Pillar 3 disclosure - 2021

December 31, 2022

TFS-ICAP Limited







1.1       Background

The Investment Firms Prudential Regime ("IFPR") came into force from 1 January 2022 and is applicable to the UK incorporated, FCA regulated entity TFS-ICAP Limited("TFS-ICAP" or "the Firm").  The IFPR requirements have been incorporated into UK regulation in the MIFIDPRU sourcebook section of the FCA handbook.  According to MIFIDPRU 8 a firm's accounting reference date sets the date for reporting and, per MIFIDPRU TP 12 transitional arrangements, the first date that TFS-ICAP will report under IFPR will be 31 December 2022.  For 31 December 2021 year-end TFS-ICAP will continue to report under the Capital Requirements Regulation ("CRR") and Capital Requirements Directive ("CRD"), together referred to as "CRD IV".


A revised regulatory capital adequacy framework, Capital Requirements Regulation ("CRR") and Capital Requirements Directive ("CRD"), together referred to as "CRD IV", came into effect on 1 January 2014.


CRD IV has been implemented in the UK for investment firms by the Financial Conduct Authority ("FCA") Handbook, specifically the Prudential Sourcebook for Investment Firms ("IFPRU").


The regulatory framework established by CRD IV consists of three Pillars:


  1. Pillar 1 sets out the minimum capital required to meet a firm's credit, market and operational risk;


  1. Pillar 2 requires a firm to establish an Internal Capital Adequacy Assessment Process ("ICAAP") to establish whether its Pillar 1 capital requirement is sufficient to cover all the risks faced by the firm, and if not, to calculate the additional capital required.  The ICAAP is then subject to review by the, FCA through the Supervisory Review and Evaluation Process ("SREP"); and


  1. Pillar 3 requires a firm to disclose specific information concerning its risk management policies and procedures, and its regulatory capital adequacy position.



Articles 431 to 455 of Capital Requirements Regulation ("CRR") set out the specific disclosure requirements and the purpose of this document is for TFS-ICAP to meet these requirements.


1.2       Disclosure Policy

In accordance with CRR Article 431(3) TFS-ICAP has adopted a formal disclosure policy to comply with the disclosure requirements and has policies for assessing the appropriateness of the disclosures, including their verification and frequency.


Under CRR Article 432(1) an entity may omit one or more of the required disclosures if the information is not material, that is that the information would not be likely to change or influence the decision of a user relying on that information for the purposes of making an economic decision.


Under CRR Article 432(2) an entity may omit one of more of the required disclosures if they would require the disclosure of any information regarded as proprietary or confidential that is information which would, respectively, undermine a competitive position or breach an obligation of confidence between a firm and its customers.

In accordance with CRR Articles 433 and 434, TFS-ICAP will publish this disclosure at least annually on the website.




2.1       Management and Control


TFS-ICAP is a joint venture between TFS2 SA, Nex International Limited and Ltd. These entities exercise combined control over TFS-ICAP Limited.


TFS-ICAP is provided with administrative support services by Tradition Management Services Limited ("TMS") under a services agreement.


TFS-ICAP has created a governance and control framework that sets out the way in which the formal Board and Committee structure and approval systems operate. The framework covers policy, risk appetite, business performance, limits setting, delegation of levels of authority, capital management and assurance mechanisms.


The governance and controls structure for TFS-ICAP is based on the following lines of defence:


  • First line - process owners and the management functions which have primary responsibility for the assessment and monitoring of their own risks; and
  • Second line - support functions which provide the business with specialist support in analysing risks and monitoring controls.


The board of TFS-ICAP ("the Board") provides the following governance and oversight:


  • Setting appropriate risk strategy and risk appetite;
  • Promoting internal risk culture and risk awareness;
  • Monitoring the implementation of the risk strategy;
  • Ensuring the independence of the control functions such as Compliance and Risk Management; and
  • Verifying that independent control functions operate correctly.


Details regarding members of the Board and their other UK directorships are available from Companies House.


The Board is supported by two functional committees that meet monthly, the Oversight Committee and the Management Committee.


The purpose of the Management Committee is to consider any matters relating to:

  • risk and controls;
  • capital and liquidity;
  • regulation and compliance; and
  • culture and conduct.


The purpose of the Oversight Committee is to consider any matters relating to the support services provided to TFS-ICAP Ltd, including those provided by Tradition.


The Oversight Committee is made up of Independent Non-Executive Board members and the Management Committee is made up of representatives from senior management and Independent Non-Executive Board members.  Members of TMS as service provider are invited to attend as required.


The Firm does not have a dedicated Risk Committee but risk is an agenda item at each quarterly Board meeting.   The CRO presents a risk report, with associated management information, to the Board at each quarterly meeting.


