Part 6 IFR disclosure

1. Introduction and Context

The Investment Firm Regulation and Directive (“IFR/IFD”) is the prudential regime for MiFID investment firms which aims to streamline and simplify the prudential requirements for EU investment firms. IFR/IFD applies to Hidden Road Partners CIV NL B.V. (“the “Firm” of “HRP NL”) as an AFM authorized and regulated firm. 

The public disclosure requirements of IFR/IFD are set out in Part 6 of IFR. This disclosure is in respect of the accounting year ended 31 December 2023. HRP NL classifies as a Class 2 investment firm under IFR/IFD.

1.1. Business Summary 

HRP NL is a subsidiary of Hidden Road, a global credit network for institutions enabling seamless access to traditional and digital markets. Conflict-free and built on a modern technology stack, Hidden Road removes complexity and cost in prime brokerage, clearing and financing. Hidden Road services a professional counterparty base made up of institutional investors, market makers, hedge funds and proprietary firms. The geographical location of potential counterparties will be global, focused where the market provides credit intermediation opportunities. HRP NL does not provide any services to retail clients.

The Firm is established to provide prime brokerage services in traditional and digital assets, from the Netherlands. To support this, the Firm is authorised and regulated as an investment firm by the Dutch Autoriteit Financiële Markten (“AFM”) with firm reference number 14006260 since 20 April 2023 for the following:

Additionally, the Firm is registered as Crypto Service Provider with De Nederlandsche Bank (“DNB”) with firm reference number R188751 since 26 June 2023 for the following:

In 2023, HRP NL offered prime brokerage services to counterparties with respect to the following types of asset classes:

• Foreign exchange (“FX”) spot and derivatives

2. Governance

2.1. Overview of Governance Arrangements

       2.1.1. The Board

For 2023, the Management Board of HRP NL existed of the following natural persons: 

• Mr. Michael Higgins 
• Mr. Emmanuel Llorens 
• Mr. Wouter Rijsdijk (resigned as per 21 July 2023) – vacancy

Strategic and operational decision-making responsibility at HRP NL ultimately rests with the Board. The Firm is headed by an effective Board, which meets formally on a calendar quarterly basis, and which directs and controls the Firm. The Board will also have the flexibility to hold ad hoc meetings, should the need arise to discuss matters of strategic importance on a more frequent basis. All such meetings will have written agendas and minutes to ensure a true record of events. 

The Board comprises the above executive members and is privy to any information required to allow it to discharge its responsibilities. Management and financial information is distributed to senior managers and directors. The Board is supported by the local compliance and risk teams, who give updates at the quarterly board meetings.

HRP NL has a separate Risk and Compliance Committee and AML/CFT Committee. Additionally, HRP NL is part of the Hidden Road Group Coin Assessment Committee, Business Continuity Planning Committee and HRP Group Investment Committee.

        2.1.2. Directorships 

Neither of the directors have held office in executive or non-executive functions outside of the HRP Group throughout the financial year ending 31 December 2023.

        2.1.3. Diversity

Due to the size of the Firm and the fact that the Firm has only just started operations, it is not proportionate for HRP NL to have a policy promoting diversity on the management body. 

3. Risk Management

3.1. HRP NL’s approach to risk management

The Firm’s overall risk management objective is to develop internally a systems and controls framework to achieve the following:

• To mitigate risk to a level that any losses sustained remain within HRP NL’s overall quantified risk appetite; 
• Not to pose a material risk to the Firm’s ability to continue trading; and  
• To meet its prudential supervisory obligations.

The HRP Group abides by the following core list of Risk Management Principles:

1. Strong senior management oversight and independent governance;
2. Automated trade booking & consolidated real-time risk monitoring; 
3. Ensuring compliance with hard risk and position limits; 
4. Conservative model stressing at the extreme of observed historical tail events;
5. Accept highly liquid collateral only and applies appropriate haircuts otherwise; 
6. Real-time monitoring and rule-based algorithmic remediation to minimize time between adverse event and action;
7. Automated singular infrastructure to ensure counterparties comply with limits and risk framework;
8. Comprehensive, automated process that will meet regulatory requirements and oversight;
9. Documentation with every counterparty to protect the Firm’s assets and risk interests;
10. Maximize ROIC while limiting probability of credit losses.

The governing body takes an active role in the risk management process at HRP NL and is responsible for the maintenance of, and ultimately compliance with, the risk management strategy at the Firm. The Firm recognises that risk management processes are evolutionary and should be subject to ongoing review and modification.  

HRP NL adopts a risk management framework, which integrates functions within the Firm and documents controls and policies that are proportionate to the size and complexity of the Firm.  

There are also control and policy documents which form part of the risk management framework. These include but are not limited to:  

• Risk appetite statements;
• Risk Control Self Assessments (“RCSA”);
• Business Wide Risk Assessment (“BWRA”): this a collection of financial crime risk assessments;
• Business Continuity Plan and Disaster Recovery Framework;
• NL Compliance Manual (and associated policies);
• Risk Based Compliance Monitoring;
• MLRO report;
• Credit Assessments.

3.2. Key risks and the associated risk management approach

The following section covers risk management objectives and policies for HRP NL’s relevant risks as set out in Parts Three, Four and Five of IFR. The firm is exposed to counterparty credit risk (K-TCD), operational risk (K-DTF), concentration risk (K-CON), market risk (K-NPR) and liquidity risk.

