ayers alliance financial group limited iii disclosure...articles 431 to 455 of the crr specify the...

AYERS ALLIANCE FINANCIAL GROUP LIMITED

AYERS ALLIANCE FINANCIAL GROUP LIMITED

4/F, KIBC, 4 Prophet Iliya Street, Limassol, Cyprus

MAY 25, 2018

PILLAR 3 DISCLOSURES

2017

According to Part Eight of Regulation (EU) No 575/2013 of the European Parliament and of the

Council of 26 June 2013 on prudential requirements for credit institutions and investment firms

and amending Regulation (EU) No 648/2012

Ayers Alliance Financial Group Limited Pillar 3 Disclosures Report 2017

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Table of Contents

1 Introduction ............................................................................................................................................ 2

1.1 Corporate information ..................................................................................................................... 2

1.2 Pillar 3 Regulatory framework ......................................................................................................... 3

2 Scope of Application ............................................................................................................................... 3

3 Governance – Board and Committees .................................................................................................... 4

3.1 Board of Directors ............................................................................................................................ 4

3.1.1 Board Recruitment Policy ......................................................................................................... 4

3.1.2 Board Diversity Policy ............................................................................................................... 4

3.1.3 Number of directorships held by members of the Board ......................................................... 5

3.2 Committees ...................................................................................................................................... 5

3.2.1 Investment Committee ............................................................................................................. 5

3.2.2 Risk Management Committee .................................................................................................. 6

4 Control Functions .................................................................................................................................... 7

4.1 Risk Management Function ............................................................................................................. 7

4.2 Internal Audit Function .................................................................................................................... 8

The main duties of the Internal Audit Function are: ......................................................................... 9

4.3 Compliance Function and Money Laundering Officer ..................................................................... 9

4.4 Board Declaration – Adequacy of the Risk Management arrangements ...................................... 10

4.5 Risk Statement ............................................................................................................................... 10

5 Principal Risks ........................................................................................................................................ 11

5.1 Credit Risk ...................................................................................................................................... 11

5.2 Operational Risk ............................................................................................................................. 11

5.3 Compliance Risk ............................................................................................................................. 12

5.4 Market and Liquidity Risk .............................................................................................................. 12

5.5 Reputation & Legal Risk ........................................................................................................... 13

6 Capital Base ........................................................................................................................................... 13

6.1 Common Equity Tier 1 Capital - Own Funds .................................................................................. 14

6.2 Deductions from Common Equity Tier 1 Capital ........................................................................... 15

7 Capital Requirements ............................................................................................................................ 15

7.1 Credit Risk ...................................................................................................................................... 16

7.2 Operational Risk ............................................................................................................................. 19

7.3 Market FX Risk ............................................................................................................................... 19

8 Leverage ratio ....................................................................................................................................... 19

9 Remuneration Disclosures .................................................................................................................... 22


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10 Annexes ............................................................................................................................................... 24

10.1 Annex I – Information flow on risk to management body ........................................................... 24

10.2 Annex II – Board Approved Risk Statement ................................................................................. 24

10.3 Annex III – Balance sheet reconciliation ...................................................................................... 25

10.4 Annex IV – Own funds disclosure template ................................................................................. 26


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1 Introduction

1.1 Corporate information

Ayers Alliance Financial Group Limited (the ''Company'') was incorporated in Cyprus on 15 November 2012 as a private limited liability company under the Cyprus Companies Law, Cap. 113. Its Registered Office is at 4/F, KIBC, 4 Prophet Iliia Street, Limassol, Cyprus. The principal activity of the Company is the provision of currency brokerage services to retail

clients.

On 26/3/2014, the Company received authorisation from the Cyprus Securities and Exchange Commission (hereafter the “CySEC”) to operate as a Cypriot Investment Firm under license number 230/14 and registration number HE 315127. The Company currently offers the following investment and ancillary services:

Investment Services Ancillary Services

Reception and transmission of orders in

relation to one or more financial

instruments

Safekeeping and administration of financial

instruments, including custodianship and

related services

Execution of orders on behalf of clients

Granting credits or loans to one or more

financial instruments, where the firm

granting the credit or loan is involved in the

transaction

Dealing on Own Account

Foreign exchange services where these

are connected to the provision of

investment services

Portfolio management Investment research and financial analysis

or other forms

Investment advice Services Related to Underwriting

Underwriting of financial instruments

and/or placing of financial instruments on a

firm commitment basis

Placing of financial instruments without a

firm commitment basis:


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1.2 Pillar 3 Regulatory framework

Regulatory framework overview

On 26 June 2013, the European Parliament and the Council released a legislative package

known as “CRDIV” to strengthen the regulation of the financial sector. The CRDIV package

replaces the previous European Capital Requirements Directives (2006/48 and 2006/49) and

CySEC’s Directives DI144-2007-05 and DI144-2007-06, commonly known as Basel II, in relation

to capital requirements and large exposures, with a European Directive (2013/36/EU) and a

European Regulation (575/2013). The Regulation (EU) 575/2013 (“the Regulation”) is directly

applicable as a Single Rule book by all Member State institutions, whereas the Directive

2013/36/EU needs to be transposed by all member state regulatory authorities. The transposed

Directive of CySEC is named as Directive DI144-2014-14 (“the Directive”).

The regulatory framework consists of three Pillars:

• Pillar I sets out the minimum capital requirements firms are required to meet;

• Pillar II requires firms to assess their capital requirements in light of any specific risks not

captured or not adequately captured in the Pillar I calculations; and

• Pillar III seeks to improve market discipline by requiring firms to publish certain details of

their risks, capital and risk management practices.

