A. Pillar 3 Disclosure
The European Capital Requirements Directive (“CRD”) introduced capital adequacy standards and an associated supervisory framework in the EU based on the Basel II rules. It has been implemented in the United Kingdom by Financial Conduct Authority (“FCA”) through FCA’s Prudential sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”). The framework consists of three ‘pillars’.
The minimum capital required by a firm to meet credit, market and operational risk.
A regular assessment of a firm’s regulatory capital, through a process known as the Internal Capital Adequacy Assessment Process (“ICAAP”), which determines whether the amount of internal capital is sufficient to cover all the risks to which the firm is exposed or whether additional capital needs to be held against the risks not covered in Pillar 1.
This introduces public disclosure of qualitative and quantitative information and is aimed to encourage market discipline by providing market participants access to key information on a firm’s capital, risk exposures and risk management processes.
The rules in BIPRU 11 set out the Pillar 3 requirements. This document is designed to meet the Pillar 3 requirements. The rules permit Polygon Global Partners LLP (“Polygon”) to omit any information that is considered immaterial, such that its omission would be unlikely to change or influence the decision of those relying on that information. In addition, Polygon may omit required disclosures which it regards as proprietary or confidential. Proprietary information is that which may undermine Polygon’s competitive position if it is shared. Information is considered to be confidential where there are obligations binding Polygon to confidentiality with its customers, suppliers and counterparties.
No omissions have been made on the grounds that the relevant information is proprietary or confidential. Certain information has been omitted on the ground that it is immaterial (see the section headed “Items omitted from the Pillar 3 Disclosures”).
2. Scope and application
Polygon is authorised and regulated by the FCA and as such is subject to minimum capital requirements, based on its categorization as a BIPRU firm.
Polygon provides investment management services and other services to various affiliates (“Affiliates”).
Polygon does not form part of a consolidation group for prudential purposes. Polygon was authorised by the Financial Services Authority from 4 May 2011 and became authorised by the FCA on 1 April 2013.
3. Risk Management and the Risk Management Process
Polygon is governed by an Executive Committee. The Risk Committee and Infrastructure Committee report to the Executive Committee and with their input the Executive Committee determines the business strategy and risk appetite for Polygon. The Executive Committee includes Polygon’s Chief Executive Officer (“CEO”).
For various reasons, the Executive Committee considers that from a regulatory capital perspective, Polygon is a relatively low risk organization. For example, Polygon holds no client assets, nor does it take proprietary positions.
Due to the small size of Polygon and its relatively low risk profile, the Executive Committee considers that Polygon does not warrant the need for a separate risk management function within Polygon. Risk management is undertaken by the Risk Committee with the assistance of the CEO together with support from internal compliance, legal and operations teams. In addition, Polygon retains external professional services firms for expert advice and consultation, as and where considered appropriate.
The Executive Committee, through formal and informal meetings, is actively involved in determining Polygon’s business strategy and implementing processes to mitigate risks. Polygon’s risk profile is assessed, as part of the ICAAP process, at least annually and more frequently as and when the need arises, at the discretion of the Executive Committee.
The Executive Committee also determines how the risks Polygon faces may be mitigated and assesses the arrangements to manage those risks on an ongoing basis. The Executive Committee meets both formally and informally to discuss current projections for profitability, cash flow, regulatory capital management, business planning and risk management. The Executive Committee manages Polygon’s business and identifies risks through a framework of policy and procedures taking account of relevant laws, standards, principles and rules (including FCA principles and rules) with the aim of operating a defined and transparent risk management framework. These policies and procedures are updated as required.
The Executive Committee has identified that credit, business and operational, and market risks are the main areas of risk to which Polygon is exposed. The Executive Committee formally review the risks, controls and other risk mitigation arrangements and assesses their effectiveness. Where the Executive Committee identifies material risks, it considers the financial impact of these risks as part of Polygon’s business planning and capital management and concludes whether the amount of regulatory capital is adequate.
4. Credit Risk
Polygon’s clients include certain Affiliates to which it provides investment management services. This may result in a high client concentration risk. Polygon is financially dependent upon its Affiliates. Their continued support is enshrined in their various agreements.
