xtrade europe

Xtrade Europe Ltd – Disclosure and Market Discipline Report for 2014

Xtrade Europe Limited

Regulated by the Cyprus Securities and Exchange

Commission license number 108|10.

DISCLOSURE AND MARKET DISCIPLINE REPORT FOR

2014

July 2015

Contact us:

Address 1st & 2nd Floor, Tofias Building, Vasileos Konstantinou 140, Limassol 3080, Cyprus

Telephone +357 24 022 477

Fax +357 25 333 067

Websites http://www.xtrade.com

Emails: [email protected]

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http://www.xtrade.com/

mailto:[email protected]


Table of Contents

INTRODUCTION ......................................................................................................................... 3-4

RISK MANAGEMENT STRUCTURE.......................................................................................... 5-6

CAPITAL STRUCTURE................................................................................................................ 7-8

RISK EXPOSURES & MITIGATION........................................................................................ 9-15

REMUNERATION SYSTEM..................................................................................................... 16-17

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INTRODUCTION

The present report is prepared by Xtrade Europe Ltd (“Company”) a Cyprus Investment

Firm (“CIF”) authorized and regulated by the Cyprus Securities and Exchange

Commission ( “CySEC”, the “Commission”) under the license number 108|10 and

operates in coordination with the Markets in Financial Instruments Directive (MiFID)

(EU Directive 2004/39/EC).

As a Cyprus Investment Firm (‘CIF’), Xtrade Europe Limited is obliged, pursuant to

Article 433 of Part Eight of the CRR to publish, at least on an annual basis, these

disclosures.

The external auditors of Xtrade Europe Limited, PricewaterhouseCoopers, provide

limited level of assurance on the fair presentation of the disclosures annually as required

by Paragraph 32(1) of Part II of DI2014-144-14 for the Prudential Supervision of

Investment Firms. The following Report is published pursuant to the above obligations

as well as in accordance with the circulars issued by CySEC.

It should be noted that any disclosures described herein apply to the Company on a solo

basis.

Pillar 3 disclosure is a requirement of CRD IV, consisting of the Capital Requirements

Directive (‘CRD’ or ‘Directive 2013/36/EU’) and the Capital Requirements Regulations

(‘CRR’ or ‘Regulation (EU) No. 575/2013), which is effective from January 1st, 2014. The

above has resulted to the respective amendments of the Investment Services and

Activities and Regulated Markets Law (Law 144(1)/2007) and the implementation of the

respective Regulations and the release of Directives DI144-2014-14, DI144-2014-15, in

order to accommodate the amendments of the European Directive.

The main aim of the above directives and regulations is to implement the main Basel III

reforms across the EU. Pillar 3 requirements under CRD IV are designed to promote

market discipline through the disclosure of key information about risk exposures and

risk management processes.

The current regulatory framework comprises of three pillars:

1. Pillar I (minimum capital requirements): sets out the requirements on

calculating the minimum capital required for the Company to be able to cover

credit risk, market risk and operational risk. 2. Pillar II (supervisory review process ‘SREP’): sets out a supervisory review

process which assess the internal adequacy processes (ICAAP), as to whether the

Company’s Pillar 1 capital is adequate to meet those risk exposures and

encourage the Company to develop and use better risk management techniques

3. Pillar III(market discipline): sets out the required disclosures to allow market

participants, having a full picture of the risk profile of the Company, to assess key

information relevant to the capital structure, risk exposures, risk assessment

processes and hence the capital adequacy of the Company.

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In accordance with its CIF the Company is authorized to provide the following services: 1. Investment services

Reception & Transmission of Clients Orders

Execution of Clients Orders

2. Ancillary services Safekeeping and administration of financial instruments, custodianship and

related services such as cash/collateral management

Granting credits or loans to an investor to allow him to carry out a transaction

in one or more financial instruments, where the firm granting the credit or

loan is involved in the transaction

Foreign exchange services where these are connected to the provision of

investment services

This report is published on the Company’s website at www.xtrade.com, on an annual basis and where necessary the Company shall proceed with amendments of the report, approved by the Board of Directors.

