Risk Management

Principles of risk management

Risk management is integral to the management of the ICECAPITAL Group’s operations in terms of both decision-making and internal control. As an investment services company, ICECAPITAL is committed to following sound risk management policies and to actively identifying any material risks related to its operations. This commitment also applies to all of the company’s employees and especially to the partners. The objective is to minimize the probability of unexpected losses, as well as any factors that could have a detrimental impact on the company’s reputation. The board of directors approves the Group’s risk management policies and has appointed specific people to be responsible for risk management and control. The Group’s risk management policies follow the regulations and standards of the Finnish Financial Supervisory Authority.

The Group’s risk management has some special characteristics, as explained below.

The organizational structure is flatter than in many other companies. Each employee has one of the company’s partners as his or her superior. All significant financial decisions and commitments are made by the partners. With members of the executive management actively involved in the details of day-to-day decision-making, the company has not adopted an audit function completely independent of any risk-exposed activity. Similarly, the IT function and its development have not been separated from other functions.

The Group’s business areas (investment banking, asset management, private equity funds and securities brokerage) are fee-based. Therefore, the company avoids taking risk positions. The company also follows a policy of low risk exposure when investing its own assets.

Capital adequacy

As an investment services company, ICECAPITAL Securities Ltd has observed, with minor exceptions, the same capital adequacy regulations as commercial banks observe, known as Basel II. According to current regulations, the capital adequacy ratio – that is, the ratio of own assets to the total of risk-weighted receivables and contingent liabilities – must be at least eight per cent. The Group’s Pillar 1 capital adequacy ratio was 67.6% on 31 December 2009, compared to 38% on 31 December 2008.

ICECAPITAL has drawn up a capital adequacy plan in accordance with the revised capital adequacy regulations, which describes the Group’s risk-based capital needs, sufficiency of capital and solvency. The company aims to maintain a capital adequacy ratio at least double that required.

Credit risk

Realization of a credit risk means that a counterparty has failed to fulfill its financial contractual obligations. The Group’s counterparties include co-operation partners and customers who purchase its services. The Group does not grant actual credit. The impact of credit risk on the company’s own assets is minor, given the solvency and well-established position of the Group’s customers. The Group had no substantial overdue commission receivables from customers at year end.

Market risks

Market risks arise from investments in the equity, fixed income, currency, real estate and alternative investment markets. Changes in the market value of such investments have a direct impact on the company’s market value and, to a great extent, on its income statement and balance sheet. The company’s assets have been conservatively invested in instruments of low risk exposure, with a long-term ownership span. Sufficiency of equity has been taken into account in all investment activities.  Market and credit risk are taken into account in the statutory capital adequacy framework.

Liquidity risk

For ICECAPITAL, the practical meaning of liquidity risk, also known as financing risk, would be the company’s cash and cash equivalents being insufficient and no additional financing being available. The ICECAPITAL Group is solvent and aims to minimize its liquidity risk in accordance with its capital adequacy objectives. The bulk of the company’s assets are held in short-term fixed income funds redeemable at one day’s notice. Moreover, since the Group has relatively steady and predictable cash outflows, it can prepare well for its liquidity needs.

Operational risks

If they materialize, operational risks cause losses and tarnish the company’s reputation as a result of inadequate or incorrect routines, processes or conduct, or through unexpected external events. We take a broad view of operational risks and consider them to include human error and misconduct, as well as legal risks arising from unexpected interpretations of contracts or unforeseen amendments to legislation. All employees – partners, in particular – must take operational risks into account in their work. The Group’s expenses from operational risks have been low to date. We perform on-going preventive work to avoid operational risks. In addition, the ICECAPITAL Group has taken out comprehensive insurance to cover losses caused by mistakes, misconduct and criminal activity. Contingency planning keeps the Group prepared for any major interference in operations.

Business risk

Business risks include all factors that may jeopardize or prevent the achievement of the Group’s strategic objectives.

Every profitable business involves shareholder risk. The Group does not, for example, refrain from forming an opinion about new products and services, even if their future demand is uncertain. One of our core competencies is predicting the future needs of investors and companies before others do. The Group’s partners carry out comprehensive assessments to determine the maximum risk before deciding on each significant/major investment.

International risks

The ICECAPITAL Group’s international risks are mainly limited to the real estate private equity fund established in Russia in 2007. The Group plans to continue business in neighboring regions. External investors carry the risk for losses in these operations as well – naturally, with the hope of future profits. Understandably, any substantial losses incurred in emerging markets would have a detrimental impact on the company’s reputation. The Group’s asset management business has also expanded to Sweden, Norway and Denmark. The capital committed to these operations is reasonable with respect to the Group’s capital adequacy, but would not endanger the continuity of business, even if the risks were realized.