Paris Orleans SCA

Paris Orleans SCA Pillar 3 disclosures for the financial year ended 31 March 2012 MI ROTHSCH I LD EFTA01114823 EFTA01114824 Contents I. Scope 3 2 Risk Management 4 3. Regulatory Ratios 6 4. Regulatory Capital 7 5. Capital Adequacy 8 6. Credit Risk 9 7. Market Risk 14 8. Operational risk 15 EFTA01114825 Page 2 EFTA01114826 I. Scope 1.1 Introduction This document is published to provide information about Paris Orleans SCA's ("PO') compliance with the public disclosure rules set out in the Order of 20 February 2007 relating to minimum capital requirements (known as "Pillar 3" requirements as set out in the Basel II Accord and its European transposition by the Capital Requirement Directive ("CFtD")). PO is registered within the list of Financial Companies supervised by the Autorite de Contrale Prudentiel ("ACP"). The Pillar 3 disclosure requirement complement the minimum capital requirements ("Pillar 1") and the supervisory review process ("Pillar 2') and aim to encourage market discipline by allowing market participants to assess key pieces of information on the risk exposures and the risk assessment processes of PO. 1.2 Basis of disclosure These risk disclosures are made in respect of PO and its subsidiary undertakings (together"the Group" or "the PO Group"). Since 31 March 201 I , the PO Group has been regulated by the ACP The following regulated banking entities are fully consolidated in PO's accounts: I. NM Rothschild and Sons Limited ("NMR'). incorporated in the United Kingdom and supervised by the Financial Services Authority ("FSA"): • Rothschild Bank AG ("RBZ"), incorporated in Switzerland and supervised by the Swiss Financial Market Supervisory Authority ("FINMA'): 3. Rothschild & Cie Banque ("RCB"), incorporated in France and supervised by the ACP, and 4. Rothschild Bank International ("RBI") and Rothschild Bank C.I. Limited ('RBCI"), incorporated in Guernsey and supervised by the Guernsey financial Services Commission ("GFSC). As at 31 March 2012. the regulatory consolidation scope is identical to the statutory consolidation scope. Unless otherwise indicated. financial information presented in this document is as at 31 March 2012 (PO's financial year- end). As there is a significant overlap between the information disclosure requirements for Pillar 3 and information already disclosed in the PO 2012 Annual Report this document should be read in conjunction with that reportThe PO Group organisation presented in this document is consistent with the governance arrangements described within the PO 2012 Annual Report following the reorganisation that was approved at the Extraordinary General Meeting of PO shareholders on 8 June 2012. 1.3 Corporate reorganisation On 4 April 2012, the Group announced an important step in its continued development.The aim of this reorganisation was to simplify the Group structure and improve day-to-day management, and involved two phases: • the first being the acquisition of certain shares previously held by third parties in certain subsidiaries (RCS, Financiere Rabelais and Rothschilds Continuation Holdings) of PO, in exchange for 38.4 million new ordinary shares in PO, ■ the second involving the conversion of PO into a French partnership limited by shares (societe en commandite par actions). This reorganisation was approved at the Extraordinary General Meeting of shareholders on 8 June 2012. PO Gestion SAS ("PO Gestion"). the managing partner of PO, is chaired by the Group's longstanding Chairman, David de Rothschild, alongside Chief Executive Officers. Nigel Higgins and Olivier Pecoux 1.4 Media This document is available on PO's corporate website (www. paris-orleanscom) along with the PO 2012 Annual Report 1.5 Verification These disclosures have been circulated and presented to the Audit Committee, the Supervisory Board and the Group Risk Committee of PO in Novembennecember 2012. Unless otherwise indicated, information contained within this document has not been subject to external audit. The Pillar 3 disclosures have been prepared purely for the purpose of explaining the basis on which the PO Group has prepared and disclosed certain capital requirements and information about the management of certain risks, and for no other purpose. They do not constitute any form of financial statement and must not be relied upon in making any judgement on the PO Group. Page 3 EFTA01114827 2 Risk Management 2.1 Overview The guiding philosophy of risk management in the Group is for the management to adopt a prudent and conservative approach to the taking and management of risk The maintenance of reputation is a fundamental driver of risk appetite and of risk management. The protection of reputation guides the type of clients and businesses with which the Group will involve itself. The nature and method of monitoring and reporting varies according to the risk type. Most risks are monitored daily with management information being provided to relevant committees on a weekly. monthly or quarterly basis. Where appropriate to the risk type. the level of risk faced by the Group is also managed through a series of sensitivity and stress tests. The identification. measurement and control of risk are integral to the management of PO's businesses. Risk policies and procedures are regularly updated to meet changing business requirements and to comply with best practice. 