Any information not contained in this report was either not applicable based on the

Company’s business and activities, or such information is considered as proprietary to

the Company. Sharing such information with the public would possibly undermine the

Company’s competitive position

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RISK MANAGEMENT STRUCTURE

The Board of Directors and the CEO have the overall responsibility for the internal control systems in the process of “Capital Adequacy Assessment” therefore they have

established effective processes for the identification, Analysis, assessment, monitoring

and the management of each risk and supervise the overall risk management system.

The Company recognizes the benefits of having a diverse Board of Directors which

includes and makes use of differences in the skills, experience, background, race and

gender between directors. Diversity is taken into consideration in determining the

optimum composition of the Board of Directors.

The Company’s business effectiveness is appeared and based on the guidelines of The

Board of Directors, Internal Audit, Risk Manager, Compliance and Anti-Money

Laundering Officer and The Risk Management team policies and procedures.

The Company’s management structure is as follows:

Board of Directors in place: Is ultimately responsible for overlooking and directing

the operations of the Company and approve objectives and strategic directions, as

detailed in the Company’s approved Internal Operations Manual (the “IOM”). All members of the Board of Directors held Directorships only with the Company during

2014.

Risk Manager Function in place: The Risk Management policy established by the

Risk Manager and sets out the procedures and mechanisms regarding risk as well as

it describes the roles and responsibilities of The Risk Management Team. It is

covered by the necessary expertise and follows the required processes as detailed in

the Company’s IOM for implementation and monitoring of Risk Management

policies and needs.

The Company operated its Risk Management Committee function for the year of

2014 with an outsourced expert service arrangement. Due to business development,

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the Company has implemented an in-house risk management function for the year

2015 onwards.

Compliance Function in place: Is covered by the necessary expertise and follows the

required processes as detailed in the Company’s IOM. Specifically, it is

implementing a compliance monitoring program to ensure the overall compliance of

the Company with laws and relevant directives imposed by the CySEC.

Internal Audit Function in place: Is covered by the necessary expertise and follows

the required processes as detailed in the Company’s IOM. Specifically, it is

implementing an internal audit program to independently review the Company’s

functions and activities and their adherence to processes, controls, and

requirements.

Risk management is carried effectively through the establishment of an effective risk

oversight structure and the necessary internal organisational controls are in place to

ensure that the Company identifies and manages its risks adequately, establishes the

necessary policies and procedures, sets and monitors relevant limits and complies with

the applicable legislation.

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CAPITAL STRUCTURE

Own funds and Capital requirements

The Company periodically manages its capital in order to ensure that it will be able to

mitigate any risk exposures arising from the business while maximizing the return to

shareholders.

Capital Adequacy Reports prepared on solo basis with reporting currency in Euro and

submitted on a quarterly basis to the Commission.

The Company ensures optimal operating conditions via monitoring that sufficient

capital is available for its operations and for covering its exposures to risks.

The Company’s total capital resources and total capital requirements as at 31 December

2014 are shown in Table 1. The Company’s Capital Resources consist of Tier 1

Capital only.

Table 1: Capital Resources

('000)EUR Own Funds (Tier 1 Capital) Share Capital 750.00 Audited Reserves 543.48 Audited Profit for Current Year 244.03 Total Eligible Own Funds (Tier 1 Capital) 1,537.51

The following table provides the reconciliation of own funds items to the audited

Financial Statements as at 31 December 2014: Table 2: Reconciliation of regulatory capital, with Equity per Company’s Financial Statement

('000)EUR

Total equity per Company’s Financial 1,537.51 Statements Total Eligible Own Funds (Tier 1 capital) 1,537.51

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The Company’s regulatory own funds and capital adequacy ratio as at 31 December 2014

were as follow:

Table 3: ('000)EUR

Total Eligible Own Funds 1,537

Credit Risk 2,213 Foreign Exchange Risk 760

Operational Risk 5,535

Total Capital Requirements 8,509

Capital Adequacy Ratio 18.07%

Capital Adequacy ratio (CAR): In accordance with the Regulatory framework issued

from CySEC, the Capital Adequacy of the Company is set to a minimum of 8%.

