INTRODUCTION

The Capital Requirements Directive (“CRD”) and the Alternative Investment Fund Management Directive (“AIFMD”) of the European Union establish a revised regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain.

In the United Kingdom, the CRD and AIFMD have been implemented by the Financial Conduct Authority (“FCA”) in its regulations through the General Prudential Sourcebook (“GENPRU”), the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”), the Interim Prudential Sourcebook for Investment Business (“IPRU (INV)”).

The CRD consists of three ‘Pillars’:

• Pillar 1 sets out the minimum capital amount that meets the Firm’s credit, market and operational risk capital requirement;

• Pillar 2 requires the Firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet Pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks that it may be exposed to; and

• Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline.

The AIFMD adds further capital requirements based on the Alternative Investment Fund (“AIF”) assets under management and professional liability risks.

The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet our Pillar 3 obligations.

The Pillar 3 disclosure document has been prepared by East X in accordance with the requirements of BIPRU 11 and is verified by East X’s Management Committee. Unless otherwise stated, all figures are as at the 31 March 2021 financial year-end.

Pillar 3 disclosures will be issued on an annual basis after the year end and published as soon as practical with the annual accounts.

BACKGROUND TO THE FIRM

East X LLP (“East X”) is authorised and regulated in the UK by the FCA (FRN 927277) and as such is subject to minimum regulatory capital requirements. The Firm is categorised by the FCA, for capital purposes, as a collective portfolio management investment (“CPMI”) firm. East X is not a member of a group and so is not required to prepare consolidated reporting for prudential purposes. East X manages two funds.

RISK MANAGEMENT

The Firm is governed by its Senior Managers ("Senior Managers"), who determine its business strategy and risk appetite. They are also responsible for ensuring strong governance and risk management.

As part of the risk assessment, the Senior Managers consider financial exposures, potential operational issues as well as baseline and downside performance.

The Senior Managers manage risk though a framework of policies and procedures that consider relevant laws, standards, principles and rules.

East X LLP is a Limited Liability Partnership registered in England and Wales, Partnership Number OC431086

East X LLP is authorised and regulated by the Financial Conduct Authority (FRN 927277)

East X has clearly documented policies and procedures (these are contained in the Firm’s Compliance Policies and Procedures Manual), which are designed to minimise risks to the Firm and all staff are required to confirm that they have read and understood them.

East X undertakes an ICAAP at least annually. It is the process through which the Firm identifies and manages its key risks on an on-going basis. The process is forward looking and is an integral part of the management of the Firm. The ICAAP identifies the major sources of risk to the regulated entity, how the Firm intends to deal with those risks and details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required. East X also carries out regular assessments of the types and distribution of financial resources, capital resources and internal capital, which are documented in the ICAAP.

RISKS

East X conducted an analysis of potential sources of risk as identified in GENPRU 1.2.30 and the following risks have been identified:

CREDIT RISK

Credit risk is defined as the risk of loss caused by the failure of a counterparty to perform its contractual obligations. A factor which may contribute to increased credit risk is concentration of assets held with a single counterparty.

Given the nature of the relationship between East X and its client(s), it is very unlikely that there is any credit risk.

MARKET RISK

Market risk is the risk of any impact upon the firm’s financial condition due to fluctuations in values of, or income from, assets or in interest or exchange rates.

The Firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP. The Firm’s foreign exchange risk therefore would only arise in respect of its accounts receivable and cash balances held in currencies other than GBP.

No specific strategies are adopted to mitigate the risk of currency fluctuations.

OPERATIONAL RISK

Operational risk is defined as the risk of loss due to system breakdowns, internal and operational control failures, staff fraud or misconduct, and catastrophes.

Given the nature, scale and complexities of the Firm’s current business, the risk management structure is relatively simple. The Firm manages the risks of the Firm through periodic receipt of management information on the Firm’s financial position, capital adequacy and compliance with the various rules and regulations to which the Firm is subject.

BUSINESS RISK

A considerable part of the Firm’s risk is the risk of a downturn in business. The main concerns of the Firm relate to poor performance of the Fund and redemptions.

Risk of Poor Investment Decisions/Investment Performance.

The Investment Team at East X has considerable experience managing portfolios. The Firm will continuously strive to improve standards of investment practice and knowledge to guard against the risk.

