Taking into account the Financial and Capital Market Commission „Regulations on the Information Disclosure”, which determine the procedures for disclosure of the information about risks inherent to activities of investment brokerage companies, purposes, methods and policies of risk management, assessment of compliance with the requirements for equity and capital adequacy, remuneration policy and practices, the information provided in the annual report of the Company is supplemented by this section.
Assessment of capital adequacy
PThe equity and the methods of assessment of capital adequacy are provided in the annual report as an integral part of it and are published on the Website of the Company.
Credit risk is a probability to suffer losses in a situation where a business partner (a counterparty) or a debtor of the Company fails to fulfill the contractual obligations to the Company. Assets and off-balance liabilities are the subjects of credit risk.
The capital required to cover the credit risk is determined according to the standardized approach described in the Regulations for Calculating the Minimum Capital Requirements.
The credit risk of the Company is mostly associated with exposures to financial institutions and business partners. In this connection the Company, while managing credit risk, pays special attention to the assessing solvency of its counterparties before starting a business relationship with them and conducts regular analysis of the existing partners throughout the course of the cooperation. The assessment of credit risk level includes the detailed and comprehensive analysis of qualitative and financial indicators of a business partner. The management risk concentration, one of the possible manifestations of credit risk, is carried out through diversification and expansion of the network of counterparties, in preference for cooperation with large and reliable partners who have an excellent reputation in the market. Company’s own funds are held on short-term deposits with credit institutions selected on the basis of their credit ratings and the offered terms, in accordance with FCMC regulations.
Operational risk is the risk of direct or indirect damages due to internal or external incidents. Operational risk includes legal risk but excludes strategic and reputational risks. Operational risk is inherent to all investment and ancillary investment services, processes and systems of the Company.
Operational risk management is carried out using the following general methods:
- self-assessment of operational risk: internal evaluation of every product and process of the Company for presence of operational risks, their analysis and the implementation of control mechanisms to reduce the negative impact on the activities of the Company;
- analysis of the operational risk indicators: examination of parameters directly or indirectly indicating the level of operational risk of the Company;
- operational risk measurement by recording the operational incidents, their causes and damages incurred as the result of the incidents;
- development and testing of the business continuity plan of the Company;
- minimization of operational risk through internal control mechanisms;
- investments into systems modernization and security of information technologies.
Risk arising when foreign currencies rates fluctuate against the currency in which the financial instruments were acquired.
The risk management department of the Company, based on analysis and forecast of the foreign exchange position, as well as the results of stress tests, including the VaR probability of losses, sets limits on currency risks.The Company calculates the capital required to cover the currency risk as 8% of the total absolute value of the total open foreign exchange position in accordance with the FCMS Regulations for Calculating the Minimum Capital Requirements.
Management of risks that do not require special capital reserves
Risks related to money laundering and terrorism financing
Activities of the Company are aimed at cooperation with and provision of financial services to reliable customers and cooperation partners in order to, whenever possible, prevent involvement of the company into money laundering and terrorism financing as well as to prevent the possibility of damages related to rapid loss of confidence of reliable customers and cooperation partners.
The Company ensures compliance with legislative acts and best international practices of fighting money laundering and terrorism financing.
The Company is obliged to identify its Customers, evaluate risks on the basis of the data provided by the Customer and conduct the Customer due diligence. These requirements are imposed by the Law “On the Prevention of Money Laundering and Terrorism Financing” of the Republic of Latvia and are binding on the Company in fighting money laundering and terrorism financing.
The objective of fighting money laundering is to prevent possibility of legalizing the proceeds from robbery, fraud, trafficking in drugs and human beings and other illegal activities (disguising the illegal origin and criminal nature of funds), using the investment and ancillary investment services provided by the Company. The objective of fighting terrorism financing is to prevent the involvement of the Company in provision of financial support to terrorists or organization of terrorist acts.
To minimize risks and to ensure the effective operation of the Company’s internal control system, one of the important measures is employee training in the field of the prevention of money laundering and terrorism financing. The Company ensures ongoing employee training that covers the procedures for customer due diligence, discovering and reporting unusual and suspicious transactions, other requirements of the respective internal regulatory documents of the Company and informs the employees about the latest developments in the legislation of the Republic of Latvia, international regulations and standards of best practice.
The policy of the Company is based on the following legal acts:
- Law “On the Prevention of Money Laundering and Terrorism Financing” of the Republic of Latvia;
- Financial and Capital Market Commission Regulations No. 125 of 27 August 2008 “Regulations for Enhanced Customer Due Diligence”;
- Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering;
- Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering - Commission Declaration.
Reputational risk is the risk that the Company's customers, business partners, shareholders, supervisory institutions and other stakeholders might get a negative perception of the Company, which would affect the Company’s abilities to maintain the existing business relations and develop new relations with customers and other business partners and have a negative impact on the Company financing.
Being vigilant about its reputation, formed by both internal (employees) and external (customers, partners, the public) communication, the Company purposefully carries out specific activities to improve it and the advance planning of actions to be taken in case of its deterioration.
Reputational risk management of the Company is regulated by the following main principles:
- adherence to general business values, including honesty, accuracy, openness and willingness to cooperate, provision of high-quality services;
- compliance with legislative regulations;
- commitment to continuous improvement of the risk management system;
- careful selection of customers and partners, to ensure that the cooperation does not have negative impact on the reputation of the Company.
To assess the reputational risk, the Company takes into account both positive and negative customer feedback (complaints, claims); media information about the Company; the willingness of partners to cooperate with the Company.
Compliance risk is the risk of losses, sanctions that may be imposed on the Company, possibility of damage to its reputation or threats to its future operation if the Company does not comply with or breaches laws and other regulatory acts established by the respective supervisory authorities regulating activities of investment brokerage companies, codes of professional conduct and ethics and other standards of best practice related to the Company activities.
Compliance risk management is regulated by the following main principles:
- The Company performs preventive actions to ensure the timely and thorough identification, documentation and assessment of risks related to the compliance risk;
- Develops internal regulatory documents before the introduction of new products and services;
- Develops standard forms of contracts and examinates non-standard contracts and agreements with counterparties;
- Follows changes of legislative acts of the Republic of Latvia and the European Union related to the Company activities.
- Develops and updates the regulatory framework of the Company in accordance with the internal rules and the FCMC regulations.
In accordance with the Remuneration Policy of the Company, the Supervisory Board determines remuneration for the Executive Board members. In its turn, the Executive Board sets remuneration for employees of the Company. The Remuneration Policy establishes the system of calculations of remuneration of the employees who hold positions affecting the Company profits, which allows to attract high-quality specialists and, at the same time, reduces risks of disproportionate bonuses based on their short-term performance results while evaluating their decisions and transactions in the long run.
Decision on renumeration also includes the remuneration trends in the financial sector.The summarized data on the remuneration of the employees of the Company are provided in the annual report of the Company.