PRINCIPAL RISKS AND UNCERTAINTIES.


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RISK

WHAT WE ARE DOING

EUROZONE AND COUNTERPARTY RISK

During recent years, investor confidence in a number of financial services institutions has been severely impacted following the collapse of Lehman Brothers, the nationalisation of many global banks and the ongoing concerns over sovereign debt primarily in the eurozone. Although the controls framework within LGIM Holdings has allowed the uncertainty in markets to be managed, a lack of confidence remains in the sector which may result in increased downgrade or default of counterparties.

LGIM Holdings seeks to limit the potential exposure to loss from counterparty and third-party failure through financial strength based pre-selection criteria for those counterparties with which the Group will do business and the setting of pre-defined risk based limits on concentrations. This includes a number of defined policies and procedures covering different types of counterparty exposure and ongoing contingency strategies in place relating to eurozone failure.

REGULATION AND LEGISLATION

The markets in which the Group operates are highly regulated, with regulation and legislation defining the overall framework for the design, marketing and distribution of products; the acceptance and administration of business; and the prudential capital that regulated companies should hold. Current areas of significant regulatory change include, the changes within, and to, the FSA, [Solvency II] and Development in OTC market infrastructure, MiFID II and the US FATCA legislation. Dedicated control functions exist in LGIM and Group to review and assess these changes and to ensure that actions are taken to maintain compliance.

REPUTATIONAL AND CONTAGION RISK

In order to continue to develop and grow the LGIM business the current strategy is to maintain market share and to access new markets and sources of funds. As a result, changes are required to internal processes and client service capabilities. These processes, while carefully controlled and managed, may fail or be impacted by, for example, fraud or IT systems failure, giving rise to loss, adverse client reaction and a resultant loss of existing clients or inability to write new business.

LGIM Holdings has a well-established and embedded risk framework that ensures that as business continues to change the associated risks are identified and managed. LGIM Holdings maintains a strong capital position which is kept under regular review.

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