). Since 31 March 201 I, the PO Group has been
regulated by the ACP
1.4 Media
This document is available on PO's corporate website (www.
The following regulated banking entities are fully consolidated in
paris-orleanscom) along with the PO 2012 Annual Report
PO's accounts:
I. NM Rothschild and Sons Limited ("NMR'). incorporated
in the United Kingdom and supervised by the Financial
Services Authority ("FSA"): 1.5 Verification
• Rothschild Bank AG ("RBZ"), incorporated in Switzerland These disclosures have been circulated and presented to the
and supervised by the Swiss Financial Market Supervisory Audit Committee, the Supervisory Board and the Group Risk
Authority ("FINMA'): Committee of PO in Novembennecember 2012. Unless
otherwise indicated, information contained within this document
3. Rothschild & Cie Banque ("RCB"), incorporated in France
has not been subject to external audit. The Pillar 3 disclosures
and supervised by the ACP, and
have been prepared purely for the purpose of explaining the
4. Rothschild Bank International ("RBI") and Rothschild Bank C.I. basis on which the PO Group has prepared and disclosed
Limited ('RBCI"), incorporated in Guernsey and supervised certain capital requirements and information about the
by the Guernsey financial Services Commission ("GFSC). management of certain risks, and for no other purpose. They
As at 31 March 2012. the regulatory consolidation scope is do not constitute any form of financial statement and must not
identical to the statutory consolidation scope. be relied upon in making any judgement on the PO Group.
Unless otherwise indicated. financial information presented in
this document is as at 31 March 2012 (PO's financial year-
end). As there is a significant overlap between the information
disclosure requirements for Pillar 3 and information already
disclosed in the PO 2012 Annual Report this document
should be read in conjunction with that reportThe PO Group
organisation presented in this document is consistent with the
governance arrangements described within the PO 2012 Annual
Report following the reorganisation that was approved at the
Extraordinary General Meeting of PO shareholders on
8 June 2012.
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2 Risk Management
The Group Risk Committee ("CRC') formulates policies
2.1 Overview and procedures which promote the proper identification,
The guiding philosophy of risk management in the Group is for measurement monitoring, and control of risk and which reflect
the management to adopt a prudent and conservative approach the Group's risk appetite.These policies and procedures define
to the taking and management of risk The maintenance of the Group Risk Framework.
reputation is a fundamental driver of risk appetite and of risk The GroupAssets and Liabilities Committee ("Group ALCO")
management. The protection of reputation guides the type of is responsible (or ensuring that the Group has prudent funding
clients and businesses with which the Group will involve itself. and liquidity strategies. for the efficient management and
The nature and method of monitoring and reporting varies deployment of capital resources within regulatory constraints
according to the risk type. Most risks are monitored daily and for the oversight of the management of the Group's other
with management information being provided to relevant financial strategies and policies, including credit decisions.
committees on a weekly. monthly or quarterly basis. Where The Group Compliance Committee ("GCC') reviews the
appropriate to the risk type. the level of risk faced by the Group existence, effectiveness and scope of compliance procedures
is also managed through a series of sensitivity and stress tests. and monitoring in the Group with a view to ensuring that they
The identification. measurement and control of risk are integral comply with the relevant regulatory requirements.
to the management of PO's businesses. Risk policies and The Group Remuneration Committees set the principles
procedures are regularly updated to meet changing business and parameters of the remuneration policies for the Group
requirements and to comply with best practice. and determine the nature and scale of short and long term
incentive performance arrangements that encourage enhanced
performance and reward individuals 'in a "risk based- manner
2.2 Structure and risk for their contribution to the success of the Group in light of an
assessment of the Group's fnancial situation and future prospects.
governance
PO Gestion is responsible for setting and reviewing PO's
governance arrangements and for establishing adequate. sound 2.3 Risk management
and appropriate risk management processes in line with all legal
and regulatory requirements. framework
Internal control governance within the Group is effected The objectives of the Group Risk Framework are to mitigate
through PO and onwards to the senior executive management and control risks by means of policies. processes. systems and
committees for each of the Group's businesses and the Boards procedures. to create a culture of risk awareness and ownership
of the principal operating entities. PO Gestion. in conjunction through communication and education at every level of the
with the Group Management Committee. has direct oversight Group. to communicate the Group's risk appetite and to
of all Group entities in respect of intemal control matters and preserve the Group's reputation.
considers all major strategic and other risk matters affecting all The table hereafter summarises the three "lines of defence"
parts of the Group adopted for risk management within the Group. Primary
The main roles of the committees with responsibility for key risk responsibility rests with executive management. with second
management areas are as follows: and third lines of defence provided by Group support functions
and assurance from internal audit processes.