As at 31 December 2014, the Company’s capital adequacy ratio was 18.07%, higher than

the minimum required of 8%

Mitigation of capital risk: In order to manage its capital risk, Xtrade Europe Ltd

monitors, constantly, its capital adequacy ratio to ensure that this remains, at all times, at a level above 8%.

The Company also uses forecasts to assess the Company’s capital position, based on its

operating plan, so as to ensure that no capital deficiencies will arise. The Company

Accumulates additional capital through the accumulation of profits over time.

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RISK EXPOSURES & MITIGATION

The Company’s activities expose it to a variety of financial risks as described below.

1. Market risk

Price risk

The Company is exposed to market price risk from fluctuations in equity prices, foreign

currencies, index prices and commodities due to the open positions on CFDs held by the

Company as counterparty to its customers and classified on the statement of financial position as derivative financial instruments.

Mitigation of risk: The Company benefits from a number of factors that reduce the

volatility of its revenue and protect it from significant changes in market conditions

such as its product range. This diversification leads to a significant reduction in the

Company’s exposure to price risk.

The Company’s exposure to price risk at any point in time depends primarily on short-

term market conditions and client activities during the trading day, hence the exposure

at each reporting date may not be representative of the price risk exposure faced by the

Company over the year.

Foreign Exchange Risk

Foreign exchange risk arises from future commercial transactions and recognised assets

and liabilities denominated in a currency that is not the Company’s functional currency. The Company’s exposure to foreign exchange risk arises mainly from cash balances, trade receivables, derivative financial instruments and trade payables denominated in a

foreign currency.

Mitigation of risk: The foreign exchange risk in the Company is effectively managed

by setting and controlling foreign exchange risk limits, such as through the

establishment of maximum value of exposure to a particular currency pair as well as

through the utilization of sensitivity analysis.

Management has adopted appropriate procedures to monitor and manage foreign

exchange risk on a continuous basis.

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Cash flow and fair value interest rate risk

The Company’s cash flow interest rate risk arises from its trading activities and more

specifically from the interest charged on the derivative financial instruments (both assets

and liabilities) that remain open overnight. Other financial assets and liabilities held at

fixed interest rates expose the Company to fair value interest rate risk, however this risk

is insignificant to the Company as these assets/liabilities are not material.

2. Credit Risk

Credit risk is the risk of loss that the Company would incur if the counterparty in a

transaction failed to perform its contractual obligations.

Credit risk arises from derivative financial instruments and deposits with banks and

financial institutions as well as trade and other receivables and receivable from related

parties. Exposure to credit risk is managed by the risk management department of the

Company.

Past due and impaired definitions

Past due: As per IFRS 7, Appendix A “Defined terms”, a financial asset is past due

when a counterparty has failed to make a payment when contractually due. It is noted

that during the year there were no past due balances within trading securities, repurchase receivables, due from banks, loans and advances to customers and other

financial assets.

A debt is impaired if there is objective evidence of impairment as a result of one or

more events that have occurred after the initial recognition of the liability (an incurred

‘loss event’) and that loss event (or events) has an impact on the estimated future cash

flows of the debt or the group of debts, that can be reliably estimated.

Impairment of financial assets carried at amortised cost: The Company

assesses at the end of each reporting period whether there is objective evidence that a

financial asset or a group of financial assets is impaired. A financial asset or a group of

financial assets is impaired and impairment losses are incurred only if there is objective

evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on

the estimated future cash flows of the financial asset or group of financial assets that can

be reliably estimated.

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The criteria that the Company uses to determine that there is objective evidence of an

impairment loss include:

significant financial difficulty of the issuer or obligor;

a breach of contract, such as a default or delinquency in interest or principal payments;

the Company, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not

otherwise consider; it becomes probable that the borrower will enter into bankruptcy or other financial

reorganisation; the disappearance of an active market for that financial asset because of financial

difficulties; or

observable data indicating that there is a measurable decrease in the estimated

future cash flows from a portfolio of financial assets since the initial recognition of

those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:

(i) adverse changes in the payment status of borrowers in the portfolio; (ii) national or local economic conditions that correlate with defaults on the assets

in the portfolio.

The Company first assesses whether objective evidence of impairment exists.