Basis and frequency of disclosure

The 2017 Pillar III disclosures report (“the Report”) of the Company sets out both quantitative

and qualitative information required in accordance with Part Eight “Disclosures by Institutions”

of the CRR. Articles 431 to 455 of the CRR specify the Pillar III framework requirements. The

Report is prepared annually.

All disclosures mentioned are in line with the Company's management accounts as at 31st of

December 2017, which have been prepared by the management of the Company.

2 Scope of Application

The Company is making the disclosure on an individual (solo) basis.


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3 Governance – Board and Committees

3.1 Board of Directors

The responsibility of the overall risk management and/or assessment lies with the Board of

Directors of the Company. The Board of Directors needs to identify, assess, monitor and control

each type of risk on a continuous basis.

More specifically, when managing and/or assessing risks, the responsibilities of the Board of

Directors and Senior Management may be summarized as follows:

• Assess on a continuous basis the effectiveness of the policies, arrangements and procedures in place;

• Decide on the Company’s risk bearing capability and strategy;

• Ensure they are on the same page in terms of appetite for risk in executing the Company’s strategy and make sure the stakeholders understand the stance of the Company;

• Review the Risk Assessment Report prepared by the Risk Manager and take appropriate action where necessary;

• Ensure that the Company has the ability to cover its financial needs and capital requirements at any time.

The following table shows the constitution of the Board of Directors as at 31 December 2017:

Name Position

Mr. Wissam Sabbah Executive Director

Mr. Clement Sun Tat Tung Executive Director

Mr. Niels Ramin Vahman Non-Executive Director

Mrs. Vasiliki Pourgoura Non-Executive Director

* Mr. Cyrus Jun Ming Wen resigned on the 20th of November 2017

3.1.1 Board Recruitment Policy

The selection criteria of the Board Members are based on various factors such as skills and

knowledge, integrity, honesty, previous experience and others. In addition, for the Non-

Executive members of the Board, the Company’s selection is based on a more balanced

approach; for example, the Company is selecting directors with diverse industry background

such as legal and financial, so as to fulfil its needs and execute its strategic plan.

3.1.2 Board Diversity Policy

The Company acknowledges the benefits of having a diverse Board. To this respect, the

Company evaluates on a yearly basis the diversity of its Board, with a view to maintaining a

competitive advantage among other companies in the industry given the communities it does


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business with. Diversity is based on skills, experience, knowledge and independence. All these

values are evaluated by the Shareholders, Directors, Internal Auditor and Compliance officer to

ensure a more balanced approach.

3.1.3 Number of directorships held by members of the Board

The table below provides the number of directorships each member of the Company’s

management body holds at the same time in other entities. Directorships in organizations which

do not pursue predominantly commercial objectives, such as non-profit or charitable

organizations, are not taken into account.

It shall be noted that, the Company is not considered significant in terms of its size, internal

organization and the nature, scope and complexity of its activities.

Name

Position in AYERS

ALLIANCE FINANCIAL

GROUP Ltd

Directorships - Executive in

other companies

Directorships - Non Executive

in other companies

Mr. Wissam Sabbah Executive Director 0 0

Mr. Sun Tat Clement Tung* Executive Director 6 6

Mrs. Vasiliki Pourgoura Non-Executive Director

7 0

Mr. Niels Ramin Vahman Non-Executive Director

0 0

Note: Mr. Cyrus Jun-Ming Wen resigned on the 20th of November 2017

3.2 Committees

3.2.1 Investment Committee

The main task of the Investment Committee is the inscription of the investment policy and the

monitoring of the provision of investment services to clients.

Responsibilities of the Investment Committee: i. Examination of macroeconomic environment

ii. The development of distinct investment strategies (Model Portfolios) that correspond to

the CIF (Cyprus Investment Firm) risk profile;

iii. Proper division of capital and structuring of portfolios

iv. Categorization of clients in accordance with their investment profile (high, medium and

low risk)

v. Monitoring and examination of the investment advice and performance and returns of

the managed portfolios

vi. Revision of investment policy on a periodic basis

vii. Briefing of internal audit for the financial instruments in which the transactions will be

executed

viii. Determination of limits for an investment

ix. Development of a report with proposed asset allocation weights, and other relevant

information that will serve as guidance for officers

x. Selection of appropriate benchmarks for different types of portfolios


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xi. Review and approval of decisions taken by the General Manager in relation to the

granting of credits to and using margins by the clients, including size of the margin

offered.

3.2.2 Risk Management Committee

The Risk Management Committee (RM Committee) is formed with the view to ensure the efficient management of the risks inherent in the provision of the investment services to clients, as well as the risks underlying the operation of the Company in general, and is deemed responsible for this. During 2017, the RM Committee has met one time. Towards this direction, the Company adopts and maintains risk management policies, which identify the risks relating to the Company’s activities, processes and systems and sets the level of risk tolerated by the Company. Also, the RM Committee bears the responsibility to monitor the adequacy and effectiveness of the risk management policies and procedures that are in place, the level of compliance by the Company and its relevant persons with the policies and procedures adopted, as well as the adequacy and effectiveness of the measures taken to address any deficiencies with respect to those policies and procedures, including failures by the Company’s relevant persons to comply with them. The following table shows the constitution of the RM Committee for 2017:

Name Position

Mr. Cyrus Wen Executive Director

Mr. Wissam Sabbah Executive Director, General Manager & Head of Risk Management

Mr. Constantinos Constantinides (FAI Financial Associates International)