5. Business and Operational Risk
Operational risk is defined by the FCA as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. The Executive Committee has identified relevant risks and related mitigation and controls as part of its ICAAP review.
Polygon has policies and procedures and ongoing operational and related compliance monitoring to help identify weaknesses and potential control failures which are required to be reported promptly when observed to the Executive Committee.
6. Market Risk
The Executive Committee believes that Polygon’s market risk, which include the potential effects of a long term downturn in financial markets and foreign currency exchange risk, would not have a direct material effect on Polygon as it does not take proprietary positions.
7. Regulatory Capital
Polygon’s capital position as at the year ended 31 December 2019 was as follows:
Tier 1 Capital
Total Tier 2 and Tier 3 Capital
Total Available Capital after Deductions
Polygon is a relatively small firm with a simple operational infrastructure. Polygon’s market risk is mainly limited to foreign exchange risk on its foreign currency cash balances. In addition, Polygon is subject to credit risk on management and performance fees receivable from Affiliates. Polygon follows the standardised approach to market risk and the simplified standard approach to credit risk. Polygon is subject to the Fixed Overhead Requirement and is not required to calculate operational risk capital though it considers this as part of its process to identify the level of risk-based capital required.
Polygon is a BIPRU firm for the purposes of the FCA’s capital requirements rules and, as such, its minimum capital requirement is the greatest of:
· The base capital requirement of €50,000;
· The sum of its market and credit risk requirements; and
· The 13 Week Fixed Overheads Requirement (“FOR”).
The Executive Committee considers that the available capital at 31 December 2019 more than adequately exceeds the minimum capital requirement of the FOR.
Polygon’s capital requirements for regulatory purposes as at the year ended 31 December 2019 is summarised as follows:
Base capital requirement
Sum of market and credit risk requirement
Fixed overhead requirement
Total Available Capital after Deductions
As at 31 December 2019, Polygon’s regulatory capital requirement is $4,749 and Polygon’s regulatory capital of $8,515 exceeds the minimum capital requirement by $3,766. As such, Polygon’s regulatory capital exceeds its regulatory capital requirement by 179%.
Items omitted from the Pillar 3 Disclosures
Polygon’s minimum capital requirement under Pillar 1 is driven by its FOR and not the sum of its credit risk and market risk requirements. Polygon has, accordingly, concluded that the detailed disclosure requirements in relation to credit risk and market risk set out in BIPRU 11.5.4R(2)-(4), BIPRU 11.5.5-11.5.13R, and BIPRU 11.5.15R-11.5.16R may be excluded from the Pillar 3 Disclosures on the grounds that they are immaterial (in accordance with BIPRU 11.3.5R).
Polygon does not engage in securitization activity and the securitization disclosures in BIPRU 11.5.17R are not applicable. Polygon has, therefore, concluded that it is permitted to exclude such disclosures from the Pillar 3 Disclosures on the grounds that they are immaterial (in accordance with BIPRU 11.3.5R).
Polygon maintains a written remuneration policy designed to comply with the rules and guidance relating to the FCA’s Remuneration Code as it applies to BIPRU firms (the “Remuneration Rules”). Polygon’s remuneration policy applies to its members and employees whose professional activities have a material impact on Polygon’s risk profile (“Remuneration Code Staff”). Polygon’s Executive Committee oversees Polygon’s remuneration of Remuneration Code Staff.
The total compensation of Remuneration Code Staff is generally structured as a base salary or, in the case of LLP members, a fixed profit allocation and a year-end bonus or, in the case of LLP members, a discretionary profit allocation. The payment of any such year-end bonus or year-end distribution of profits is subject to various conditions and the amount may be zero under certain circumstances. In the case of other Remuneration Code Staff, the amount of any year-end bonus or year-end distribution of profits is entirely discretionary and is based on a number of considerations, including, among other things, the relevant member of staff’s experience and performance in the role, the overall performance of the investment strategy that the employee supports (if applicable), the profitability of the Polygon group, and competitive pay practices and industry benchmarks. The relative weight accorded to each of these factors is also discretionary.