The Firm has a Remuneration Committee made up of Non-Executive directors; its role is to assist and make recommendations to the Board of TFS-ICAP to better enable it to discharge its responsibility to oversee the remuneration policies, structures and practices of TFS-ICAP to ensure that:



a) individuals are rewarded fairly and responsibly having regard to their role and performance; and

b) those policies, structures and practices, particularly in the context of performance related or variable remuneration, are in line with the Board's standards on governance and risk, its strategic objectives, customer and shareholder interests and applicable laws and regulations.


2.2       Governance and Control Framework

The governance framework is based upon the concept of internal lines of defence against risk. This concept aims to ensure that accountability for the management of risk is embedded in day-to-day management.


The First Line of Defence

The first line of defence consists of operations and business process owners across the Firm who have primary responsibility for their Risk and Control Self-Assessment ("RCSA"). They act as risk owners with a responsibility to be proactive in reducing the likelihood and severity of incidents, including establishing appropriate risk controls and ensuring that when incidents occur they are recorded, reported and remediated where appropriate.


The day-to-day management of certain controls are delegated to a number of support functions which support the first line of defence business and operational management.  These support functions include, but are not limited to:  Finance, IT, Legal, HR, Facilities and Front Office Risk and Control ("FORC").


The Second Line of Defence

The second line of defence consists of the risk and control functions that establish overarching systems and processes to assess, monitor and minimise risks across the Firm, overseeing the effectiveness of the first line risk management and control environment, and where necessary defining additional controls, mitigation or other risk management measures.  The second line is responsible for challenging and formally reviewing the effectiveness of the first line in managing the risks that it incurs and owns.


This role is primarily performed by the control functions and senior managers described below:


Risk Function- The Chief Risk Officer has a reporting line to the Board.  The Risk Function is responsible for the measurement, monitoring and reporting of risks within TFS-ICAP and for driving the development of risk management capability and the Firm's Enterprise-wide Risk Management Framework.


ComplianceFunction-The Compliance Officer has a reporting line to the Board.  The objective of compliance is to monitor adherence to all regulatory rules and requirements and to ensure that all regulatory issues are effectively monitored and managed.


The Firm does not have an Internal Audit function which the Board considers to be appropriate given the straight-forward nature, small scale and lack of complexity of TFS-ICAP's activity.



2.3       Risk Management

The objectives of enterprise-wide risk management for TFS-ICAP are:

  • To identify and assess the risks inherent within the Firm's activities;
  • To identify, implement, assess and monitor mitigation strategies in order to reduce TFS-ICAP's risk exposure;
  • To alert the Board of any substantive threats to its risk appetite;
  • To identify, record and analyse risk events;
  • To monitor key risks and report on their threat levels;
  • To ensure that issues identified internally or by third parties are recorded, remediated, escalated and reported;
  • To ensure that the various components of the Enterprise-wide Risk Management Framework are integrated and cohesive);
  • To provide senior management with risk-related information in order to encourage risk-informed decision making;
  • To embed a robust risk management culture within TFS-ICAP; and
  • To contribute to the risk-based quantification of regulatory capital and to the continuous improvement of the management of the Firm's capital requirements.


2.4       Risk Categorisation and Profile

Risk categories of relevance for TFS-ICAP include the following:


          i.Credit Risk

The Finance Function assesses and manages the cash held with banks and the commission receivables from customers in order to assess and monitor overdue receivables.  Where recovery of all or part of amounts due is in doubt, Finance is responsible for establishing provisions so that balance sheet values fairly reflect potential credit losses.  The Finance Function has an agreed methodology that is used and is aligned with applicable accounting and regulatory requirements. 



TFS-ICAP has not experienced any significant credit losses.  The universe of core clients of TFS-ICAP is primarily comprised of banks and financial institutions. 



              ii.Market Risk

TFS-ICAP is exposed to foreign currency risk that arises through its normal operating activities, which generate receivables and payables in foreign currencies.  In addition to GBP, revenue is principally earned in EUR and USD and to a lesser degree in other currencies.  Foreign currency risk is analysed and managed by the Finance Function; the risk is minimised by conversion of currency balances into GBP as appropriate, as well as the use of FX forward contracts to hedge residual exposures.  



            iii.Operational Risk

TFS-ICAP follows the Basel Committee definition for operational risk - the risk of loss caused by human error, ineffective or inadequately designed processes, system failure or improper conduct (including criminal activity).


TFS-ICAP can experience operational risk losses in its day-to-day business from errors, penalties and differences in broking activities which are considered normal in a wholesale brokerage business. 


Operational risk incidents are collected in the enterprise-wide risk management system (OneSumX) thus creating a database for analysis.


