Adaptation of a management company to the CSSF Risk Management requirements (CSSF 07/308)
The issue
In August 2007, the CSSF issued the circular CSSF 308/07 (the “circular”) on risk management and use of derivative financial instruments for investment funds subject to part 1 of the law dated 20 December 2002 (or so called “UCITS III funds”).
This circular highlights a significant change in the way management companies are organised and clarifies:
- roles and responsibilities of the management team,
- technical clarifications concerning commitment calculations (for non-sophisticated funds) and Value at Risk (VaR) implementation and other important topics such as counterparty risk calculation for OTC derivatives.
The management team must ensure that:
- the classification of UCITS between sophisticated and non-sophisticated funds is done consistently, on the basis of a self assessment and criteria clearly documented;
- the Risk Management organisation complies with legal requirements;
- the valuation of OTC derivatives is reliable and verifiable on a daily and independent basis.
The technical clarifications cover several aspects including:
- the concept of global exposure,
- the VaR threshold,
- the counterparty risk,
- the look through principle,
- the documentation to be prepared and made available upon CSSF request.
Our approach
We developed a UCITS III Risk Management project workshop. The main objective of this workshop was to review the key implications (regulatory and operational) of the circular CSSF 308/07 (“the circular”) on the existing structures. Our specialists identified the elements that were either non compliant with the circular or not efficient from a commercial, HR, capital or costs perspective. They proposed several Risk Management compliant solutions including the respective pros and cons and a time line for the adaptation.
We helped clients to classify efficiently their range of products between sophisticated and non sophisticated funds and to prepare the required documentation on a cost effective way. We helped them to optimise calculations of counterparty risks for OTC derivatives, as well as the collateral management.
The Outcome
At the end of the project, the management company and the Funds were adapted to the Risk Management circular without any interruption in the cross border distribution. And new products were launched optimising new opportunities resulting from that circular.
