Annual Report for the year ended 31 December 2008

Risk Reporting
The Group Board receives a monthly risk report detailing market and credit
risk exposures, operational risk incidents and losses and key risk indicators.
in addition, the risk committee discusses significant exposures and reviews
limit breaches or requests for temporary limit increases.
(a) Management of Market Risk
Market risk management seeks to identify and control the potential loss in
value of Group assets arising from changes in market prices. The principal
risk for the Group is an adverse change in equity prices. The risk
Department’s role is to independently monitor, control and report this risk.
it is important for senior management to be aware of the possible capital
implications of an adverse movement in prices. stress tests provide
an indication of the potential size of losses that could arise in extreme
conditions. The stress tests approved by the risk committee are historical
scenarios that show the profit & loss that would occur if the historic changes
were to be repeated. These stress test results are calculated in near realtime
and the end-of-day results are reviewed by the risk committee and the
Board of Directors. This stress test is used to determine whether the Group
holds enough capital under pillar 2 of the capital requirements Directive.
Equity Price Risk
The Group is exposed to equity market risk in respect of its equity holdings.
These comprise: (i) available-for-sale financial assets, (ii) trading portfolio assets
and liabilities that result from market making, and (iii) derivatives. in conjunction
with stress tests outlined above, a sensitivity analysis has been performed
on the Group’s exposure to equity risk. The analysis is based on the assumption
that underlying equity prices had an increase/decrease of 10% with all other
variables held constant at the year end. The results as outlined below, are
only representative of the impact that is observed at the year end, and not
of the impact that was observed during the year. This occurs due to a varying
portfolio throughout the year.
i) Available-for-sale financial assets
The Board continues to review the performance of existing available-for-sale
financial assets in the Group’s portfolio and realises these investments when
deemed appropriate.
The Group does not consider any of the assets to be impaired.
For available-for-sale financial assets, a 10% increase/decrease in equity
prices would result in an increase/decrease respectively in equity reserves
of £106,000 (2007: £68,000).
ii) Trading portfolio assets and liabilities that result from market making
The risk Department monitors the market risk limits as laid down in the Trading
policy statement. An automated system notifies the department whenever
a limit is breached and the risk Department then have a discussion with
the trader before notifying senior management as to how the breach will
be resolved. The whole process is logged and is fully auditable so that it is
possible, for example, to analyse limit breach patterns or limit utilisation.
A 10% increase/decrease in equity prices on trading portfolio assets would
increase/decrease profit in the income statement by £503,000 (2007:
£1,777,000). A 10% increase/decrease in equity prices on trading portfolio
liabilities would decrease/increase profit in the income statement by
£426,000 (2007: £605,000) respectively.
notes to tHe FinanCial statements CONTINuED
FOR THE YEAR ENDED 31 DECEMBER 2008
iii) Derivatives
Derivatives mainly consist of options and warrants received in lieu of
corporate finance fees. Management of market risk in respect of derivatives
is through active involvement of senior management under the supervision
of the Board of Directors.
The Group will occasionally use derivatives to hedge its trading portfolio.
All such positions are discussed with senior management and independently
monitored by the risk Department.
Additionally, non-regular way trades at the period end give rise to derivative
forward contracts as a result of the change in market value from the
contract (trade) date to 31 December 2008.
WDB capital uK equity Fund limited holds cFDs and these are brought into the
Group on consolidation. These positions are held on a matched basis and are
closed out on a monthly basis, hence do not provide the Group with any material
exposure to equity risk. At the year end there were no open cFD positions.
The impact of a 10% increase in equity prices on derivatives would increase
profit in the income statement by £111,000 (2007: £257,000). A 10%
decrease in equity prices would decrease profit in the income statement
by £99,000 (2007: £232,000).
Foreign exchange risk
The following table summarises the Group’s currency exposure arising from
unmatched monetary assets or liabilities not denominated in the Group’s
functional currency of the Group entity:
2008 2007
£’000 £’000
net assets/(liabilities)
euros 110 496
us Dollar 566 1,223
hong Kong Dollar 731 642
swiss Franc 216 89
other currencies 140 (83)
1,763 2,367
The Group’s activities are primarily denominated in sterling and it therefore
has minimal foreign exchange risk. The majority of transactions denominated
in a foreign currency that would expose the Group to currency risk are economically
hedged immediately, normally in the spot market. The Group does not enter
into forward exchange contracts for hedging anticipated transactions.
Based on the Group’s year end net assets dominated in non sterling currencies
the impact of a 10% strengthening or weakening in sterling against major
currencies would result in a gain or loss of £176,000 (2007 £237,000).
During 2008 the Group was also exposed to foreign exchange movements
with the WDB capital uK equity Fund limited. however, the Group’s interest
in the fund reduced from 94.79% to 50.20% during 2008. in 2009 the
Group expects its interest in the fund to reduce below 50% and therefore
will no longer be 100% consolidating WDB capital uK equity Fund limited’s
results. The impact of the continued dilution of the Group’s interest in WDB
capital uK equity Fund limited, and converting to equity associate accounting
(in accordance with iAs 28) reduces further the Group’s exposure to foreign
exchange movements.
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