EUROPE: CESR Launches Consultation on Risk Management Principles for UCITS

Tuesday August 19 2008

CESR has launched a consultation on Risk management principles for UCITS.

The Consultation Paper, published today, proposes a framework for guidelines concerning risk management, providing principles and an outline of the key elements for a standard in the risk management process. Whilst much of this is familiar from other documents such as the Luxembourg CSSF’s Circular 07/308, there are some interesting new proposals here, including the following points:

* An introductory discussion of market risk which hints at the need for credit and liquidity risk etc to be taken into account when calculating market risk;

* The risk management process should be considered by the competent authorities as part of the process for licensing the UCITS ;

* The Board of Directors should be held accountable for the appropriateness of the risk management process ;

* There should be a formalised process for providing periodic written reports to the Board of Directors, providing an in-depth analysis of the consistency between the actual risks and the defined risk profile of the UCITS;

* The Risk Management Policy document should identify the personnel and unit(s) that are in charge of the different parts of the risk management process;

* A confirmation of the potential for outsourcing of the risk management activity, subject to appropriate controls ;

* The Company should ensure that every transaction is immediately taken into account in the calculation of the corresponding limits;

* The risk management process should allow warnings to be generated so that appropriate corrective measures may be taken on a timely basis to prevent breaches.

Next Steps

The principles set out in the Consultation Paper will be complemented by a paper on the technical and quantitative issues related to risk management, which is expected to be published for consultation by the end of 2008. That may, for example, deliver European consistency in the approach to allowable VaR limits and remove current inconsistencies as regards counterparty exposure calculations.

CESR has asked for responses to the questions in this consultation paper to be submitted via CESR `s website (www.cesr.eu) under the section `Consultations`, by 17 October 2008. CESR will then publish a feedback statement and final level 3 text, by the end of this year.

The Consultation Paper can be found at the above link.

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