Compliance Officer

Committee members discharge their duties solely in the joint interest of the clients and the Company, and exercise the care, skill, prudence and diligence that a prudent man, acting in a like capacity would use in the conduct of a similar enterprise. The RM Committee meets regularly, and all committee decisions must be unanimous. A quorum constitutes three persons present either physically or through conference calls. Quorum must be achieved before meetings can be considered open. All meetings of the Committee are minuted and maintained in file. All decisions of the Committee are communicated in writing to all relevant departments in a timely manner as the importance/urgency of the decision dictates. The RM Committee is dedicated primarily to managing the credit, market and operational risks of the Company, and as part of its responsibilities it has to set out, approve and regularly update the policies, arrangements and procedures, which form the risk strategy, as well as to monitor all risks on an ongoing basis. In carrying out its duties the RM Committee provides the BoD with status updates, as well as recommendations on risk management policies and guidelines. In case of findings arising from the performance of its duties, the RM Committee shall present these findings in a report to the BoD. The latter shall decide upon the risk management policies of the Company, giving regard to the recommendations of the RM Committee. The RM Committee’s main responsibilities may be summarized as follows:


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• Ensure the efficient management of the risks inherent in the provision of the investment services to clients, as well as the risks underlying the operation of the Company

• Monitor and control the Risk Manager in the performance of his duties

• Establish, implement and maintain adequate risk management policies and procedures which identify the risks relating to the Company’s activities and processes

• Monitor the adequacy and effectiveness of the risk management policies and procedures

• Monitor the investment risks undertaken by the Company and by each client on an individual basis

• Monitor the exposures of the Company.

4 Control Functions

4.1 Risk Management Function

The Company’s risk management framework aims to establish, implement and maintain adequate policies and procedures designed to manage any type of risks relating to the Company’s activities. The current risk management framework sets the process applied in the activities of the Company, designed to identify potential events that may affect its business, to manage risks to be within its risk appetite, and to provide reasonable assurance regarding the achievement of its mission and its objectives. The Risk Management function mainly implements and maintains suitable risk management policies approved by the RM Committee, to identify and manage risks relating to the Company’s activities, processes and systems. In its role, the function primarily sets appropriate tolerance levels for identified risks and ensures compliance to these by means of adequate and effective policies and procedures. The appointed Risk Manager (RM) participates in RM Committee meetings where he reports on the risk factors affecting the Company. The Risk Management function operates independently and is assigned the monitoring of the following:

a) the adequacy and effectiveness of the Company’s risk management policies and procedures

b) the level of compliance by the Company and its relevant persons with the arrangements, processes and mechanisms adopted

c) the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons of the Company to comply with such arrangements, processes and mechanisms or follow such policies and procedures.

As an additional and effective control, the RM Committee is responsible for monitoring and controlling the Risk Manager in the performance of his duties. The Risk Manager reports directly to the Board and the RM Committee, and has the following

main responsibilities:

• Ensures that clients do not exceed the maximum deal size, where a deal exceeding this limit is blocked by the software system, as defined by the RM Committee from time to time. For any counterparty for which the Company is exposed to credit risk the Risk Manager, at least on a semi-annual basis, prepares a suggestion to the RM Committee suggesting acceptable counterparties and exposure limits per counterparty. The basis


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of recommendations is the independent review of each counterparty by the RM department with particular weight on its creditworthiness and reputation.

• Verifies that the Company has sufficient redundancy in systems and personnel or can adequately replace in a timely manner such assets, so that it can continue to operate without interruption.

• Ensures that the Company has in place a functional disaster recovery plan (DRP) that is tested at least on a yearly basis and all employees have sufficient knowledge of all procedures that are required to (a) make the disaster recovery site operational and (b) operate in disaster recovery conditions.

• Independently assesses the Company’s procedures and reports to the RM Committee on any risks that the Company can face from:

a. Non-compliance to current or future changes in the legal environment. b. Conflicts of interest that can lead to unfair customer treatment. c. Inadequate controls over fraudulent behavior from employees.

• Monitors client transactions on daily basis to identify preferential trading treatment by the reception & transmission department.

• Ensures that the Company’s capital adequacy ratio is above the minimum ratio of 8% at all times.

• Evaluates client financial transfers and cases where it grants credit or loans to clients.

• Monitors all information communications between the Company and its clients to verify the absence of any false information representations.

• Prepares at least annually the Risk Assessment Report which identifies and assesses all possible risks the Company is or may be incurring.

• Prepares, on a frequent basis and at least annually, a report to the RM Committee and senior management indicating in particular whether the appropriate remedial measures have been taken in the event of any previously identified deficiencies.

• Designs and implements the Internal Capital Adequacy Assessment Process (ICAAP), and records it in a report that is updated at least annually, based on a set of methodological tools that include risk assessment, capital planning and stress tests, among others. The company is currently in the process of completing its ICAAP process for 2017.

The Risk Manager is responsible for preparing the following reports:

• Immediately, in the event of any deficiency, a report to the Board of Directors indicating whether the appropriate remedial measures have been taken to remedy the deficiency in question.

• On a frequent basis and at least annually, a report to the Board of Directors indicating whether the appropriate remedial measures have been taken in the event of any deficiencies.

4.2 Internal Audit Function

The Internal Audit function aims to ensure compliance of the different units of the Company with

the manual and the procedures in place, as well as with relevant Company decisions taken. The

Company is outsourcing the Internal Audit Function. The internal auditor that the Company

contracts has adequate knowledge and experience in respect of the capital market and financial

issues as well as in connection to the institutional framework governing the Company’s

operation.