2.2 Structure and risk governance PO Gestion is responsible for setting and reviewing PO's governance arrangements and for establishing adequate. sound and appropriate risk management processes in line with all legal and regulatory requirements. Internal control governance within the Group is effected through PO and onwards to the senior executive management committees for each of the Group's businesses and the Boards of the principal operating entities. PO Gestion. in conjunction with the Group Management Committee. has direct oversight of all Group entities in respect of intemal control matters and considers all major strategic and other risk matters affecting all parts of the Group The main roles of the committees with responsibility for key risk management areas are as follows: The Group Management Committee ("GMC'): its purposes are to formulate strategy for the Group's businesses. to assess the delivery of that strategy. to ensure the proper and effective functioning of Group governance structures. operating policies and procedures. to define the Group's risk appetite and to be responsible for the management of risk The PO Audit Committee: this committee of the Supervisory Board of PO supervises and reviews the Group's internal audit arrangements. liaises with the Group's external auditors and monitors the overall system and standards of internal control. The Group Risk Committee ("CRC') formulates policies and procedures which promote the proper identification, measurement monitoring, and control of risk and which reflect the Group's risk appetite.These policies and procedures define the Group Risk Framework. The GroupAssets and Liabilities Committee ("Group ALCO") is responsible (or ensuring that the Group has prudent funding and liquidity strategies. for the efficient management and deployment of capital resources within regulatory constraints and for the oversight of the management of the Group's other financial strategies and policies, including credit decisions. The Group Compliance Committee ("GCC') reviews the existence, effectiveness and scope of compliance procedures and monitoring in the Group with a view to ensuring that they comply with the relevant regulatory requirements. The Group Remuneration Committees set the principles and parameters of the remuneration policies for the Group and determine the nature and scale of short and long term incentive performance arrangements that encourage enhanced performance and reward individuals 'in a "risk based- manner for their contribution to the success of the Group in light of an assessment of the Group's fnancial situation and future prospects. 2.3 Risk management framework The objectives of the Group Risk Framework are to mitigate and control risks by means of policies. processes. systems and procedures. to create a culture of risk awareness and ownership through communication and education at every level of the Group. to communicate the Group's risk appetite and to preserve the Group's reputation. The table hereafter summarises the three "lines of defence" adopted for risk management within the Group. Primary responsibility rests with executive management. with second and third lines of defence provided by Group support functions and assurance from internal audit processes. The Group Chief Risk Officer co-ordinates risk policy and promotes the development and maintenance of effective procedures throughout the PO Group. The Group Internal Audit team reviews the internal control framework and reports its findings to the Audit Committee and to PO Gestion. Page EFTA01114828 Group Risk Framework The Three Lines of Defence for 'den:if/In evals.atng and managing risks First Line of Defence Comprises the Boards and Committees of the PO Group: • set the Group's risk appetite; • approve the strategy for managing risk: and • are responsible for the Group's system of internal control It is the responsibility of senior management to support risk management best practice and to oversee the establishment and implementation of effective risk management systems. 