AIG Asset Management (Europe) Limited Pillar 3 …

1 AIG Asset Management ( europe ) Limited Pillar 3 DISCLOSURE SEPTEMBER 2014 AIG Asset Management ( europe ) Limited Pillar 3 Disclosure AIG Asset Management ( europe ) Limited Pillar 3 DISCLOSURE SEPTEMBER 2014 Background the Capital Requirements Directive The Capital Requirements Directive ( the Directive ) of the European Union established a revised regulatory capital framework across europe governing the amount and nature of capital that must be maintained by credit institutions and investment firms. In the United Kingdom, this directive was implemented through the creation of Financial Services Authority (now called the Financial Conduct Authority, or FCA) General Prudential Sourcebook ( GENPRU ) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms ( BIPRU ).

2 The framework consists of three pillars : 1. Pillar 1 sets out the minimum capital requirements to meet a firm s credit, market and operational risk; 2. Pillar 2 requires the firm and the FCA to assess whether a firm s Pillar I capital is adequate to meet its risks. This is reviewed annually by the FCA; 3. Pillar 3 requires a firm to publish certain information about its risks, capital and risk Management controls and process. The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet the Firm s Pillar 3 obligations.

3 The rules allow a firm to omit one or more of the required disclosures if the firm believes it to be immaterial. Materiality is based on the criteria that the omission of information would be unlikely to change or influence the decision of a user relying on that information. Firms are also able to omit information on the grounds that it is proprietary or confidential. Confidential information is information which binds the firm to clients or counterparties. COMPANY PROFILE: AIG Asset Management ( europe ) Limited AIG Asset Management ( europe ) Limited (the Firm ) is an indirect wholly-owned subsidiary of American International Group, Inc.

4 ( AIG Inc. ) and is authorised and regulated in the UK by the FCA as a discretionary Asset manager. The Firm is a direct subsidiary of AIG Global Asset Management Holdings Corp. ( AIGGAMHC ). The Firm is categorised as a BIPRU Limited license firm. The Firm s authorisations permit it to provide various investment services for clients, which include: advising on investments (other than pension transfers and pension opt outs); arranging deals in investments, safeguarding and administration of assets; dealing in investments as agent; and managing of investments.

5 AIG Asset Management ( europe ) Limited Pillar 3 DISCLOSURE SEPTEMBER 2014 Risk Assessment and Management The Firm accepts that the taking of risk is an inherent part of managing its business activity. The Firm has developed, and deployed, a risk recognition and control architecture which attempts to embody industry best practice. In addition, such a structure has been designed to harmonize the Firm s process with that of the wider AIG group; ensure that the risks that the Firm faces are fully recognised and prioritised according to their potential impact on the Firm s capital, and that the Firm s Board of Directors puts in place the necessary processes and structures to oversee and control such risks.

6 The Firm s Risk Committee (RC) is responsible for identifying and proposing remediation of risk. The RC reports directly to the Firm s Board of Directors. At the present time the Firm does not use an economic capital model and therefore relies on stress testing to assess the adequacy of its available capital to requirements. Such stress testing has been performed in conjunction with this analysis of Firm and business risks. The key risks managed by the Firm may be broadly categorized as Operational, Credit and Market risks. For each material risk which the Firm faces, the risk recognition framework has attempted to catalogue and quantify the probable impact on the Firm s capital.

7 In addition, attention has been given to ensuring that such risks are controlled. Residual risk to capital (expressed in monetary terms) has then been estimated. The Board of Directors sets the overall risk culture, framework and tolerance limit but with the business areas determining what this means and how to manage within the framework. The risk appetite statement has been approved by the Board of Directors and is represented below: AAMEL, by its nature, is not an active risk-taking business. Any risks arising as a result of the delivery of its service are subject to the risk appetite statement below.

8 Based on the Board s analysis of these risks, the Firm estimates its residual financial risk to capital to be approximately It is the intention of parent to ensure that our costs are fully reflected in the fees we charge to our partner client firms. The Board s appetite for risk is articulated through the acceptance of the residual risk figure. AAMEL seeks to maintain total Pillar 2 risks within this parameter. AAMEL will assess all of its key inherent and residual risks on at least an annual basis. The risk appetite of the AAMEL Board is to have no residual risks rated at a high or elevated level (as per the Corporate ORM guidelines on impact and frequency scoring) unless remedial actions are agreed to reduce the risk to a level of moderate or low in a timeframe agreeable to the AAMEL Board.

9 Any exception outside that risk appetite will be required to have an explicit Risk Committee risk acceptance, with documented risk monitoring implemented and quarterly reporting to the AAMEL Board. AIG Asset Management ( europe ) Limited Pillar 3 DISCLOSURE SEPTEMBER 2014 OPERATIONAL RISKS Trading, Clearance and Settlement The primary operational risks of the Firm are borne by the portfolios. Chief among these are risks related to the entering into and settlement of portfolio trades. The Firm has invested substantial financial resources in front office systems that allow straight through processing of trades from portfolio manager buy/sell decisions, through trade Management , and also provides pre-trade compliance capability.

10 The Firm recognises and manages risks arising from dependence on a single system. Numerous controls exist to ensure the minimisation of pricing / input risks and associated trade errors. The Firm uses Bloomberg as its primary trade capture system. The use of such a system minimises the possibility of re-keying errors. In addition, within the Fixed Income area, it is common practice to exchange Bloomberg trade tickets via the Bloomberg Message system. This permits cross-checking of trade terms shortly after trade execution. The segregation of investment Management and back-office functions creates an additional control structure around input and pricing errors.