The conclusions of the regular or extraordinary internal audits are put into writing and submitted

in the form of a report to the Board of Directors, alongside with possible suggestions in respect

of any further action to be taken by the Company, at least annually.


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The Board of Directors bears the final responsibility for the efficiency of the internal audit

mechanism, exercising general supervision over the Company’s operations.

The main duties of the Internal Audit Function are:

• The verification that all employees have the requisite knowledge of the operational guidelines of the Company.

• The examination of whether the procedures (Chinese Walls) that are designed to restrict information flow between departments are in place and operational.

• The confirmation that all employees have the required professional certifications for their position.

• The liaising with the Compliance Officer on whether any conflicts of interest have been identified and resolved.

• The investigating of whether all agreements signed by the Company with external counterparties are valid.

• The verification that every new employee with a managerial role, heading a department or holding a critical position as per applicable regulation, has been interviewed by the Company and accepted by CySEC before the beginning of their contractual employment.

4.3 Compliance Function and Money Laundering Officer

The Compliance and Money Laundering Officer is independent of all operational and business

functions and reports directly to the Board of Directors. The Compliance and Anti-Money

Laundering functions are outsourced to FAI Financial Associate International. The main duty of

the compliance department is the continuous assessment of the adequacy and effectiveness of

the measures and procedures that are applied in the organization with a scope of early detection

and minimization of any failure by the Company to comply with its obligations under the

applicable law governing the services provided.

Main duties of AML Compliance Officer: a) Prepares the internal procedures manual for the prevention of money laundering and

terrorist financing and describes and designates the responsibility borderlines of each department involved.

b) Develops and prepares the customer acceptance policy and submits it to the Board of Directors for consideration and approval.

c) Prepares a risk management procedures manual in relation to preventing money laundering and terrorist financing.

d) Performs Anti-Money Laundering (AML) and Know-Your-Customer (KYC) procedures, which include, among others:

a. Liaising with the R&T department to review individual account opening documentation and verifying that proper KYC and AML procedures have been applied, thus recommending the opening of the account.

b. Monitoring inward and outward payments to verify that all fund flows are compliant with the Company’s AML policy.

e) Provides advice and guidance to employees as appropriate on money laundering matters; he also determines whether the employees need further training and organizes appropriate training sessions/seminars, preparing and applying an annual staff training program and evaluating the adequacy of the training provided.

f) Makes recommendations and revises policies to screen transactions for customers or transactions the Company deems to be of significantly high risk (these may relate to


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persons, entities or countries that are included in lists issued by government/international bodies), requiring special attention prior to their completion.

Main duties of Compliance Officer: i. Supervises the staff and Company activities with the aim of monitoring adherence to the

legislative framework that governs the Company, identifying possible divergence from the applicable procedures and rules and undertaking proper measures for the prevention of relevant errors.

ii. Monitors on a weekly basis the website of the regulatory authority and/or any other transmission mechanism for changes in legislation that should be reflected in the practices of the Company. If changes in legislation necessitate the change of the internal operations manual, then the Compliance Officer is responsible for presenting such proposals to the Board of Directors in a timely manner and informing employees of the changes and their impact.

iii. Remains available at any time to all personnel who will be able to discuss any matter arising confidentially or bring to the attention of the Compliance Officer any practice that is associated with the procedures of the Company that can give rise to issues of non-compliance.

iv. Continuously supervises and evaluates the compliance mechanism and presents proposals for the improvement of its effectiveness to the Board of Directors, also submitting reports with the results of frequent checks to the Board.

v. Checks the degree of conformity of the Company to the indications of every nature of control (internal auditors, external auditors-independent certified auditors, supervisory authorities, tax authorities etc.).

vi. Checks frequently that the operational procedures and requirements, as set out in this manual, are followed and adhered to in every Company operation which may from time to time use various software/technology in performing such role.

vii. Prepares at least annually and submits the compliance review report to CySEC, which presents the results of the Compliance Officer’s annual internal inspection of the Company’s business and all relevant procedures manuals for the purpose of detecting and preventing violations of applicable regulation. Written records are kept and used for the compliance review to be submitted to CySEC.

4.4 Board Declaration – Adequacy of the Risk Management

arrangements

The responsibility of the overall risk management and/or assessment lies with the Board of

Directors of the Company. The Board of Directors needs to identify, assess, monitor and control

each type of risk on a continuous basis.

The Board considers that it has in place adequate systems and controls with regards to the Company’s profile and strategy and an appropriate array of assurance mechanisms, properly resourced and skilled, to avoid or minimise loss.

4.5 Risk Statement

The Company’s Risk Statement is provided in Annex II.


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5 Principal Risks

The principal risks that the Company is exposed to are the following:

• Credit Risk

• Operational Risk

• Compliance Risk

• Market and Liquidity Risk

• Legal Risk

Further information on each principal risk is provided in the sections below.

5.1 Credit Risk

Credit risk arises when a failure by counterparties to discharge their obligations could reduce

the amount of future cash inflows from financial assets on hand at the reporting date. The

Company is exposed to Credit risk mainly in relation to cash balances with financial institutions.

The Company manages this risk by holding cash balances with financial institutions it considers

to be of high credit quality.

Identification of main types of credit risks are as follows:

• Counterparty credit risk, which is managed through the following actions:

o Thorough due diligence performed in regard of all third party service providers;

o The Company deals with reputable parties and diversifies with them;

o All external service providers are bound by comprehensive legal agreements.