The Firm has appropriate fund wind down procedures in place in the even this should occur.

East X LLP is a Limited Liability Partnership registered in England and Wales, Partnership Number OC431086

East X LLP is authorised and regulated by the Financial Conduct Authority (FRN 927277)

REPUTATIONAL RISK

Reputational risk is defined as the risk of damage to the Firm’s reputation that could lead to negative publicity, costly litigation, a decline in the customer base or the exit of key staff members and therefore directly or indirectly leading to a loss of revenue. There is some overlap between reputational risks and business risks since both can result in the loss of clients and a reduction in income.

An example of reputational risk which is distinct from the investment related performance delivered to East X’s client is market abuse. This can lead to significant loss of client trust in the capabilities of the East X. Also, in a worst-case scenario, it could lead to the loss of key individuals through regulatory enforcement action, or even the loss of Part IV Permission for the Firm itself. A further example of reputational risk is that of damaging publicity about East X in the media. All staff members and external contractors are required to sign confidentiality agreements, which somewhat mitigates this risk. The Firm considers that any damage to its reputation would have the potential to cause a significant amount of damage to the Firm.

To guard against East X breaching regulatory rules, they have appointed an experienced Compliance Officer and engaged the support of a regulatory consultancy firm. East X has also implemented a detailed compliance framework, which includes a risk-based compliance monitoring programme.

East X endeavours to employ high quality staff who are professional in all their dealings and seek to implement a culture of ethical behaviour in all areas of the business. All members of staff receive training on a frequent basis, and the Firm believes it has a strong culture of compliance. For these reasons the Firm believes it has sufficiently mitigated reputational risk and that it does not need to allocate any additional capital to guard against the crystallisation of this risk.

CAPITAL RESOURCES

East X, as a collective portfolio management investment (“CPMI”) firm, has an initial capital requirement of €125k and an ongoing capital resource requirement which comprises the greater of:

i. the funds under management requirement (the sum of the Firm’s base own funds requirements of €125k plus 0.02% of the amount by which the Firm’s funds under management (related to the Fund) exceed €250m); and

ii. the Firm’s own funds based on fixed overheads requirement; and

iii. the sum of market risk and credit risk (for non-AIFM business); plus

Whichever is the applicable of:

i. the professional negligence capital requirement (“additional own funds requirement”); or

ii. the professional indemnity insurance (“PII”) capital requirement.

East X calculates the credit risk applicable to its non-AIFM activities under the simplified approach.

Based on the analysis conducted based on the financial statements ending March 2021, the Firm maintains sufficient capital, as the amount assessed under the Pillar 2 requirement does not exceed the Pillar 1 capital requirement, which is determined by the FOR and the additional own funds requirement. Therefore, Pillar 1 is considered to provide adequate capital against risks.

East X currently holds Tier 1 capital of £1,000,000 which is above the minimum regulatory capital requirement of £740,174, giving a surplus of £259,826.

East X LLP is a Limited Liability Partnership registered in England and Wales, Partnership Number OC431086

East X LLP is authorised and regulated by the Financial Conduct Authority (FRN 927277)

RENUMERATION POLICY

East X is subject to the FCA rules on remuneration. These are contained in the FCA’s Remuneration Codes located in the SYSC Sourcebook of the FCA’s Handbook.

CPMI firms are required to make a remuneration disclosure in respect of the whole of their business, i.e. MiFID and AIFMD. The specific requirements of the AIFMD remuneration disclosure are set out in the Annual Report of the AIFs.

The Remuneration Code covers an individual’s total remuneration.

East X’s compensation arrangements:

  • are consistent with and promotes sound and effective risk management;

  • do not encourage risk-taking which is inconsistent with the risk profiles or instruments of incorporation of the AIFs it manages;

  • include measures to avoid conflicts of interest; and

  • are in line with the Firm’s business strategy, objectives, values and long-term interests.

East X has a remuneration committee (the “Committee”) which meets at least annually to discuss remuneration of the Firm’s staff.

QUANTITATIVE RENUMERATION DISCLOSURE

Quantitative remuneration disclosure has not been included in this report because a full performance year has not yet been completed since East X’ authorisation as an AIFM. East X considers that the inclusion of such quantitative detail for an incomplete period would not be materially relevant, reliable or provide a clear basis for comparison for investors.