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UCITS IV and Risk Management in Luxembourg - new circular from CSSF (11/508)

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This is a non-official translation from the French original.

Luxembourg, 15 April 2011

To all Luxembourg management companies subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment and to SIAGs within the meaning of Article 27 of the Law of 17 December 2010 regarding undertakings for collective investment.

The purpose of this circular is to clarify the main adjustments that each management company currently subject to Chapter 13 of the Law of 20 December 2002 regarding undertakings for collective investment shall comply with in order to comply by 1 July 2011 with Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment and CSSF Regulation 10-4 transposing Commission Directive 2010/43/EC of 1 July 2010.

In this context the CSSF requests each management company to submit until 1 June 2011 at the latest an update of its application for authorisation completed with the new requirements under the 2010 Law and the Regulation 10-4.

Risk Management (articles 42 to 50 of Regulation 10-4)

Circular CSSF 07/308 relating to the use of a method for the management of risks has introduced the requirement for each management company to communicate to the CSSF a clear and precise procedure for the management of risks.

Article 43 of Regulation 10-4 specifies amongst others that the risk management policy shall cover not only market and counterparty risks but also operational and liquidity risks as well as any other risk that may be material for the UCITS it manages.

Furthermore Article 46 provides that management companies shall calculate the UCITS' global exposure at least on a daily basis.

As a result each management company shall update its risk management procedure taking into account not only the provisions of circular CSSF 07/308 but also the requirements of Articles 42 to 50 of Regulation 10-4 and the guidelines of the European Securities and Markets Authority (ESMA) as set forth in the document "CESR's Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS (CESR/10-788, ESMA GUidelines).

A sophisticated UCITS, as defined in point III, must entrust to a risk management unit (hereinafter referred to as «Risk Management»), which is independent of the units in charge of making portfolio management decisions, the task of identifying, measure, monitor and control the risks associated with the portfolio’s positions.

The following qualitative criteria must be fulfilled in order to allow the Risk Management unit to satisfy the Commission’s expectations in this regard:

  • In order to accomplish its assigned missions, as described in this circular, Risk Management must have a sufficient number of qualified personnel with the necessary knowledge.
  • Risk Management must have the necessary tools (IT and others) for accomplishing the missions described in this circular.
  • The persons who conduct the business of the management company, respectively of the self-managed investment company (hereinafter referred to as "SIAG"), must be actively associated with the risk management and control process. They are notably in charge of approving the adoption of the method of risk management and control.
  • Risk Management must answer directly to the persons who conduct the business, who must be regularly kept informed of Risk Management’s work and the risks run by the UCITS by means of risk monitoring reports. It is up to the persons who conduct the business to take appropriate measures on the basis of the data reported.
  • The Board of Directors of management companies and investment companies are responsible for ensuring that Risk Management complies with applicable legal and regulatory requirements and for ensuring that the mechanisms which have been implemented operate correctly.

These organisational rules must also be complied with by UCITS classified as non-sophisticated UCITS, but which make use of the approach of the internal model, which is explained in greater detail in Point III.

The Commission allows management companies and SIAGs to delegate a portion or all of the risk management and control process to a third party acknowledged to be specialised in this type of activity. Notwithstanding this delegation, the minimum requirements formulated in this circular must be complied with by this third party, and it must be ascertained that the UCITS receives the information required for the risk evaluation regularly, in order to allow it to take the measures which are required and to permit implementation of its own independent check. This delegation does not, in any way, discharge the management company or, respectively, the SIAG of its responsibility of ensuring an adequate follow-up of the UCITS’ risks.

Read it in detail here: http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf07_308eng.pdf

We can assist you in the process of implementing risk management aspects of UCITS IV:

Contactasymptotix JAM sept 10

John Morrison
CIO, Asymptotix
Tel: +32 475 63 2991


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