A portion of any year-end bonus or, as the case may be, year-end distribution of profits awarded to Remuneration Code Staff is subject to mandatory deferral. Deferred amounts may be invested in one or more of the private investment funds managed by the Polygon group and/or shares in the Firm’s listed affiliate, Tetragon Financial Group Limited (“Tetragon”). Remuneration Code Staff who voluntarily elect to leave Polygon (other than in connection with retirement) will typically forfeit all or significant portions of their unvested deferred compensation and thus have an economic incentive to remain with Polygon.
Polygon takes into account the specific nature of its own activities (including the nature of its revenues) in conducting any ex-ante risk adjustments to year-end bonuses. Polygon has elected not to make ex-post risk adjustments to year-end bonuses, as permitted under the Remuneration Rules. Polygon may, however, reduce prior year deferred compensation awards under certain circumstances.
All Remuneration Code Staff support Polygon’s investment management activities (Polygon’s only “business area” for purposes of the Remuneration Rules) and either are “senior managers” of Polygon or perform a significant influence function. Certain of the Remuneration Code Staff’s remuneration are paid by Polygon’s Affiliates. The aggregate remuneration awarded to Remuneration Code Staff for purposes of BIPRU 11.5.18R(6) and BIPRU 11.5.18R(7) for the performance year ending 31 December 2019, including year-end bonus awards subject to the deferral policy described above, was approximately £18 million.
C. UK Stewardship Code
Under the FCA’s Conduct of Business Sourcebook (“COBS”), COBS 2.2.3R, Polygon Global Partners LLP (“Polygon”) is required to include on its website a disclosure about the nature of its commitment to the UK Financial Reporting Council’s Stewardship Code (the “Code”) or, where it does not commit to the Code, its alternative investment strategy. The Code is a voluntary code and sets out a number of principles relating to engagement by investors with UK equity issuers.
Polygon acts as the investment manager to certain private investment funds and other accounts (collectively, the “Polygon Funds”). Polygon’s investment strategy is such that the Polygon Funds may hold long positions in equities, including UK equities. The Code is therefore relevant to some aspects of Polygon’s trading on behalf of the Polygon Funds.
While Polygon generally supports the objectives that underlie the Code, it has chosen not to commit to the Code. Polygon’s investment strategy involves the Polygon Funds holding positions in a variety of asset classes and in a variety of jurisdictions globally. Polygon’s approach in relation to engagement with issuers (and members of their management teams) in all of the jurisdictions in which the Polygon Funds invest is determined on a case-by-case basis. Consequently, Polygon does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction.
D. Polygon*: Modern Slavery Statement
*Polygon includes Tetragon Financial Group Limited and its subsidiaries, including Polygon Global Management Limited, TFG UK RE Ltd, and Polygon Global Partners LLP. Polygon Global Partners LLP is authorised and regulated by the UK Financial Conduct Authority.
E. Shareholder Rights Directive
FCA COBS Rule 2.2B.3R requires every FCA authorised asset manager that invests in listed equities to:
(1) develop and publicly disclose on its website, a copy of its engagement policy which includes the content specified in the amended EU Shareholder Rights Directive (Directive 2007/36/EC); and
(2) publicly disclose on an annual basis how its engagement policy has been implemented, including a general description of its voting behaviour, an explanation of its most significant votes and details of its use of the services of proxy advisors,
or, in either case, to publicly disclose a clear and reasoned explanation of why it has chosen not to comply with those requirements.
Polygon Global Partners LLP (“Polygon”) has considered carefully whether it wishes to adopt an engagement policy and to make the disclosures described above and has, for the time being, decided not to do so. The reason that it has made that decision is that Polygon manages assets in accordance with a strategy that involves a wide variety of assets and timeframes. For the portion that is more focussed on equities, the relevant exposure to equities is often obtained through swap positions (particularly in relation to European issuers, which represents Polygon’s main geographical focus). Where equities exposures are held via a swap position, the opportunities for shareholder engagement are more limited, when compared with physical shareholdings (for example, a swap holder is not entitled to vote at general meetings of the issuer). Therefore, while Polygon supports the general principles of shareholder engagement, it does not at this time (for the reasons set out above) consider it appropriate to adopt an engagement policy or make the relevant public disclosures. Polygon will keep its position under review and will update this section of its website accordingly, if there is a change in its approach.