Marshall Wace

Pillar 3 Disclosure

Marshall Wace LLP

Capital Requirements Directive - Pillar 3 Disclosures

1. Background

The European Union’s Capital Requirements Directive (“CRD”) came into effect on 1 January 2007 and introduced a set of revised regulatory capital adequacy standards and associated supervisory framework across the European Union based on the Basel II Accord. The Basel II Accord comprises recommendations issued by the Basel Committee on Banking Supervision which aimed to create an international standard that banking regulators can use when creating regulations about the amount of capital banks need to put aside to guard against various financial and operational risks. The predecessor of the Financial Conduct Authority (the “FCA”) implemented the CRD in the United Kingdom.

The CRD uses the concept of three pillars that also form the basis of the Basel II Accord and extends the requirements to cover a wide range of financial institutions. These three pillars are also embedded in the FCA’s rules that implement the CRD.

Pillar 1 specifies the minimum capital resources which the UK consolidation group (the “group” as that term is defined in the FCA Handbook of Rules and Guidance (the “Handbook”)), of which Marshall Wace LLP (the “firm”) is a member, is required to hold. For the group this is the higher of the sum of its consolidated market and consolidated credit risk requirements and its consolidated fixed overhead requirement.

Pillar 2 sets out the review process to be used to determine whether additional capital should be held by the group against any risks not adequately covered by Pillar 1. Under Pillar 2 the group is required to analyse a wide range of risks to its business and then consider whether the mitigation in place to address these risks is sufficient or whether additional capital in excess of that available under Pillar 1 is required to provide a buffer against specific risks. This procedure forms part of the group’s Internal Capital Adequacy Assessment Process (“ICAAP”) which is performed at least annually.

Pillar 3 requires the firm to develop a set of disclosure requirements which enable market participants to assess information on the risks facing the firm, its capital resources and risk management procedures.

Unless otherwise stated all information is at 31 January 2017.

Scope of disclosure

Marshall Wace LLP is a member of a UK consolidation group and the disclosures provided in this document have been prepared on a consolidated basis for this group.

Marshall Wace LLP is an Alternative Investment Fund Manager, manages or advises a range of offshore funds and segregated accounts and is authorised to act as a UCITS manager, It, along with the other principal members of its group (namely Marshall Wace Asset Management Limited, which is the managing member of the firm and MWAM UK Limited, their immediate holding company), is the focus of this disclosure.  The financial position and risks associated with other members of the group are not considered to be of consequence.  Marshall Wace LLP is authorised and regulated by the Financial Conduct Authority.  Its FCA Part 4A permission does not allow it to hold client money nor may it deal in investments as principal.

2. Risk management objectives and policies

The group’s approach to risk management is predicated on the need to manage the full range of risks facing the group including operational, business, liquidity, credit and market risks including those that may arise as a result of its affiliation with companies in Hong Kong, the US and Ireland. The group’s overriding aim in this area is to minimise the risks to the group’s clients, its counterparties and other stakeholders and to ensure it remains in full compliance with regulatory and legal requirements.

The group’s risk management framework incorporates an analysis of the impact of each material risk on the business, the probability of each risk occurring and the procedures in place in mitigation. This risk management framework is a core component of the firm’s high level systems and controls arrangements and ensures all areas of the business are subject to senior management oversight.

Risk Appetite

The group has employed the guidelines for each risk type set out in the Handbook in order to evaluate each of the major risks it faces having regard to the relevance of each such risk type to it and its business. The group has set its risk appetite at a maximum level of “medium” and has designed its controls to match this risk appetite. Where medium/high and high risks have been identified the group has introduced enhanced controls and monitoring to mitigate those risks.

Operational Risk

Operational risk is defined by the group as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The group’s risk management framework emphasises operational risk and its management and senior management review all aspects of the business on a regular basis to ensure operational risks have been identified and effective controls put in place to mitigate the risks identified so the combination of the impact assessment and probability of each risk is kept to an acceptable level.

The risk management framework is supported by a wide range of real-time management information systems that monitor performance against key performance indicators. The firm has embedded within its business processes, at all levels, robust and effective risk management processes that are subject to regular appraisal. These appraisals are supported and enhanced by independent and risk orientated monitoring procedures, the output from which is communicated to senior management through regular reports.

Business Risk

Business risk is the risk of loss inherent in the group’s operating, business and industry environment. The group’s main business risk relates to a possible fall in assets under management and a consequent diminution in investment management fees. This exposure is mitigated, to a certain extent, by having a range of funds with substantially differing geographical and return profiles, varying volatility and non-correlated return characteristics.

Liquidity Risk

The risks attendant to the group’s involvement with other entities with which it is associated are closely monitored. The group maintains sufficient surplus cash to meet its working capital requirements and other immediate requirements that can reasonably be foreseen. The risk that the business will be unable to meet its financial obligations as they fall due is not considered material for the purposes of this disclosure.