The Group Management Committee ("GMC'): its purposes
are to formulate strategy for the Group's businesses. to assess The Group Chief Risk Officer co-ordinates risk policy and
the delivery of that strategy. to ensure the proper and effective promotes the development and maintenance of effective
functioning of Group governance structures. operating policies procedures throughout the PO Group. The Group Internal
and procedures. to define the Group's risk appetite and to be Audit team reviews the internal control framework and reports
responsible for the management of risk its findings to the Audit Committee and to PO Gestion.
The PO Audit Committee: this committee of the Supervisory
Board of PO supervises and reviews the Group's internal audit
arrangements. liaises with the Group's external auditors and
monitors the overall system and standards of internal control.
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Group Risk Framework
The Three Lines of Defence for 'den:if/In evals.atng and managing risks
First Line of Defence Second Line of Defence Third Line of Defence
Comprises the Boards and Committees Comprises specialist Group support Provides independent objective assurance
of the PO Group: functions including: on the effectiveness of the management
• set the Group's risk appetite; ■ Risk of risks across the entire Group.
This is provided by Group's Audit
• approve the strategy for managing ■ Finance;
risk: and Committee and the Group's Internal
■ Legal & Compliance; Audit function.
• are responsible for the Group's ■ IT:arid
system of internal control
■ Human Resources.
It is the responsibility of senior
management to support risk These functions provide:
management best practice and ■ operational and technical guidance;
to oversee the establishment and
■ advice to management at Group level
implementation of effective risk
and operating entity level: and
management systems.
■ assistance in the identification
assessment, management.
measurement, monitoring
and reporting of financial and
non-financial risks
The Group performs liquidity stress testing based on a range of
2.4 Risk types adverse scenarios, and has contingency finding plans which are
maintained with the objective of ensuring that the Group has
Credit risk access to sufficient resources to meet obligations as they fall due
if these scenarios occur. Stressed liquidity profiles are reviewed
Credit risk is the risk of loss resulting from exposure to by the Group ALCO.
customer or counterpart), default
PO has adopted the Standardised Approach for calculating Pillar
Market risk
I capital requirements for credit risk
Market risk positions arise mainly as a result of the PO Group's
activities in interest rate, currency, equity and debt markets
Operational risk and comprise interest rate, foreign exchange. equity and debt
Operational risk. which is inherent in all business activities, is the position risk Market risk exposures are presented in the PO
risk of loss resulting from inadequate or failed internal processes. 2012 Annual Report (page 138).
people and systems, or from external events.
PO currently adopts the Basic Indicator Approach for calculating Other material risks
Pillar I capital requirements for operational risk (except for RCB
Other risks which are, or may be. material arise in the normal
which uses the Advanced Methodology Approach).
conduct of our business. Such risks, which include reputational
risk concentration risk, securitisation risk, business risk, pension
Liquidity and funding risk obligation risk and residual risk are identified and managed as
part of the overall risk controls and are taken into account in
Liquidity risk is the risk that the Group does not have sufficient
the Supervisory Board's periodic assessment of capital adequacy.
financial resources available to meet its obligations as they fall
due. or that the Group is unable to meet regulatory prudential There is additional information regarding credit risks in the
liquidity ratios. PO 2012 Annual Repoli. (pages 133-137); other information
regarding liquidity and funding risks and market risks is also
included (pages 138-141).