• Financial institutions credit risk, which is managed through the following actions:

o Most of the Company's own and client funds are held with reputable European

banks (lower default risk) which have high ratings issued by Moody’s, S&P or

Fitch and which are subject to regulatory supervision by the central banks in the

jurisdictions where they are located;

o Any own and client funds held with non-investment grade financial institutions

have strict limits per institution and per country.

• Concentration Risk, which is managed through diversifying its exposures to more Credit Institutions.

5.2 Operational Risk

Operational risk is the risk that derives from the deficiencies relating to the Company's information technology and control systems, as well as the risk of human error and natural disasters. The Company's systems are evaluated, maintained and upgraded continuously. Operational matters include failure of the Company’s systems and natural disasters, among

others.

Identification of main types of operational risks are as follows:

• Systems risk, which is managed through the following actions:

o IT support and development with respect to the trading platform is conducted by

IT department of the Company;


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o The Company has comprehensive IT systems and adequate disaster recovery

procedures in place;

o Each Trading server is replicated into a passive backup server with the ability to

automatically take over in the case of a failure to the primary server.

• Disruption of business risk, which is managed through the following actions:

o The Company has a comprehensive business contingency and disaster recovery

plan with recovery procedures and actions to be followed in the case of damage

to any vital part of the Company’s structure.

• Key client risk, which is managed as follows:

o The Company’s business model enables it will take on a large number of clients.

The Company's strategy is not to be reliant on one client, affiliate or a single

region.

Other types of operational risks which are actively managed by the Company are the following:

• Credit card risk

• Execution risk

• Money laundering risk

• Staff competency risk

• Portfolio management and investment advice risk

• Key employee risk.

5.3 Compliance Risk

Compliance risk is the risk of financial loss, including fines and other penalties, which arises from non-compliance with applicable laws and regulations. Compliance risk is limited to a significant extent due to the supervision applied by the Compliance Officer, as well as through the monitoring controls applied by the Company.

5.4 Market and Liquidity Risk

Market FX risk is the risk that the value of financial instruments will fluctuate due to changes in

foreign exchange rates. It arises when future commercial transactions and recognised assets

and liabilities are denominated in a currency that is not the Company’s reporting currency. The

Company’s reporting currency is the Euro.

Management monitors the exchange rate fluctuations on a continuous basis and acts

accordingly.

Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An

unmatched position potentially enhances profitability, but can also increase the risk of losses.

The Company has procedures with the object of minimizing such losses such as maintaining

sufficient cash and other highly liquid current assets and by having available an adequate

amount of committed credit facilities.

The main types of market and liquidity risks are the following:


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• Interest rate risk, which is managed through the following actions:

o The Company’s finance department continually monitors on an ongoing basis the

performance of all the Company’s interest bearing assets. The Company’s

current policies will not change in the foreseeable future.

• Client default risk, which is managed through the following actions:

o Client losses cannot exceed the deposits of a client

o Clients are required to lodge funds prior to trading

o Clients are assessed for appropriateness and suitability, therefore must pass the

appropriateness test in order to trade.

5.5 Reputation & Legal Risk

Reputation risk is the risk of loss of reputation arising from the negative publicity relating to the Company's operations (whether true or false) which may result to a reduction of its clientele and revenue and to legal cases against the Company. The Board of Directors, the Compliance Officer and the Internal Auditor continuously monitor the operations of the Company and, where appropriate, additional risk management measures will be implemented and notified to CySEC. Legal Risk is the financial loss and damage to the Company's reputation which is managed by obtaining continuous legal advice and suggestions on the preparation of its legal documents.

6 Capital Base

The Capital Base of the Company as at 31 December 2017 consisted solely of Common Equity

Tier 1 (CET1) capital. The book value of intangible assets as well as the Company’s contribution

to the Investor Compensation Fund are deducted in arriving at Common Equity Tier 1 capital.

CySEC requires each investment firm to maintain a minimum Capital requirement of 8%, plus a

1,25% Capital Conservation buffer and at any time may impose additional capital requirements

for risks not covered by Pillar 1. As at 31 December 2017 the capital adequacy ratio of the

Company was 24,12%.

As at 31/12/2017, the Company’s exposure to other group entities was 3,30% which exceeded

the 2% and 1% large exposure limit with regards to the limits to shareholders, directors and their

connected persons respectively according to paragraph 61 of CySEC Directive 144-2014-14

The company rectified the issue raised with regards to the amount of EUR 55.864 . Within the next three (3) months, Ayers Alliance Financial Group (ex Harborx Ltd) has settled any outstanding balance to Harborx Ltd (Hong Kong). As of 1 March 2018, any relationship between the companies have been finalized and terminated. In addition the Company had Large Exposure (LE) of 1491% to Barclays and 154% to UBS as at 31/12/2017 which exceeded the maximum LE limit of 100% of the Company’s Own Funds. The Company rectified the issue as at 1 Jan 2018 by transferring the funds off-balance sheet to unrelated credit institutions. Also, the company increased its eligible capital further as of March 2018.


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The following table shows a breakdown of the Own Funds of the Company as at 31 December

2017:

Table 1: Eligible Own Funds

Capital Position As at 31/12/2017

(EUR'000)

Own Funds

Paid up Share Capital (including share premium) 809

Retained losses (5.226)

Losses for the period -

Non-refundable advances 6.705

Total Common Equity Tier 1 Capital before deductions 2.288

Deductions

Intangible assets (489)

Investor Compensation fund (104)

Total Deductions (593)

Total Common Equity Tier 1 Capital after deductions 1.695

Total Tier 1 Capital 1.695

Total Tier 2 Capital -

Total Own Funds 1.695

6.1 Common Equity Tier 1 Capital - Own Funds

Share capital

The Company’s share capital consists of 223.086 ordinary shares of €1 each (corresponding to

a total value of €223.086) and share premium of €585.892. The Company manages its capital

to ensure that it will be able to continue as a going concern while increasing the return to its

shareholders.