Credit Risk

In the case of segregated accounts, provision for the non-payment of fees is governed by the firm’s agreements with these clients, the terms of which are subject to confidentiality clauses.  The risk of the non-payment of investment management fees arising from the firm’s management of a range of offshore funds is mitigated by the funds’ appointment of an independent administrator.  The group is not subject to the FCA’s large exposures regime.  In the case of bank deposits, money is only deposited with highly rated approved counterparties.

Market Risk

The group’s market risk is limited to exposure to foreign exchange fluctuations as a result of certain assets and liabilities being denominated in currencies other than sterling. The group’s exposure to currency risk is actively controlled through sales of foreign exchange and/or the adoption of hedging strategies.

3. Capital resources

Pillar 1

At 31 January 2017 the group had capital resources of £91.0 million which was comprised solely of Tier 1 capital.  The firm had no ‘innovative Tier 1’ instruments. 

In accordance with the FCA’s prudential rules the sum of the group’s consolidated credit risk requirement and consolidated market risk requirement has been determined as being the capital required to be held under Pillar 1.

Pillar 2

The capital required under Pillar 2 is the sum of the capital required under Pillar 1 plus any additional capital required to be maintained against risks not adequately covered by Pillar 1 capital.  The group’s overall approach to assessing the adequacy of its internal capital is set out in its ICAAP.  The ICAAP involves consideration of a range of risks faced by the group and determines the level of capital needed to cover these risks.  The level of capital required by the group to cover identified risks is a function of their impact and probability and risk mitigation controls in place.  The group believes it has taken a prudent approach to its Pillar 2 calculations and that both its capital resources and their solvency are sufficient to meet the group’s operational and other risk requirements and that these capital resources are also adequate to support its operations without any need for additional injections of capital over the period considered within the business plan forecasts contained within the ICAAP. Stress and scenario tests performed during the ICAAP support management’s view that adequate capital is held by the firm under Pillar 2. 

4. FCA Remuneration Code (the “Code”)

Marshall Wace LLP is a proportionality level three firm, as described in the FCA’s General Guidance on Proportionality dated September 2012, for the purpose of the Code.  The other entities within the UK consolidation group of which the firm is a member are not considered relevant for the purpose of the disclosure requirements of BIPRU 11.5.18R in view of the limited nature of their activities (albeit they are subject to the Code’s provisions).  This disclosure relates to the 12 month period ended 28 February 2017.

The remuneration policy is the responsibility of the Management Committee (the “MC”) of Marshall Wace LLP. The MC oversees the remuneration governance framework and ensures that remuneration arrangements are consistent with, and promote, effective risk management (the agency nature of the business of the firm does not place its balance sheet directly at risk).

The MC considers remuneration in the context of a wider agenda including retention, recruitment, motivation and talent development and the external market environment. It also receives updates on regulatory developments and general remuneration issues, as well as market and benchmarking data. The MC sets and monitors the remuneration policy standards and monitors compliance with them. A committee of the MC, formed of the capital members of the partnership, determines the amount and composition of the total remuneration paid under this policy (with additional input provided by the Marshall Wace compliance, human resources and finance functions).

Information on the link between pay and performance

The various components of total remuneration (which comprise base salary, variable bonus and benefits) are considered and are balanced appropriately having regard to the role fulfilled by each particular individual.

Firm, business area and individual performance are the significant contributors to the determination of variable bonus awards. The principal objective in determining variable bonus awards is to reward individual performance whilst ensuring that such payments are warranted given business results. In this context performance can include financial and non-financial measures, risk measures and other relevant factors. There is a focus on differentiation so that any rewards are determined according to the contribution of individuals and teams. Bonus pools and individual awards are subject to the governance of the MC and it is possible that in any year no variable bonus will be awarded.

There are deferral arrangements in place the purpose of which is to support a performance culture where employees recognise the importance of sustainable (and sustained) firm and individual performance. The payment of a significant proportion of the performance award for those in receipt of a variable compensation award above a level set at the discretion of the MC may be required to be deferred and the sum involved invested in funds managed by the firm which vest at a future point in time. This arrangement encourages sound risk management whilst aligning the longer-term interests of participants with those of investors.

Quantitative information on remuneration

Marshall Wace LLP only has one "business area", namely its asset management business. All of the Firm’s relevant staff in respect of whom it is required to make a Pillar 3 remuneration disclosure fall into the "senior management" category (in accordance with applicable FCA guidance, the firm does not have any "risk takers"). The total "remuneration" (as defined in the FCA Rules) awarded to the firm’s senior management during the year to 28 February 2017 was £68.6 million. 


The information contained in this document has not been audited by the group’s external auditors and does not constitute any form of financial statement and should not be relied upon in making any judgement on the group. The risks identified in this disclosure may not include all of the risks the group faces. Reliance should not be placed on these disclosures as to the effectiveness or otherwise of the group’s internal control environment.