2.4 Risk types Second Line of Defence Third Line of Defence Comprises specialist Group support functions including: Provides independent objective assurance on the effectiveness of the management ■ Risk of risks across the entire Group. ■ Finance; This is provided by Group's Audit Committee and the Group's Internal ■ Legal & Compliance; Audit function. ■ IT:arid ■ Human Resources. These functions provide: ■ operational and technical guidance; ■ advice to management at Group level and operating entity level: and ■ assistance in the identification assessment, management. measurement, monitoring and reporting of financial and non-financial risks Credit risk Credit risk is the risk of loss resulting from exposure to customer or counterpart), default PO has adopted the Standardised Approach for calculating Pillar I capital requirements for credit risk Operational risk Operational risk. which is inherent in all business activities, is the risk of loss resulting from inadequate or failed internal processes. people and systems, or from external events. PO currently adopts the Basic Indicator Approach for calculating Pillar I capital requirements for operational risk (except for RCB which uses the Advanced Methodology Approach). Liquidity and funding risk Liquidity risk is the risk that the Group does not have sufficient financial resources available to meet its obligations as they fall due. or that the Group is unable to meet regulatory prudential liquidity ratios. The Group performs liquidity stress testing based on a range of adverse scenarios, and has contingency finding plans which are maintained with the objective of ensuring that the Group has access to sufficient resources to meet obligations as they fall due if these scenarios occur. Stressed liquidity profiles are reviewed by the Group ALCO. Market risk Market risk positions arise mainly as a result of the PO Group's activities in interest rate, currency, equity and debt markets and comprise interest rate, foreign exchange. equity and debt position risk Market risk exposures are presented in the PO 2012 Annual Report (page 138). Other material risks Other risks which are, or may be. material arise in the normal conduct of our business. Such risks, which include reputational risk concentration risk, securitisation risk, business risk, pension obligation risk and residual risk are identified and managed as part of the overall risk controls and are taken into account in the Supervisory Board's periodic assessment of capital adequacy. There is additional information regarding credit risks in the PO 2012 Annual Repoli. (pages 133-137); other information regarding liquidity and funding risks and market risks is also included (pages 138-141). Page S EFTA01114829 3. Regulatory Ratios During the year ended 31 March 2012. PO and the individual entities within PO Group complied with all of the externally imposed capital requirements to which they were subject The following table provides a breakdown of consolidated capital requirements as at 31 March 2012 by risk type and the ratio at which it is covered by regulatory capital: Em 31 March 2012 Tier I capital 801 Tier 2 capital 608 Regulatory capital base 1.412 Credit Risk 3.627 Market Risk 91 Operational Risk 1.970 Total Risk Weighted Assets 5.688 Tier I ratio 14.1% Global ratio 24.8% Under ACP rules. the Tier I ratio must exceed 4% and the Global ratio 8% Impact of the reorganisation announced in April 2012: In May 2012. the ACP registered PO as a "Financial Company" following the announcement of the reorganisation of the PO Group which eliminated many of the minority interests within the PO Group. The PO reorganisation objectives were to: ■ streamline its organisation: ■ optimise its regulatory capital: and ■ ensure Rothschild family control. The main consequence of this reorganisation on regulatory capital is an increase of Tier I ratio from 14.1% to 18.1% because of the elimination of certain minority interests within the Group. Page 6 EFTA01114830 4. Regulatory Capital I he table below summarises the composition of regulatory capital for the PO Group as at 31 March 2012. Regulatory Capital in Em Notes 31 March 2012 Share Capital and Reserves 721 Minority interest 102 Deduction - CoodmIl & Intangible assets I (296) Adjustment to Tier I 2 3 Deduction - Participation in financial institutions 3 (10) Deduction - Secuntisations 1 (16) Tier I 804 Finally Interests eligible as Tier 2 270 Subordinated debts 335 Adjustment to Tier 2 5 29 Deduction - Participation in financial institutions 3 (10) Deduction - Secuntisations 1 (16) Tier 2 608 Total Regulatory Capital 1.412 Notes: I. Intangible assets largely comprise the Rothschild brand 2. Adjustments to Tier I relate to MS reserves and cash flow hedge adjustments. 