Non-refundable advances

The Company’s non-refundable advances relate to contributions provided to the Company by its shareholder. The Company has no obligation to repay these contributions and the shareholders have no claim on these contributions.


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6.2 Deductions from Common Equity Tier 1 Capital

Intangible assets

Intangible assets relate to the Company’s website, platform, charting software and trading software.

Investor Compensation fund Investor compensation fund relates to the Company’s contributions to the fund for the purpose of securing potential claims of its covered clients, in the event where the Company may not be in a position to satisfy.

Further breakdown of the own funds is provided in Annexes III and IV.

7 Capital Requirements

The legal and regulatory framework under which the Company operates stipulates that the

Company must maintain a minimum Capital requirement of 8%, plus a 1,25% Capital

Conservation buffer and its own funds must in no case fall below the level of initial capital

requirements.

The Company aims to maintain, at all times, a higher capital adequacy ratio compared to the

minimum Capital requirement of 8%, plus a 1,25% Capital Conservation buffer. In order to

manage its capital risk, the Company continually monitors its capital adequacy ratio so as to

ensure that this remains, at all times, at a level above the legally required level minimum Capital

requirement of 8%, plus a 1,25% Capital Conservation buffer.

The Company shall maintain a low risk level. The long-term risk profile will be managed so that

the effect of an extremely negative, but possible scenario, does not significantly reduce the

Common Equity Tier 1 capital ratio. If the monitoring process indicates an excessively large

impact on the Company’s capitalisation, measures will be taken to mitigate the risks.

The objectives of the Company, when managing its capital are:

(i) To safeguard the Company’s ability to continue as a going concern, and

(ii) To maintain an optimal capital structure in order to reduce the cost of capital.

In 2017, the Company fulfilled its obligations by successfully submitting, on a quarterly basis,

the Capital Adequacy Reports.

As shown below, the total capital requirements of Ayers Alliance Financial Group Limited as at

31 December 2017, which have been calculated as the maximum between the Operational risk

capital requirement using the Basic Indicator method and the total capital requirement for Credit

and Market risk, amounted to EUR 562 thousand, producing the following capital ratios.


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Table 7.1: Capital Ratios

CET1 ratio 24,12% T1 capital ratio 24,12%

Total Capital ratio 24,12%

The CET1 ratio is the CET1 capital of the Company expressed as a percentage of the total risk

weighted assets for covering Pillar 1 risks. The Tier 1 ratio is the T1 capital of the Company

expressed as a percentage of the total risk weighted assets for covering Pillar 1 risks, and the

total capital ratio is the own funds of the Company expressed as a percentage of the total risk

weighted assets for covering Pillar 1 risks. The Company aims to always maintain a high capital

adequacy ratio, well above the minimum Capital requirement of 8%, plus a 1,25% Capital

Conservation buffer.

Table 7.2: Capital Requirements per Category of Risk

As at 31/12/2017 (EUR'000)

Risk Category Approach

Credit Risk (CR) Standardized Approach 542

Market Risk (MR) Standardized Approach 10

Total Credit and Market (CR+MR)

552

Operational Risk (OPR) Basic Indicator Approach 10

Total (Max (OPR ; CR+MR)) 562

7.1 Credit Risk

The Company follows the Standardised Approach for the calculation of its minimum capital

requirements for Credit risk.

As at the year end, all the exposures of the Company were situated in Cyprus and in the United

Kingdom.

The Company’s Credit risk exposure as at 31 December 2017 is analysed in the following tables.


17

Table 7.3: Credit Risk Exposure by Asset Class

Exposure class

Average Exposure

during 2017 (EUR ‘000)

As at 31/12/2017 (EUR'000)

Exposure before and after CRM

Risk Weighted Assets

Capital Requirements

High Risk 57 170 255 20

Institutions 11.181 29.118 6.352 509

Corporates 5 18 18 1

Other Items 147 156 156 12

Total 11.390 29.462 6.781 542

Table 7.4: Credit Risk Exposure by Residual Maturity

Asset class

As at 31/12/2017 (EUR'000)

Residual Maturity

≤ 3 months Residual Maturity

> 3 months

Undefined Residual Maturity Total

High Risk - - 170 170

Institutions 27.335 1.783 - 29.118

Corporate - 18 - 18

Other Items 1 155 - 156

Total 27.336 1.956 170 29.462

Table 7.5: Credit Risk Exposure by Industry

Asset class

As at 31/12/2017 (EUR'000)

Financial Services

Other Total

High Risk 170 - 170

Institutions 29.118 - 29.118

Corporate - 18 18

Other Items - 156 156

Total 29.288 174 29.462


18

Table 7.6: Exposures before and after credit risk mitigation by geographic distribution:

Asset class

As at 31/12/2017 (EUR'000)

Switzerland Cyprus United Kingdom

Other Total

Corporate -

18

-

-

18

High Risk -

-

-

170

170

Institutions

2.602

637

25.806

73

29.118

Other Items -

156

-

-

156

Total

2.602

811

25.806

243

29.462

For rating its Credit risk exposures, the Company relies on publically available information from

Moody’s, S&P and Fitch rating agencies. Additionally, the Company studies the financial

statements of the financial institutions to which it is exposed, and keeps a record of their latest

Balance Sheets. All credit ratings used as at 31/12/2017 relate to exposures to institutions.

