EUROPE: CESR consults on Risk-Reward indicator for KID

Tuesday August 4 2009

CESR has today published an addendum to its 8th July 2009 consultation on the draft advice to the Commission on the format and content of Key Investor Information disclosures for UCITS.

CESR previously proposed the use of a Synthetic Risk and Reward Indicator (SRRI) as the preferred option for funds ` risk and reward disclosure. As stated in the earlier consultation the SRRI should be based on the volatility of the returns (past performance) of the fund.

CESR has now after considering the views of regulators and industry representatives, elaborated a specific methodology for the computation of the SRRI of UCITS funds.

This addendum, which should be read with the 8th July Consultation, explains CESR `s proposals on the following:

1) the definition of upper and lower bounds for the volatility intervals ( `buckets `); and

2) the detailed explanation of the risk classification process for structured funds.

CESR invites responses to this consultation paper by 10 September

Background:

The preference for SRRI is a result of factors including the findings from the European Commission `s testing exercise, which revealed that investors have a strong preference for the inclusion of a synthetic indicator in the KID. The testing also revealed that investors seem to be more confident in their ability to compare funds and assess their level of risk when they are provided with a synthetic risk and reward indicator based on a numerical scale.

The methodology has been tailored to cover the particular features of the different types of fund and, in particular, to satisfy the following criteria:

*Applicability to as many funds as possible;

*No room for manipulation;

*Easy implementation by UCITS providers;

*Easy and effective supervision by regulators;

*Stability against normal trends and fluctuations of financial markets.