CESR stressed that the calculation of the global exposure is only one element of the UCITS’ overall risk management process. It remains the responsibility of the UCITS to select the right methodology to calculate it. CESR proposes methodologies to be followed by UCITS when VaR approach is used.
This paper sets out CESR’s proposed guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS. These guidelines will accompany the level 2 implementing measures for the revised UCITS Directive (2009/65/EC) that should be adopted by the European Commission by July 2010.
The key purpose of these guidelines is to provide stakeholders with detailed methodologies in order to foster a level playing field among Member States in the area of risk measurement and the calculation of global exposure and counterparty risk for UCITS.
CESR stresses that the calculation of the global exposure represents only one element of the UCITS’ overall risk management process. It remains the responsibility of the UCITS to select an appropriate methodology to calculate it; in that context, CESR proposes detailed methodologies to be followed by UCITS when they use the commitment or the Value at Risk (VaR) approach.
For the commitment approach, CESR sets out proposed guidelines on:
· the conversion of financial derivatives into the equivalent position in the underlying assets of those derivatives;
· the methodologies for netting and hedging arrangements and principles to be respected when calculating global exposure; and
· the calculation of global exposure when using Efficient Portfolio Management Techniques.
Under the commitment approach CESR has also identified, for interest rate-related financial derivative instruments that only expose the UCITS to general interest rate risk, two possible methodologies based on the sensitivity. CESR is consulting stakeholders on which option should be retained. In the context of the commitment approach, CESR also sets out its initial thoughts on specific guidelines for structured UCITS (i.e. formula funds) which would involve an alternative approach to the standard commitment methodology for such UCITS, as well as the criteria they would have to satisfy in order to apply such an approach.
For the VaR approach, CESR proposes guidelines on:
· the principles to be applied for the choice between Relative and Absolute VaR;
· the criteria to be used in the selection of the reference portfolio for use in the Relative VaR calculation;
· the methodology for the computation of the global exposure when using Relative and Absolute VaR with a set of quantitative and qualitative requirements to be respected; and
· additional safeguards which UCITS should put in place when calculating the global exposure with the VaR approach.
In these guidelines, CESR also defines a set of high-level principles relating to assets used as collateral to reduce counterparty risk and cover rules for transactions in financial derivative instruments
Deadline for comments is 31 May 2010
© CESR - Committee of European Securities Regulators
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