3. Capital deductions result from the share of investment in financial institutions which represent more than 10% of PO regulatory capital or that are above 10% of financial institution capital ("Banque Privet Edmond de Rothschild' and "Selection 1818"). These elements are deducted equally from Tier 1 capital and from Tier 2 capital. 4. Securitisation positions that are not rated or rated below B8- are deducted from regulatory capital.These elements are deducted equally from Tier 1 capital and from Tier 2 capital. 5. Adjustments to Tier 2 comprise AFS equity reserves that are deducted from Tier 1 and partly included in Tier 2. Page 7 EFTA01114831 5. Capital Adequacy The ACP sets out the minimum capital requirement for French regulated financial institutions. An institution's minimum regulatory capital is a combination of the requirement derived from Pillar I and Mar 2 rules. Pillar I sets out the minimum regulatory capital to meet credit market and operational risk.At 31 March 2012. the Group capital requirements by risk type were as follows: Risk Weighted Capital Pillar I requirement -Em Assets requirement Credit Risk 3.627 290 Market Risk 91 7 Operational Risk 1.970 158 Total 5.688 455 Credit risk capital requirements split by asset class were as follows: Credit risk — Ern Risk Weighted Capital Assets requirement Corporates 1.459 1 17 ED-etY 1.099 88 Other assets 605 48 Institutions - Banks 215 17 Secultuation 168 13 Retail 77 6 Instartions - Other 4 I Sovereign Total 3,627 290 The Other assets category comprises mainly of Non credit obligation assets'. All credit risk capital requirements are calculated using the standardised approach. Market risk capital requirements split by risk type were as follows: Market risk — fm Risk VVeighted Capital Assets requirement EX rsk 68 5 Interest Rate risk 16 I Eqsty risk and Commodity risk 7 I Total 91 7 All market risk requirements are calculated using the standardised approach. Operational risk capital requirements are partly calculated using the Basic IndicatorApproach and partly using the Advanced Measurement Approach: only RCB currently has supervisory approval to use the latter. Operational risk — Em Basic Indicator Approach Advanced Measurement Approach Total 1,970 158 Risk Weighted Capital Assets requirement 1.627 130 313 28 Page 8 EFTA01114832 6. Credit Risk 6.1 Credit risk exposures The table below presents a summary of the Credit Risk Weighted Assets ("RWA") calculation. The net exposure is the exposure after provisions, regulatory adjustments related to assets that are treated under market and counterpart)/ risks rules and after regulatory deduction of intangible fixed assets and goodwill. The Exposure At Default ("EAD") is calculated after netting effects. collateral and credit conversion factors but before applying risk weightings. The RWA consists of the EAD multiplied by a weighting factor. which varies depending on the credit quality of the counterparty. Credit risk exposures as at 31 March 2012 were as follows: Credit Risk exposures — Cm Net expostre 8.801 Financial collateral (1.122) Credit conversion factor (19) EAD 7.630 RWA 3.627 6.2 Exposures by asset class The table below shows the analysis of exposures by asset class. Sovereign exposures are zero weighted. Asset Class —fm EAD RWA Corporates 1.472 1.159 Equity 747 1.099 Other assets 701 605 hstitutons - Banks 1,068 215 Securitisaticn 144 168 Retail 155 77 hstitutoons - Other 20 1 Sovereign 3.323 - Total 7.630 3.627 Page 9 EFTA01114833 6.3 EAD by geographical location and by industry sector The Group is mainly exposed to the United Kingdom. France and Switzerland with more than 7S% of its exposures to these three countries. EAD by industry sector are as follows: Sector — Cm Sovereigns Corporates Institutions — Banks Equity Retail Securitisation Institutions — Other Total Financial Goverrrnents Real Estate Private Persons Manufactured goods Industrials Services Materials IT and Telecoms Health care Energy Other 2.237 1.086 - 255 - 169 192 182 136 82 76 47 19 2 12 1.068 183 17 IS 38 78 1 22 10 9 374 82 73 - 88 34 - 22 19 I 3.831 1.105 602 265 197 174 160 77 69 30 I1 408 Total 3,323 1,472 1,068 747 155 144 20 6.929 More than 70% of the exposures are to the Financial and Governments sectors. "Other assets' are not included in this table because it is not possible to split these exposures by industry.The high level of Financial sector exposure is related to the high level of liquid assets held in the balance sheet for liquidity management purposes. 