Under U.K. financial services regulation implementing the European Union's Capital Requirements Directive, Schwab U.K. is required to make publicly available certain information regarding risk management policies, capital resources and capital requirements. For this reason, we have provided you access to that information here:

CHARLES SCHWAB, U.K., LIMITED: PILLAR 3 DISCLOSURE AND POLICY 

1. REGULATORY CONTEXT

This document serves to meet the Pillar 3 disclosures required by the FSA’s Prudential Sourcebook for Banks, Building Societies and Investment Firms ("BIPRU") specifically BIPRU 11.3.1R and BIPRU 11.3.3R. These rules implement in the United Kingdom the Capital Requirements Directive ("CRD"), which represents the European Union’s application of the Basel Capital Accord – Basel II.

The regulatory aim of the disclosures is to improve market discipline.

The CRD requirements have three pillars:

• Pillar 1 deals with minimum capital requirements that must be held;
• Pillar 2 deals with the Internal Capital Adequacy Assessment Process ("ICAAP") undertaken by a firm and the Supervisory Review and Evaluation Process through which the firm and regulator satisfy themselves on the adequacy of capital held by the firm in relation to the risks it faces, and;
• Pillar 3 deals with public disclosure of risk management policies, capital resources and capital requirements.

2. IMPORTANT INFORMATION ABOUT THE PREPARATION OF THESE DISCLOSURES

• This document has been prepared for the sole purpose of disclosing how Charles Schwab, U.K., Limited has documented compliance with certain capital requirements and managed risk and for no other purpose. It is based on historical information.
• This document only concerns Charles Schwab, U.K., Limited ("the Firm"). It does not deal with the risk management processes of any other entity in the Schwab group of companies.
• The information contained herein has been subject to internal review by the Firm’s Board of Directors, but has not been audited by the Firm’s external auditors. It does not constitute any form of financial statement and must not be relied upon in making any judgment on the Schwab group.
• This disclosure will be updated annually after the audit of the year-end statutory accounts and financial statements, unless there is a material change to the business strategy or scale of operations.
• This disclosure will be published on our public website.

3. BACKGROUND TO THE FIRM

Charles Schwab, U.K., Limited is incorporated in the U.K. and is authorised and regulated by the Financial Services Authority ("FSA") as a securities and futures firm, with a permission "not to hold client money". The Firm is categorised under the U.K. prudential rules as a "BIPRU €50K" "limited licence" firm. The Firm is part of a non-European Economic Area group and is a wholly-owned subsidiary of Charles Schwab & Co., Inc., a U.S.-registered broker dealer and part of The Charles Schwab Corporation. 

4. SUMMARY OF MAIN RISKS

The Firm’s main activity is introducing U.K. and Swiss resident clients to open US$ denominated brokerage accounts with the parent company. Consequently, most of the normal material risks for a securities firm (e.g. trading book risk) do not apply because the normal brokerage activities (e.g. trading) are undertaken by the parent company and thus the associated risks are borne by the parent company.

The exposures which arise from our business activities derive primarily from the ability of our parent company to continue to meet the requirements of the Transfer Pricing Agreement between it and the Firm. Thus, the Firm’s greatest risks are identified as income and cash-flow risk. The Board manages this risk by close monitoring of settlement of inter-company exposures.

5. SPECIFIC REQUIRED DISCLOSURES

BIPRU 11.5.1R - DISCLOSURE ON RISK MANAGEMENT OBJECTIVES AND POLICIES
Our general risk management objective is to create and use adequate systems and controls to mitigate risk and monitor the operation of the business and its environment to ensure that sufficient capital to cover all relevant risk is held at all times.

The Board of Directors is the Governing Body of the Firm and has management and oversight responsibility. It meets semi-annually and is composed of:

• Chief Executive Officer and Director – H.S. Spangenberg
• Chief Financial Officer and Director – D.G. Rodich

The Board decides the Firm’s risk appetite and ensures that the Firm has implemented an effective, ongoing process to identify risks, to measure potential impact and to ensure that those risks are actively managed.

• The Firm has a conservative attitude to risk and accepts certain risks inherent to the business model.
• These risks are mitigated and managed through tried and tested systems and controls.
• The Firm has identified material risks and has undertaken scenario analysis and stress tests on these risks as detailed in the ICAAP.
• Overall, there is a low level of risk and therefore the Board has set an annual frequency for review of the ICAAP.

BIPRU 11.5.2 R - DISCLOSURE ON THE SCOPE OF THE APPLICATION OF DIRECTIVE REQUIREMENTS
Charles Schwab, U.K., Limited submits reports for accounting and prudential purposes to the FSA on an unconsolidated basis.

