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28 July 2010

CESR sets out final guidelines on risk measurement and the calculation of global exposure and counterparty risk for UCITS


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The key purpose of the guidelines is to provide both regulators and companies managing UCITS with detailed methodologies to calculate the global exposure and counterparty risk for UCITS, whilst at the same time, fostering a level-playing-field in the area of risk measurement among EU Member States.


CESR publishes guidelines on risk measurement and the calculation of global exposure and counterparty risk for Undertakings for Collective Investments in Transferable Securities (UCITS). The key purpose of CESR’s guidelines is to provide both regulators and companies managing UCITS with detailed methodologies to calculate the global exposure and counterparty risk for UCITS, whilst at the same time, fostering a level-playing-field in the area of risk measurement among EU Member States. CESR’s guidelines are to accompany the Level 2 implementing measures of the UCITS Directive.
 
The guidelines set out detailed methodologies that have to be followed by UCITS when they use either the commitment or the more advanced Value-at-Risk (VaR) approach for calculating theirglobal exposure (the VaR approaches are designed for more complex investment strategies). For UCITS using the VaR approach, CESR guidelines also provide additional safeguards which these UCITS should put in place when calculating the global exposure (stress testing and back testing obligations of the VaR model, validation of the model etc.).CESR also defines a set of high level principles relating to assets that may be used as collateral and cover rules for transactions in financial derivative instruments.
 
Guidelines provide calculation methodologies for different investment strategies
 
Concerning the calculation of the global exposure, CESR sets out detailed methodologies to be followed by UCITS when they use the commitment or the VaR approaches. This means that the risk management process of a UCITS should comprise the right procedures which enable the management company to assess the UCITS’ exposure to all material risks including market risks, liquidity risks, counterparty risks and operational risks. UCITS must assess their investment strategy and portfolio composition on an ongoing basis to establish where an intra-day calculation may be required.
 
Further work on structured UCITS
The feedback of the consultation was positive with stakeholders largely supporting the draft guidelines proposed by CESR. In the consultation paper, CESR sought stakeholders’ views on the most appropriate approach for an optional ‘sensitivity’-based regime in relation to interest rate strategies for the calculation of the global exposure.
 
Given market participants’ feedback on this issue, CESR will carry out further work to assess
whether it might be appropriate for certain types of structured UCITS to use other methodologies than those published to calculate their global exposure. This work will be finalised in time to give stakeholders the possibility to prepare themselves to apply other methodologies for certain types of structured UCITS, when the UCITS IV Directive comes into force, if the outcome of the work is positive.
 
This Directive will become applicable from 1 July 2011.
 
 
 


© CESR - Committee of European Securities Regulators

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