6.4 EAD by maturity The table below sets out an analysis of credit risk by maturity as at 31 March 2012. Residual maturity of exposures is based on contractual maturity dates and not expected or behaviourally adjusted dates. Maturity band — Cm Sovereigns Institutions — Corporates Banks Equity Other assets Institutions — Retail Securidsthan Other Total < I year 3.088 475 916 20 322 43 I7 4.881 1-5 years 235 905 118 31 - 25 26 3 1.346 >5 years 92 34 98 87 118 429 Undated - - 595 379 974 Total 3.323 1.472 1,068 747 701 155 144 20 7.630 Group strategy is to reduce its corporate barking activities and to maintain a highly liquid short term position.This results in more than 60% of the exposures having a maturity below I year. Page 10 EFTA01114834 6.5 Value adjustment on impaired assets by asset class Value adjustments, whether through individual or collective provisions or through equity reserves, shown below relate to impaired assets only. The net exposure takes into account value adjustments but does not include any collateral. Negative value adjustments and provisions by Asset Class — Cm Impaired on- balance sheet gross exposure Value Adjustments Net Exposure Corporates 196 (137) 49 Equity I I i (70) 47 Secunusation 48 (35) I3 Other assets 8 (8) Retad Total 359 (250) 109 6.6 EAD by credit quality PO uses external credit assessments provided by Standard & Poor. Moody's and Fitch for all exposure classes. These are used. where available. to assign exposures a credit quality step and calculate credit risk capital requirements under the standardised approach. Credit quality steps are provided by the Regulator and are used to weight asset classes based on the external rating. The following tables provide. by asset class. an analysis of exposures by credit quality steps as at 31 March 2012: EAD by quality — Ern Sovereigns Institutions — Corporates Banks Equity Other assets Institutions — Retail Se<uridsarion Ocher Total Credit Quality Step I Credit Quality Step 2 Credit Quality Step 3 Credit Quality Step 4 Credit Quality Step 5 Credit Quality Step 6 Unrated 3.323 - I I 49 7 I 27 2 1.375 1.065 3 747 98 - 603 - - - 155 33 20 29 30 23 I 8 20 - 4,452 69 134 31 SO 3 2.891 Total 3323 1.472 1.068 747 701 155 144 20 7.630 Credit quality steps correspond to the following external ratings: Counterparty quality step I AAA to AA Aaa to Aa3 AAA toAA. 2 A+ to A- AI to A3 A+ to A. 3 BBB+ to B8& Saa I to Saa3 BB8+ to B88- 4 BB+ to 88 Sal to Ba3 8B+ to B8- 5 8+ to B- BI to B3 B.) to 8- 6 <CCC+ <Caa I <CCC Fitch Moody's S&P Page I I EFTA01114835 6.7 Counterparty credit risk Counterpart), credit risk ("CCR") is deemed to be the risk that a counterparty to a derivative transaction defaults.The duration of the derivative and the credit quality of the counterparty are both factored into the internal capital and credit limits for counterparty credit exposures. Given the profile of the Group. this type of risk is not materialThe table below details CCR exposures. Derivatives positions are not netted. Em Gross Financial exposure collateral EAD Banking Book 60 ex) Trading Bock 82 (27) 55 Total 142 (27) 1 15 6.8 Credit risk mitigation techniques The value of financial collateral used as credit risk mitigation is E 1.122m as of 31 March 2012.The main types of collateral consist of netting agreements for market related transactions and of financial collateral related to Lombard Lending to private clients. Note that exposures to private clients that are above E 1 m are classified as corporate. as defined by French regulations. Net exposure is calculated after value adjustment due a provision or value changes on Available For Sale ("AFS") securities. Fully adjusted exposure is calculated after collateral mitigation on net exposures. EAD includes off balance sheet exposures based on credit conversion factors provided by French regulations. Em Net exposure Financial collateral Fully adjusted exposure EAD RWA Sovereign 3.323 3.323 3.323 Institutions - Banks 1,777 (691) 1,083 1,068 215 Corporates 1,797 (297) 1.500 1.472 1.459 Equity 748 ( 1 ) 747 747 1.099 Other assets 701 701 701 605 Retail 291 (130) 161 155 77 Seculteation 141 - 114 144 168 Institutions - Other 20 - 20 20 4 Total 8.801 (1.122) 7.679 7,630 3.627 Page 12 EFTA01114836 6.9 Securitisations The Group's primary securitisation focus is on managing securitisation vehicles on behalf of third party investors. This may involve the transfer of some assets from the Group, but these are immaterial in both the context of the Group's and the securitisation vehicles balance sheets. The Group does not underwrite or provide liquidity support to these vehicles. The Group may invest in both its managed vehicles and third party securitisations. The table below sets out investments in securitisations by credit quality step as at 31 March 2012: Cm Credit quality step Cash Synthetic Total RWA RWA before deduction from regulatory capital Resecuritisation 2 3 I4 14 31 31 6 3 Unrated S 62 Securitisation I 33 33 7 7 2 19 19 10 10 3 IS IS IS IS 4 21 9 30 IOS 106 5 23 23 292 6 U-rated 3 3 41 Total 135 9 144 168 572 Page 13 