• Counterparty credit risk – is primarily incurred through the extension of leverage to clients. The firm effectively controls this by employing a conservative margin model and continuous monitoring;
• Operational risk – is inherent to the provision of financial services. The firm effectively controls this by employing highly automated processes, clear policies and procedures including a dedicated incident management process;
• Concentration risk – is primarily incurred through exposure to group affiliates, this is closely monitored and controlled in line with the IFR requirements;
• Market risk – is very low, as the firm operates as a matched principal broker. Any residual risk derives from foreign currency bank account balances, which are monitored closely;
• Liquidity risk – is very low as the firm’s balance sheet is highly liquid.

4. Own Funds

4.1. Composition of regulatory own funds

Template EU IF CC1.01 – Composition of regulatory own funds (Investment firms other than small and non-interconnected)

4.2. Reconciliation to audited financial information

Template EU ICC2: Own funds: reconciliation of regulatory own funds to balance sheet in the audited financial statements

4.3. Main features of the firm’s own funds instruments

Table EU I CCA – Main features of own instruments issued by the firm.

5. Own funds requirements

5.1. HRP NL own fund requirements

Investment firms shall at all times have own funds which amount to the highest of the following:

1. Their fixed overhead requirement;
2. Their permanent minimum capital requirement;
3. Their K-factor requirement.

The results of these requirements for HRP NL are detailed in the table below:

5.2. Adequacy of internal capital

IFR/IFD requires the Firm, at all times, to maintain overall financial resources, (both in capital and liquid assets), which are adequate, both in amount and quality to ensure that:

• it is able to remain financially viable throughout the economic cycle, with the ability to address any material potential harm that may result from its ongoing activities; and
• its business can be wound down in an orderly manner, minimising harm to clients or to other market participants.

HRP NL assesses its compliance with IFR/IFD own funds and liquidity requirements through its Internal Capital and Liquidity Adequacy Assessment Process (“ICLAAP”). The ICLAAP is updated annually and on an event-driven basis. 

When reviewing the ICLAAP, the Board satisfies themselves that the Firm has sufficient financial resources available to meet the own funds and liquidity requirements as at the date of review and on at least an annual forward-looking basis based on the Firm’s current business model and strategy.

ICLAAP and capital adequacy are a standing agenda item at HRP NL’s board meetings.

6. Remuneration

6.1. Qualitative Disclosure

HRP NL has in place a remuneration policy appropriate to the nature, scale and complexity of the risks and activities of the Firm. It is not proportionate or required for HRP NL to have a remuneration committee based on the criteria laid down in Article 32(4) of the IFD. 

Material Risk Takers (“MRTs”) are identified through qualitative criteria based on their roles and responsibilities. This includes members of senior management and those responsible for managing a material risk within the Firm.

HRP NL offers fixed pay to all staff in an amount based on criteria such as the level of education, the degree of seniority, the level of expertise and skills required, the constraints and job experience and the relevant business sector. 

All staff of HRP NL are also eligible to variable remuneration in the form of a discretionary cash bonus. The requirement for deferral of remuneration and the requirement to pay at least 50% in share-like instruments does not apply to HRP NL based on the criteria laid down in Article 32(4) of the IFD. 

The value of the annual bonus awarded by HRP NL will be based on the performances of each relevant staff member, the business units that each staff member is part of and the global consolidated firm return on capital. The value of the bonus pool also has regard to HRP NL’s capital adequacy process. More specifically, the factors that will be assessed to determine the level of variable remuneration are:

1. Profit levels and growth: 
   1. in the Hidden Road Partners Group; 
   2. in HRP NL; and 
   3. in the employee’s business unit;
      in all cases taking into account relevant risk parameters,
2. Measures relating to building and maintaining positive customer relationships and outcomes; 
3. Performance in line with Firm strategy or values, for example by displaying leadership, teamwork or creativity; 
4. adherence to the Firm’s risk management and compliance policies; 
5. measures to avoid conflicts of interest; 
6. achieving targets specified by HRP relating to: 
   1. environmental, social and governance factors; and 
   2. diversity and inclusion.

These factors will be assessed across a number of years and the payment of this performance-based remuneration will take account of HRP NL’s business cycles and risks. HRP NL ensures that its remuneration policies are in line with its business strategy, objectives, values and long-term interests through a determined distribution policy for staff, management and shareholders which is aimed to reward each member while ensuring HRP’s financial stability, and bonuses are not paid from capital. 

All variable remuneration will be subject to in-year adjustments, clawback and malus, where relevant and appropriate, for a minimum period of 3 years, for all MRTs. The specific circumstances under which clawback or malus will apply will rely on specific criteria and be determined on an individual basis but in all cases, HRP NL will be able to reduce an MRT’s variable remuneration by 100%. Generally, malus or clawback will apply where an MRT participated in, or was responsible for, conduct which resulted in significant losses to HRP NL and/or failed to meet appropriate standards of fitness and propriety. The effect of these provisions is to allow for sufficient time for risks to HRP NL to crystalise, and for subsequent adjustment to variable remuneration to be made.

It is not HRP NL’s policy to make severance payments to employees on early termination of their contract, however payment may be made for their statutory minimum notice period entitlements.

6.2. Quantitative Disclosures

No MRTs received guaranteed variable remuneration. There were no severance payments to MRTs in the year ended 31 December 2023.