TFS-ICAP seeks to minimise operational risks by putting in place robust internal risk management and business controls.  TFS-ICAP uses the compliance function to reinforce and oversee the operation of these controls.  TFS-ICAP also aims to minimise operational risk at all times through a robust control and operational infrastructure governed by an operational risk management framework that includes:


  • measuring risk and assessment of the risk mitigation in place: achieved through the application of a regular risk and control self-assessment, and scenario analysis which forms part of the annual capital quantification process; and


  • on-going management and monitoring of risks: achieved through management information reporting on incidents, KRIs and risk appetite.


Historical losses associated with operational risk events are well within TFS-ICAP's minimum regulatory capital requirement for operational risk.



             iv.Regulatory Risk

Whilst TFS-ICAP management remain ultimately responsible for overall compliance with legal and regulatory requirements, the Compliance Function has the day-to-day responsibility for ensuring that an appropriate regulatory risk framework is in place and that regulatory risk is identified, assessed and managed.  The scope for regulatory risk covers the risk of material loss, reputational damage or liability arising from a failure to comply with the requirements of the Firm's lead regulator, the Financial Conduct Authority, other regulatory bodies and related codes of best practice that oversee regulated financial services businesses.


TFS-ICAP is subject to legal and regulatory obligations designed to restrict the ability of criminals to launder the proceeds of their crimes through the financial system. The Compliance Function also has the supervisory and advisory responsibility for ensuring that appropriate organisational arrangements are in place to undertake and monitor Anti Money Laundering activities.


              v.Strategic/Business Risk

TFS-ICAP is exposed to risk arising from changes in its business environment, including the risk that it may not be able to carry out its business plans and its desired strategy.  These risks are material, as failed entry to new markets and products, failed acquisitions or late adoption of technology can be costly.


             vi.             Liquidity Risk

Liquidity risk is the risk that TFS-ICAP is not able to meet its liabilities as they fall due, is unable to maintain access to effective and stable sources of funding, or that in order to meet liabilities it is obliged to sell assets at prices that lead to mark-to-market losses.


Balance sheet liquidity risk arises from changes in the profile of the Firm's current assets and liabilities (its working capital).  These may result from changes in foreign exchange rates, the rate at which receivables are collected or payables are settled, unexpected costs for example from a broker error or operational failure, or from changes in financing arrangements.  Balance sheet liquidity risk is monitored and managed by the Finance Function.



2.5          Board statement on risk management arrangements


The Board confirms that the risk management arrangements of TFS-ICAP provide assurance that the risk management systems put in place are adequate with regard to the Firm's profile and strategy.



2.6          Board statement on risk profile


TFS-ICAP does not perform any proprietary trading and its risk profile centres on arranging options trades for clients, operating an Organised Trading Facility ("OTF") and providing data.  It is exposed to operational risk of interruption to or inaccuracy or incompleteness in provision of these services.  The business strategy is predicated on delivering excellent client service and maintaining client trust.  The Board adopts a conservative approach and sets low tolerance for risks that could materially impact the business strategy.




3.1       Business Activity


As a wholesale broker TFS-ICAP operates as an intermediary in the financial markets facilitating the trading activity of customers, particularly commercial and investment banks, in derivative products, principally options.  The broking activity covers options across a range of asset classes, currencies and geographies.  


TFS-ICAP provides brokerage services on an arranging basis.


Supporting its voice broking activity, TFS-ICAP also provides customers with access to the Volbroker electronic broking system and operates the Tradition-NEX Currency Options OTF Trading Platform.


In addition to its brokerage services, TFS-ICAP offers a variety of market information services through its market data division which provides real-time price information to clients and data providers.



3.2       Regulatory Classification

TFS-ICAP is a Limited Licence firm, as defined under CRR Article 95(1) and from 1 January 20212 is categorised as a non-SNI MIFIDPRU firm under IFPR; it was previously an IFPRU 730k firm.



3.3       Internal Capital Adequacy Assessment Process


Capital and liquidity are managed through budgeting, forecasting and monthly capital reporting.  The Firm's Internal Capital Adequacy Risk Assessment process (ICARA from 2022, previously ICAAP) is reviewed annually by the Board.


Scenario analysis is performed to assess the potential impact of identified risks to the Firm's business model.  The Board maintains robust governance processes to maintain capital and liquidity resources that are prudent and appropriate to the aggregate anticipated risks of its business activities.




Outlined in the following sections are the own funds (capital resources) and own funds requirements (regulatory capital requirements) for TFS-ICAP.


4.1       Capital Ratios

Under CRR, TFS-ICAP must, at all times, satisfy the following own funds requirements:


a)       Common Equity Tier 1 capital ratio of 4.5%

b)       Tier 1 capital ratio of 6%

c)       Total capital ratio of 8%.