Table 7.7: Exposures before and after credit risk mitigation by credit quality step

Credit Quality Step As at 31/12/2017 (EUR'000)

Exposure before and after CRM

1 -

2 -

3 27.863

4 -

5 -

6 -

Unrated/NA 1.599

Total 29.462

Determination of value adjustments and provisions

The determination of value adjustments and provisions requires from Management the exercise of judgment, to make estimates and assumptions that influence the amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are deemed to be reasonable based on knowledge available at that time. Actual results may deviate from such estimates. The estimates and underlying assumptions are being revised on a continuous basis. Revisions in accounting estimates are recognised in the period during which the estimate is revised, if the estimate affects only that period, or in the period of the revision and future periods, if the revision affects the present as well as future periods.


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Impairment

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

Past Due

The definition of “past due” exposures is in accordance with Article 178 (1) (b) of the Regulation.

As at the reporting date, the Company did not have any past due exposures.

7.2 Operational Risk

For the calculation of operational risk in relation to the capital adequacy reports, the Company

applies the Basic Indicator Approach. The Net Income from activities for 2015, 2016, 2017 and

the Capital Requirements as at 31st December 2017 is shown below:

Operational Risk (Basic Indicator Approach)

2015 (EUR'000)

2016 (EUR'

000)

2017 (EUR'

000)

Average (EUR'000)

Capital Requirements 31 Dec 2017

(EUR'000)

Net Income from Activities

12 160 22 65 9.7

7.3 Market FX Risk

The Company’s Capital Requirements for Foreign Exchange Risk as at 31/12/2017 was EUR

10 thousand and arose from the its exposures to the United States Dollar and the Great British

Pound.

8 Leverage ratio

The Leverage ratio is a new monitoring tool which allows competent authorities to assess the

risk of excessive leverage in their respective institutions. It is a simple, non-risk-based ratio that

has been introduced in the Basel III framework to constrain the build-up of excessive leverage.

This new regulatory and supervisory tool has been running since 1st January 2015.

The Leverage ratio is defined as the capital measure (i.e. the Company’s Tier 1 capital) divided

by the exposure measure as this is defined in the European Commission’s Regulation (EU)

2015/62 of 10 October 2014 amending Regulation (EU) No 575/2013 of the European

Parliament and of the Council with regards to the Leverage ratio. It is noted that the final

calibration, and any further adjustments to the definition, were completed within 2017, with a

view to migrating to a Pillar I minimum capital requirement on 1 January 2018.


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The Company’s Leverage ratio as at the reference date was 5,75%, the minimum allowable

being 3%.

The table below provides a reconciliation of accounting assets and Leverage ratio exposures:

Table 15: Summary reconciliation of accounting assets and Leverage ratio exposures

Applicable

Amounts

(EUR'000)

1 Total assets as per published financial statements 30.045

4 Adjustments for derivative financial instruments 0

7 Other adjustments (583)

8 Total leverage ratio exposure 29.462

The following table provides a breakdown of the exposure measure by exposure type:

Table 16: Leverage ratio common disclosure

CRR Leverage

ratio exposures

(EUR'000)

On-balance sheet exposures (excluding derivatives and SFTs)

1 On-balance sheet items (excluding derivatives, SFTs and

fiduciary assets, but including collateral) 30.055

2 (Asset amounts deducted in determining Tier 1 capital) (593)

3 Total on-balance sheet exposures (excluding derivatives,

SFTs and fiduciary assets) (sum of lines 1 and 2) 29.462

Derivative exposures

4 Replacement cost associated with all derivatives transactions

(i.e. net of eligible cash variation margin) -

5 Add-on amounts for PFE associated with all derivatives

transactions (mark-to-market method) -

11 Total derivative exposures (sum of lines 4 to 10) -

Securities financing transaction exposures

16 Total securities financing transaction exposures (sum of

lines 12 to 15a) -

Other off-balance sheet exposures


21

19 Other off-balance sheet exposures (sum of lines 17 to 18) -

Exempted exposures in accordance with CRR Article 429 (7) and (14) (on and off

balance sheet)

EU-19a

(Exemption of intragroup exposures (solo basis) in

accordance with Article 429(7) of Regulation (EU) No

575/2013 (on and off balance sheet))

-

EU-19b (Exposures exempted in accordance with Article 429 (14) of

Regulation (EU) No 575/2013 (on and off balance sheet)) -

Capital and total exposures

20 Tier 1 capital 1.695

21 Total leverage ratio exposures (sum of lines 3, 11, 16, 19,

EU-19a and EU-19b) 29.462

Leverage ratio

22 Leverage ratio 5,75%

The table below provides a breakdown of total on balance sheet exposures (excluding

derivatives, SFTs and exempted exposures) by asset class:

Table 17: Split-up of on balance sheet exposures (excluding derivatives, SFTs and

exempted exposures)

CRR

Leverage

ratio

exposures

(EUR'000)

EU-1 Total on-balance sheet exposures (excluding derivatives,

SFTs, and exempted exposures), of which: 29.462

EU-2 Trading book exposures 0

EU-3 Banking book exposures, of which: 29.462

EU-4 Covered bonds 0

EU-5 Exposures treated as sovereigns 0

EU-6 Exposures to regional governments, MDB, international

organisations and PSE NOT treated as sovereigns 0

EU-7 Institutions 29.118

EU-8 Secures by mortgages of immovable properties -

EU-9 Retail exposures -


22

EU-10 Corporate 18

EU-11 Exposures in default -

EU-12 Other exposures (e.g. equity, securitisations, and other non-

credit obligation assets) 327

Description of the processes used to manage the risk of excessive leverage

In order to manage the risk of excessive leverage, the Company monitors its Leverage ratio on

a monthly basis and ensures that it is always above the current 3% limit.