For loans and receivables category, the amount of the loss is measured as the difference

between the asset’s carrying amount and the present value of the estimated future cash

flows (excluding future credit losses that have not been incurred) discounted at the

financial asset’s original effective interest rate.

The carrying amount of the asset is reduced and the amount of the loss is recognised in

profit or loss. If a loan has a variable interest rate, the discount rate for measuring any

impairment loss is the current effective interest rate determined under the contract. As a

practical expedient, the Company may measure impairment on the basis of an

instrument’s fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the

decrease can be related objectively to an event occurring after the impairment was

recognised (such as an improvement in the debtor’s credit rating), the reversal of the

previously recognised impairment loss is recognised in profit or loss.

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Mitigation of risk: The Company accepts as counterparty, for the purposes of depositing

Client funds, only financial institutions (including banking institutions) that the Company

internally assesses as financially stable;

In order to diversify its exposure, XFR maintains accounts with a number of European based

investment grade banking institutions.

Client funds are held in segregated accounts, separated from company funds, meaning

that once received Client funds are deposited by the Company on the Clients’ behalf;

It should be noted that the above mentioned account(s) are held by XFR in a fiduciary

capacity and Client funds deposited are not recognised in the Company’s financial statements as assets or liabilities (instead Client funds are disclosed in separate notes in

the Company’s financial statements and clearly marked as fiduciary);

The Company Assesses the credit quality of its counterparty taking into account its

financial position, past experience and other related factors (if there is no independent

credit rating by a rating agency

The Company ensures that Client(s) fund their account(s) prior to the commencement

of trading in financial instruments and that sufficient cash margin has been deposited

before a market position is opened

The Company monitors all trading accounts through an automated process that

highlights trading accounts approaching or entering into a Margin Call and Stop-out

Some of the mitigation strategies that the Company follows are regular credit review of

counterparties by the investment committee.

The Company follows the Standardized Approach for Credit risk.

The exposure values before and after credit risk mitigation are shown in the Table 4 and 5

below:

Table 4: Exposures before and after Credit Risk Mitigation as at 31 December 2014

Credit Quality Step Institutions Corporates Public sector entities

1 66.09

2 3 4 5 6

188.93 0.23 43.58 Total

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For the purpose of calculating the capital requirements of the Company mainly under

the credit risk requirement, for the exposure classes listed below, the external credit

ratings from Standard & Poor’s (S&P) have been applied.

• Exposures to central governments or central banks.

• Exposures to public sector entities.

• Exposures to institutions.

• Exposures to corporates.

The general ECAI association with each credit quality step complies with the standard

association published by CySEC as follows:

The total amount of exposures after accounting offsets and without taking into account

the effects of credit risk mitigation, and the average amount of the exposures over the

period broken down by different types of exposure classes:

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Table 5: ECAI Association with each credit quality step

Credit Quality

Step

Moody’s

Rating

Institutions Risk Weight

Sovereigns

Risk Weight

Corporate

Risk Weight Residual Maturity

up to 3 months

Residual Maturity

more than 3 months

1

AAA to AA-

20%

20%

0%

20%

2 A+ to A- 20% 50% 20% 50%

3

BBB+ to BBB-

20%

50%

50%

100%

4

BB+ to BB-

50%

100%

100%

100%

5 B+ to B- 50% 100% 100% 150%

6

CCC+ and below

150%

150%

150%

150%


Table 6: Exposures by Exposure class as at 31 December 2014

('000)EUR

Public sector entities 43.59

Institutions 255.02

Corporates 0.29

Retail 1,272.80 Items associated with - particular high risk

Equity -

Other items 918.12 Risk weighted exposure 2,489.80 amounts for credit, counterparty credit risks

The Company due to its operations is exposed to a certain extent to credit risk from the

Cyprus and Great Britain.

Table 7: Exposures by geographic distribution

('000)EUR

Cyprus Great Britain

Corporates 0.29 66.09

Institution 188.93 -

Other 918.12 -

Public Sector Entities 43.58 -

Retail 1,272.80

Grand Total 2,423.70 66.09

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external factors. Operational risk can be further divided

into the following sub-categories: Internal Fraud Risk; External Fraud Risk; Marketing

and Advertising Risk; Regulatory Reporting Risk; Internal Procedures and Controls

Risk; Damage to Physical Asset, Business Disruption & System Failures Risk; Legal Risk

etc.