CRR requires these ratios to be calculated using total exposure amounts, which are equivalent to the Pillar 1 requirements multiplied by a factor of 12.5.


At 31 December 2021, the total own funds, own funds requirements and capital ratios of TFS-ICAP were as follows:


Own funds

as at 31 December 2021




Common equity Tier 1 capital


Tier 1 capital


Tier 2 capital


Own funds/ Total capital resources


Own funds requirement

as at 31 December 2021





Credit risk exposure amount


Market risk exposure amount


Settlement risk exposure amount



Fixed overhead risk exposure amount


Total Risk Weighted Assets (RWA)





Pillar 1 Capital Requirement*



Capital ratios based on Pillar 1

Common equity Tier 1 capital ratio ( 4.5% minimum)


Tier 1 capital ratio ( 6% minimum)


Total capital ratio ( 8% minimum)



*The Pillar 1 capital requirement for TFS-ICAP as a limited licence firm is the higher of the sum of credit risk and market risk exposures, and the fixed overhead risk exposure. 






The following disclosures specified in CRR are not applicable to TFS-ICAP:


- Article 440 - TFS-ICAP is not currently required to hold any capital buffer;

- Article 441 - TFS-ICAP is not designated an institution of global systemic importance;

- Article 449 - TFS-ICAP does not securitise assets;

- Article 451 - TFS-ICAP is not currently required to comply with the leverage ratio requirements;

- Article 452 - TFS-ICAP is not subject to the standardised approach to credit risk, not the IRB approach for Pillar 1 credit risk charge;

- Article 454 - No TFS-ICAP has not adopted the AMA approach for calculating operational risk exposure (as the Firm is not subject to a Pillar 1 operational risk charge); and

- Article 455 - TFS-ICAP does not use an internal model to calculate Pillar 1 market risk exposure.





Pillar 3 Disclosures on Remuneration - 2021


In accordance with the CRR Article 450 a firm must disclose, at least annually, information regarding its remuneration policy and practices for those categories of staff whose professional activities have a material impact on its risk profile.  The following disclosure for TFS-ICAP provides the information required and that applicable for the Remuneration Code Proportionality level three firms.


  1. 1.      Information concerning the decision-making process used for determining the remuneration policy, including if applicable, information about the composition and the mandate of a remuneration committee, the external consultant whose services have been used for the determination of the remuneration policy and the role of the relevant stakeholders


TFS-ICAP's remuneration policy sets out the policies, practices and procedures applicable to all TFS-ICAP employees designed to discourage excessive risk taking behaviour and ensure remuneration is consistent and commensurate to performance.


TFS-ICAP's Remuneration Committee (as explained in Section 2.1 above) is entrusted with reviewing the operation and effectiveness of the remuneration policy for the Firm. 


During 2021 TFS-ICAP did not use the services of an external consultant in determining its remuneration policy. 


  1. 2.      Information on the link between pay and performance


Composition of remuneration

The remuneration paid to TFS-ICAP employees comprises fixed salary, variable pay in the form of bonuses, non-contributory pension and benefits in kind.


General performance review

All members of staff are subject to a performance review in connection with the setting and adjustment of remuneration.  Performance is assessed by reference to appraisals, compliance with internal HR and Compliance policies and regulation and contractual performance clauses.


In addition, from time to time, an independent benchmarking exercise is carried out to ensure that TFS-ICAP compensation and benefits packages are appropriate and in line with industry peers.



Discretionary - Monthly/quarterly/biannual/annual (depending on the contractual provision) bonuses are allocated by senior management.  Factors considered include the employee's ability, performance and conduct, his/her personal contribution (often within a team environment), the profitability of the employee's particular desk or business area (if applicable), and the overall profitability of the firm.


Formulaic - Many broking staff receive variable remuneration pursuant to a contractually-specified formula.  Such formulae are devised pursuant to experience and market practice, and are the subject of regular review.


Management percentage - So as to incentivise good management, certain front office managers receive whole or part of their variable remuneration based on the profitability of the business area(s) for which they have responsibility.  The calculations are based on net profits (following deduction of all attributed costs) and are paid out at the frequency of the broking staff in their business area(s).  Senior management performance is also rewarded in the context of the strength or weakness of TFS-ICAP's performance in the relevant period and anticipated market conditions.


  1. 3.      Aggregate quantitative information on remuneration, broken down by business area


Broking staff: £10.0m (2020 £11.2m)


Non-broking staff are employed and remunerated in Tradition Management Services Limited; proportionate costs are recharged under the terms of the outsourced services contract between the Firm and TMS.



  1. 4.      Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm


Remuneration Code staff: £1.1m (2020: £4.5m)