Factors that had an impact on the Leverage Ratio during the period

The Leverage ratio of the Company for the financial year 2017 was 5,75%. There is only one

observation for the leverage ratio due to the company obtaining the Dealing on Own account

license recently.

9 Remuneration Disclosures

The remuneration policy of the Company is set by the Senior Management and the Board of

Directors. The remuneration levels of management and staff are determined after taking into

consideration each person’s skills, knowledge and performance of his/her duties, as well as the

rates that prevail in the market for similar positions.

The remuneration policy seeks to ensure that the levels and structures of remuneration are

designed to attract, retain and motivate management talent needed to run the business and to

comply with the applicable legislation and regulation.

There was no Board meeting held in 2017, during which remuneration issues were discussed.

As a small Cyprus Investment Firm, Ayers Alliance Financial Group Ltd does not have a

Remuneration Committee. Salary increases are decided by the shareholder after receiving

feedback from the executive directors with regards to the performance of each employee and

the Company as a whole.

In 2017, the remuneration structure of Ayers Alliance Financial Group Limited included fixed

monthly salaries and discretionary bonuses based on individual and collective performance, as

well as yearly appraisal results.

Table 9.1 below presents the 2017 annual gross remuneration of Senior Management (including

Non-Executive Directors) and other staff whose actions have a material impact on the risk profile

of the Company.

Table 9.1: Gross Remuneration of Management Body and Other Staff

As at 31/12/2017 (EUR'000)

No. of people Cash-fixed Cash-variable Total

Senior Management

7 196.681 14.429 211.110


23

Total 7 196.681 14.429 211.110

Table 9.2: Gross Remuneration by Business Line

As at 31/12/2017 (EUR'000)

Business Area: Cash-fixed Cash-variable Total

Executive and Non-Executive directors

84.367 0 84.367

Reception & Transmission of Orders and Compliance

41.683 0 41.683

Underwriting and Portfolio Management

70.631 14.429 85.060

Total 196.681 14.429 211.110

Staff costs can be found in the management accounts prepared by the management for the

period from January to December 2017.

As per management accounts prepared by the management for the period from January to

December 2017, there was no outstanding deferred remuneration and no deferred remuneration

was awarded during 2017.

The Company does not provide any pension scheme / provident fund for its employees.

During the year, the Company did not pay any new sign-on or severance payments.


24

10 Annexes

10.1 Annex I – Information flow on risk to management body

10.2 Annex II – Board Approved Risk Statement

In order to achieve its business objectives, the Company recognizes that it will take on certain

business risks. The Company aims to take business risks in an informed and proactive manner

such that the level of risk is aligned with the potential business rewards. Management regularly

reviews risk exposures against current business-risk level tolerances and risk limits to ensure

they fit with the Company strategy.

The Company is risk averse with respect to risks that could:

• Negatively affect clients

• Negatively affect the safety of employees

• Negatively affect the Company’s reputation or brand

• Lead to breaches of Laws and regulations, or

• Endanger the future existence of the Company

Report name Owner of report / preparer

Recipient Frequency

1 Internal Audit Report

Outsourced / KPMG Limited

BoD & CySEC Yearly

2 Compliance AML Report

Outsourced / FAI Financial Associates Ltd

BoD & CySEC Yearly

3 Compliance Function Report

Outsourced / FAI Financial Associates Ltd

BoD & CySEC Yearly

4 Risk Management Report

Risk Manager / Wissam Sabbah

BoD & CySEC Yearly

5 Suitability Report

Outsourced / ASG Premier Audit Services Ltd

BoD & CySEC Yearly

6 ICAAP Report Outsourced / KPMG Limited

BoD and, upon request, CySEC

Yearly


25

10.3 Annex III – Balance sheet reconciliation

As at 31/12/2017

(EUR'000)

Eligible Own Funds

Share capital 223

Share premium 586

Retained Earnings (5.226)

Non-refundable advances 6.705

Intangible assets (489)

Investor Compensation fund (104)

Original Own Funds (Tier 1 Capital) 1.695


26

10.4 Annex IV – Own funds disclosure template

At 31 December 2017 Transitional Definition

Prescribed residual

amount of Regulation

(EU) No 575/2013

Full - phased in Definition

(EUR'000) (EUR'000) (EUR'000)

Common Equity Tier 1 capital: instruments and reserves

Capital instruments and the related share premium accounts

809 809

Retained earnings (5.226) (5.226)

Funds for general banking risk 6.705 6.705

Common Equity Tier 1 (CET1) capital before regulatory adjustments

2.288 2.288

Common Equity Tier 1 (CET1) capital: regulatory adjustments

2.288 2.288

Intangible assets (net of related tax liability) (489) (489)

Investor Compensation fund (104) (104)

Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

Total regulatory adjustments to Common Equity Tier 1 (CET1)

1.695 1.695

Common Equity Tier 1 (CET1) capital 1.695 1.695

Additional Tier 1 (AT1) capital - -

Tier 1 capital (T1 = CET1 + AT1) 1.695 1.695

Tier 2 (T2) capital - -

Total capital (TC = T1 + T2) 1.695 1.695

Total risk weighted assets 7.026 7.026

Capital ratios and buffers

Common Equity Tier 1 24,12% 24,12%

Tier 1 24,12% 24,12%

Total capital 24,12% 24,12%

ayers alliance financial group limited iii disclosure...articles 431 to 455 of the crr specify the...

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