EFTA01114837 7. Market Risk Market risk arises mainly from FX risk in the Group Merchant Banking activities. which do not systematically hedge foreign exchange exposures from gains that are not realised. Market risk capital requirements split by risk type were as follows at 31 March 2012: Market risk —Em RiskWeighted Assets Capital requirement EX nsk 68 5 Interest Rate risk 16 I Equity nsk and Commodity risk 7 1 Total 91 7 All market risk requirements are calculated using the standardised approach. Interest rate risk from the non-Trading Book is described within the PO 2012 Annual Report (pages 139-140). Page 14 EFTA01114838 8. Operational risk The capital requirement for operational risk is calculated using the Basic Indicator Approach for the PO Group except for RCB where the use of the Advanced Measurement Approach has been authorised. The Group Operational Risk Policy defines roles. responsibilities and accountabilities across the Group for the identification. measurement. monitoring and reporting of operational risks. Risk maps are developed by each business and support unit_ The nature of PO's businesses means that operational risks are most effectively mitigated through the application of rigorous internal procedures and processes. with a particular emphasis on client take-on. identification of conflicts of interest. project-specific appointment letters. formal approval of new products and quality controls in transaction implementation. This is supported by a programme of training on PO Group's procedures and regulatory and compliance issues.The PO Group manages its operational risks through a variety of techniques. including monitoring of incidents. internal controls. training and various risk mitigation techniques. such as insurance and business continuity planning. One of the objectives of the Group Operational Risk Policy is to ensure that operational risk is managed and reported consistently across the Group Senior management of each business and support unit are required to: ■ identify the operational risks which are material in their business: ■ describe the controls in place to mitigate these risks: and ■ assess the potential impact of each risk and the likelihood of an event occurring (after taking account of mitigants in place). Senior management of operating entities are required to identify. escalate and report operational risk incidents and control weaknesses which give rise to or potentially give rise to financial loss or reputation damage. The ACP authorised RCB to use the Advanced Measurement Approach in December 2007.The RCB framework is composed of both qualitative and quantitative elements. The qualitative elements follow the requirements for the PO Group as set out in the Group Operational Risk Policy The quantitative elements comprise an internal model that quantifies material operational risks.The RCB internal model inputs are internal data. external data. scenario analysis and Key Risk Indicators that reflect the business and internal control environment. Internal losses are collected without threshold at RCB. Scenario analyses are defined with business experts for material risks.The RCB model is composed of ten risk classes based on the combination of Basel business lines and Basel risk categories: ■ Internal fraud: ■ External fraud: ■ Employment practices and workplace safety: ■ Clients. products. and business practices: ■ Damage to physical assets: ■ Business disruption and system failures: and ■ Execution. delivery. and process management. The RCB insurance programme has been revised during the deployment of the Operational Risk Advanced Measurement Approach framework to allow the recognition of the effect of insurance techniques as a factor in reducing capital. Risk Weighted Capital Operational risk —Em Assets requirement Batt Indicator Approach Advanced Measurement Approach local 1.970 158 1.627 130 343 28 Page IS EFTA01114839 About Paris Orleans, the parent company of the Rothschild group F'if IS Orleans operates in three main areas: ■ Global Financial Advisory provides advisory services for mergers and acquisitions. debt financing and restructuring, and equity capital markets: ■ Wealth Management and Asset Management including institutional asset management ■ Merchant Banking which comprises third party private equity business and proprietary investments. Paris Orleans SCA is a French partnership limited by shares (societe en convnandite par actions with a share c ital of El 41.806.058. Paris trade and companies registry Registered office France. Paris Orleans is listed on NYSE Euronext in Paris. Compartment B - ISIN Code: For information. please contact: Paris Orleans Internet: www.paris-orleans.com Investor relations: Marie-Laure Becquart Page 16 EFTA01114840