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3. Regulatory Ratios
During the year ended 31 March 2012. PO and the individual entities within PO Group complied with all of the externally imposed
capital requirements to which they were subject
The following table provides a breakdown of consolidated capital requirements as at 31 March 2012 by risk type and the ratio at
which it is covered by regulatory capital:
Em 31 March 2012
Tier I capital 801
Tier 2 capital 608
Regulatory capital base 1.412
Credit Risk 3.627
Market Risk 91
Operational Risk 1.970
Total Risk Weighted Assets 5.688
Tier I ratio 14.1%
Global ratio 24.8%
Under ACP rules. the Tier I ratio must exceed 4% and the Global ratio 8%
Impact of the reorganisation announced in April 2012:
In May 2012. the ACP registered PO as a "Financial Company" following the announcement of the reorganisation of the PO Group
which eliminated many of the minority interests within the PO Group.
The PO reorganisation objectives were to:
■ streamline its organisation:
■ optimise its regulatory capital: and
■ ensure Rothschild family control.
The main consequence of this reorganisation on regulatory capital is an increase of Tier I ratio from 14.1% to 18.1% because of the
elimination of certain minority interests within the Group.
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4. Regulatory Capital
I he table below summarises the composition of regulatory capital for the PO Group as at 31 March 2012.
Regulatory Capital in Em Notes 31 March 2012
Share Capital and Reserves 721
Minority interest 102
Deduction - CoodmIl & Intangible assets I (296)
Adjustment to Tier I 2 3
Deduction - Participation in financial institutions 3 (10)
Deduction - Secuntisations 1 (16)
Tier I 804
Finally Interests eligible as Tier 2 270
Subordinated debts 335
Adjustment to Tier 2 5 29
Deduction - Participation in financial institutions 3 (10)
Deduction - Secuntisations 1 (16)
Tier 2 608
Total Regulatory Capital 1.412
Notes:
I. Intangible assets largely comprise the Rothschild brand
2. Adjustments to Tier I relate to MS reserves and cash flow hedge adjustments.
3. Capital deductions result from the share of investment in financial institutions which represent more than 10% of PO regulatory
capital or that are above 10% of financial institution capital ("Banque Privet Edmond de Rothschild' and "Selection 1818").
These elements are deducted equally from Tier 1 capital and from Tier 2 capital.
4. Securitisation positions that are not rated or rated below B8- are deducted from regulatory capital.These elements are
deducted equally from Tier 1 capital and from Tier 2 capital.
5. Adjustments to Tier 2 comprise AFS equity reserves that are deducted from Tier 1 and partly included in Tier 2.
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5. Capital Adequacy
The ACP sets out the minimum capital requirement for French regulated financial institutions. An institution's minimum regulatory
capital is a combination of the requirement derived from Pillar I and Mar 2 rules. Pillar I sets out the minimum regulatory capital
to meet credit market and operational risk.At 31 March 2012. the Group capital requirements by risk type were as follows:
Risk Weighted Capital
Pillar I requirement -Em Assets requirement
Credit Risk 3.627 290
Market Risk 91 7
Operational Risk 1.970 158
Total 5.688 455
Credit risk capital requirements split by asset class were as follows:
Risk Weighted Capital
Credit risk — Ern Assets requirement
Corporates 1.459 1 17
ED-etY 1.099 88
Other assets 605 48
Institutions - Banks 215 17
Secultuation 168 13
Retail 77 6
Instartions - Other 4 I
Sovereign
Total 3,627 290
The Other assets category comprises mainly of Non credit obligation assets'.
All credit risk capital requirements are calculated using the standardised approach.
Market risk capital requirements split by risk type were as follows:
Risk VVeighted Capital
Market risk — fm Assets requirement
EX rsk 68 5
Interest Rate risk 16 I
Eqsty risk and Commodity risk 7 I
Total 91 7
All market risk requirements are calculated using the standardised approach.
Operational risk capital requirements are partly calculated using the Basic IndicatorApproach and partly using the Advanced
Measurement Approach: only RCB currently has supervisory approval to use the latter.
Risk Weighted Capital
Operational risk — Em Assets requirement
Basic Indicator Approach 1.627 130
Advanced Measurement Approach 313 28
Total 1,970 158
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6. Credit Risk
6.1 Credit risk exposures
The table below presents a summary of the Credit Risk Weighted Assets ("RWA") calculation.
The net exposure is the exposure after provisions, regulatory adjustments related to assets that are treated under market and
counterpart)/ risks rules and after regulatory deduction of intangible fixed assets and goodwill.
The Exposure At Default (