BIPRU 11.5.3 R - DISCLOSURE ON CAPITAL RESOURCES

Regulatory Capital as at 31st December 2009	GBP
Total Tier 1 capital after deductions*	436,036
Total Tier 2 capital**	-
Total Tier 3 capital**	-
FSA Capital Resource Requirement (CRR)	155,661
Surplus	280,350
Solvency Ratio (%)	280.12%

* Tier 1 capital is comprised of fully paid, called up ordinary share capital and externally audited earnings and does not have any deductions
** The Firm does not have any additional Tier 2 or Tier 3 capital resources or deductions

BIPRU 11.5.4 R – DISCLOSURE ON COMPLIANCE WITH BIPRU 3, BIPRU 4, BIPRU 6, BIPRU 7 AND BIPRU 10 AND THE OVERALL PILLAR 2 RULE

BIPRU 3 - DISCLOSURE ON STANDARDISED CREDIT RISK
The Firm has adopted the standardised approach and the simplified method of calculating risk weights.

BIPRU 4 - DISCLOSURE ON INTERNAL RATINGS BASED APPROACH
The Firm does not adopt the Internal Ratings Based approach and therefore this is not applicable.

BIPRU 6 - DISCLOSURE ON OPERATIONAL RISK REQUIREMENT
This disclosure is not applicable because the Firm is a limited licence firm and therefore is not subject to the Operational Risk Requirement.

BIPRU 7 - DISCLOSURE ON MARKET RISK
As discussed in the "Summary of Main Risks", this disclosure is not applicable because the Firm does not have a Trade Book.

BIPRU 10 - DISCLOSURE ON CONCENTRATION RISK REQUIREMENTS
The Firm has adopted the standardized approach and closely monitors all exposures to ensure that the regulatory required thresholds are not exceeded.

DISCLOSURE ON OVERALL PILLAR 2 RULE
The Firm has adopted the “Pillar 1 Plus” method of calculating its ICAAP Capital Resources Requirement. The Compliance Officer presents the ICAAP report to the Board for their review, amendment and approval on an annual basis or whenever a material change to the business arises.

BIPRU 11.5.5 R - DISCLOSURE ON RETAIL EXPOSURES
This disclosure is not required because the Firm has not adopted Internal Ratings Based approach to credit risk.

BIPRU 11.5.6 R - DISCLOSURE ON EQUITY EXPOSURES
This disclosure is not required because the Firm has not adopted Internal Ratings Based approach to credit risk.

BIPRU 11.5.7 R - DISCLOSURE ON COUNTERPARTY RISK
This disclosure is not required because the Firm does not have a Trading Book.

BIPRU 11.5.8 R - DISCLOSURE ON CREDIT RISK AND DILUTION RISK
Failure to receive income payments from the Parent Company is the Firm’s primary Credit Risk exposure. The Firm holds all cash with banks assigned high credit ratings. A financial asset is past due when a counterparty has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.

BIPRU 11.5.9 R - DISCLOSURE ON VALUE ADJUSTMENTS AND PROVISIONS
This disclosure is not required as the Firm does not make Value Adjustments and Provisions for Impaired Exposures that need to be disclosed under BIPRU 11.5.8 R (9).

BIPRU 11.5.10 R - DISCLOSURE ON CALCULATING RISK WEIGHTED EXPOSURE – STANDARDISED APPROACH
This disclosure is not required because the Firm has not adopted the standardised approach. Instead the Firm uses the Simplified method of calculating Risk Weights.

BIPRU 11.5.11 R - DISCLOSURE ON CALCULATING RISK WEIGHTED EXPOSURE – IRB APPROACH
This disclosure is not required because the Firm has not adopted the Internal Rating Based approach.

BIPRU 11.5.12 R - DISCLOSURE ON MARKET RISK – TRADING BOOK
This disclosure is not required because the Firm has no Trading Book.

BIPRU 11.5.13 R - DISCLOSURE ON USE OF THE VaR MODEL
This disclosure is not required because the Firm does not use a VaR model for the calculation of the Market Risk Capital Requirement.

BIPRU 11.5.14 R - DISCLOSURE ON OPERATIONAL RISK
In line with the requirements for our prudential category, our Pillar 1 Capital Resources Requirement is equal to the higher of: €50,000; or Credit Risk Capital plus Market Risk Capital; or Fixed Overhead Requirement. Our Fixed Overhead Requirement is disclosed as a proxy for the Pillar 1 Operational Risk Capital calculation. 

BIPRU 11.5.15 R - DISCLOSURE ON NON-TRADING BOOK EXPOSURES IN EQUITIES
This disclosure is not required because the Firm does not have non-trading book exposure to equities.

BIPRU 11.5.16R - DISCLOSURE ON EXPOSURES TO INTEREST RATE RISK IN THE NON-TRADING BOOK
Although the Firm holds substantial cash balances on its balance sheet, there is no significant exposure to interest rate fluctuations.

BIPRU 11.5.17R - DISCLOSURE ON SECURITISATION
This disclosure is not required because the Firm does not securitise its assets.