Mitigation of risk: The Company mitigates this risk by our Risk platform technology

and sophisticated procedures that benefit from hands-on involvement of the

experienced specialist risk management team. 14


The Company integrated to sophisticated technology KYC verification tools to make sure

all documents is authentic. At the core of Risk Management team lead by Risk Manager, are the multi-criteria decision power which are self-learning and flexible. Their final output determines whether the transaction is submitted to banks, blocked or flagged for

review.

The Company has Real-time alerts mechanism for flagged transactions, to review

transactions, flag users, issue refunds, void transactions, do follow-ups, blacklist and

whitelist multiple users and associated elements, and send live feedback to the Banks.

The Company also mitigates this risk by a four eyes structure and board oversight, to

ensures the separation of power regarding vital functions of the Company namely

through the existence of a financial services director and a separate director of

operations. The board further reviews any decisions made by management and

monitors their activities.

Moreover, Internal audit visits to ensure that employees comply with the Company’s

internal procedures.

IT Risk

IT risk is the business-impact risk associated with the online operation, as well as

availability of the platform to end-user and information security.

Mitigation of risk: The Company mitigates this risk with in house development team

and IT department, adequate arrangements in place regarding back-up procedures, software maintenance, strict information security policy, servers high-availability

platform, hardware maintenance and use of the internet with safeguarding procedures, and constant monitoring of the services 24/7.

Reputational Risk

Reputational risk occurs when negative publicity arising from customers, counterparties, shareholders or regulators regarding the Company’s business practices affects the

Company.

Mitigation of risk: The Company, in this respect, employs the following mitigation

strategies:

• The company has a well-implemented Customer complaint handling-policy to keep

customers satisfied. • Information provided to customers is ensured to be fair, clear and not misleading. • The Company reviews and approves any advertising and other material before they

are being published. • The company offers comprehensive refund policy when user doesn’t Login or trade

after First Time Deposit, and when requested by clients.

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REMUNERATION SYSTEM

Decision on these matters is taken on a Board of Directors level while the remuneration

policy is periodically reviewed. The remuneration mechanisms employed are well known management and human resources tools that take into account the staff’s skills, experience and performance, whilst supporting at the same time the long-term business

objectives.

The Company's remuneration system and policy is concerned with practices of the

Company for those categories of staff whose professional activities have a material impact on its risk profile, i.e. the Senior Management, members of the Board of

Directors and the Heads of the departments; the said practices are established to ensure

that the rewards for the ‘executive management’ are linked to the Company’s

performance, to provide an incentive to achieve the key business aims and deliver an

appropriate link between reward and performance whilst ensuring base salary levels are

not set at artificially low levels.

The total remuneration of staff consists of fixed and variable components that are

appropriately balanced:

a. Fixed remuneration varies for different positions/roles depending on each

position’s actual functional requirements, and it is set at levels which reflect the

educational level, number of work years whithin the company, experience, accountability, and responsibility needed for an employee to perform each

position/role. Fixed remuneration is also set in comparison with standard market

practices employed by the other market participants/ competitors. b. Variable remuneration is designed to ensure that the total remuneration

remains in competitive levels and to reward the staff for its performance whilst

remaining aligned with the department’s and/or the Company’s performance. Other

factors taken into account are the financial viability of the Company, and the general financial situation of the state in which the Company operates. Also we take into

consideration each employee’s personal objectives (such as personal development, compliance with the Company’s systems and controls, commitment and work

ethics). The variable remuneration component is mainly awarded in the form of cash while

no remuneration is payable under deferral arrangements (with vested or unvested

portions), nor were there any severance payments during the current year.

Remuneration of Key Management Personnel and Directors:

The remuneration of the key management personnel of the Company, including Board

of Directors, in 2014, was as shown in the following tables: Broken down by Management area

Number of Beneficiaries

Fixed Remuneration

Variable Remuneration

2014

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Non-Seni 1 38493 - 38493

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Broken down by Business area

Number of Beneficiaries

Fixed Remuneration

Variable Remuneration

2014

Senior Managers 1 38493 - 38493

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