Updating Risk & Collateral Management for UCITS using EPM techniques
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Presentation of Yves de Naurois during the 11th Annual Fund Compliance & Risk Management Conference hosted by ESAFON in Luxembourg on the 18th of June 2013. In this presentation Yves is using his experience in advising UCITS funds to steer the topic of conversation around Updating Risk & Collateral Management for UCITS using EPM Techniques.
Updating Risk & Collateral Management for UCITS using EPM techniques
- 1. The 11th Annual Fund Compliance & Risk Management Conference Updating Risk & Collateral UUUpppdddaaatttiiinnnggg RRRiiissskkk &&& CCCooollllllaaattteeerrraaalll MMMMaaaannnnaaaaggggeeeemmmmeeeennnntttt ffffoooorrrr UUUUCCCCIIIITTTTSSSS uuuussssiiiinnnngggg EEEEPPPPMMMM tttteeeecccchhhhnnnniiiiqqqquuuueeeessss Yves de Naurois 18-06-2013
- 2. Efficient Portfolio Management Techniques - Repos - Reverse Repos - Securities Lending
- 3. 3 Repos & Reverse Repos Repurchase agreement (spot sale + forward contract) Open, OOOpppeeennn,,, tttteeeerrrrmmmm,,,, oooovvvveeeerrrrnnnniiiigggghhhhtttt FFFFiiiirrrrsssstttt lllleeeegggg Securities Cash Seller Buyer SSSSeeeeccccoooonnnndddd lllleeeegggg Securities Cash + (repo rate) RRRReeeeppppoooo RRRReeeevvvveeeerrrrsssseeee RRRReeeeppppoooo Title of securities legally transferred Coupons passed back to repo seller Global exposure remains with repo seller Buyer has a counterparty exposure
- 4. 4 Repos & Reverse Repos Repurchase agreement (spot sale + forward contract) Loan Borrower Lender Collateral RRRReeeeppppoooo RRRReeeevvvveeeerrrrsssseeee RRRReeeeppppoooo SSSSeeeeccccuuuurrrriiiittttiiiisssseeeedddd llllooooaaaannnn
- 5. 5 Securities Lending Lender Securities Collateral Securities Lending House Short Seller Securities Collateral Title transferred to borrower Coupon + dividends passed backed to lender Lender receives a fee Lender securitised loan is securitised by collateral
- 6. 6 Efficient portfolio management techniques - Disclosures PPPPrrrroooossssppppeeeeccccttttuuuussss sssshhhhoooouuuulllldddd:::: Disclose the usage of EPM techniques (risks, counterparties, conflicts of interests involved) Include costs/fees policy of the techniques. Who receives them (Related parties to the UCITS management company or depositary) AAAAnnnnnnnnuuuuaaaallll RRRReeeeppppoooorrrrtttt sssshhhhoooouuuulllldddd aaaallllssssoooo ccccoooonnnnttttaaaaiiiinnnn:::: Exposure through EPM techniques The identified counterparties Type and amount of the collateral received (to reduce the counterparty exposure) Revenues arising from EPM techniques SSSSeeeeccccuuuurrrriiiittttyyyy lllleeeennnnddddiiiinnnngggg:::: UCITS should ensure to be able to recall any security lent at any time (7 days) RRRReeeevvvveeeerrrrsssseeee rrrreeeeppppoooo:::: UCITS should ensure to be able to recall the full amount of cash at any time (7 days) EEEEPPPPMMMM tttteeeecccchhhhnnnniiiiqqqquuuueeeessss sssshhhhoooouuuulllldddd bbbbeeee ttttaaaakkkkeeeennnn iiiinnnnttttoooo aaaaccccccccoooouuuunnnntttt iiiinnnn tttthhhheeee lllliiiiqqqquuuuiiiiddddiiiittttyyyy rrrriiiisssskkkk pppprrrroooocccceeeessssssss ttttoooo mmmmeeeeeeeetttt rrrreeeeddddeeeemmmmppppttttiiiioooonnnn AAAAllllllll rrrreeeevvvveeeennnnuuuueeeessss mmmmiiiinnnnuuuussss ccccoooosssstttt bbbbeeeennnneeeeffffiiiitttt tttthhhheeee UUUUCCCCIIIITTTTSSSS
- 7. 7 Repurchase Agreement Global Exposure Counterparty Risk RRRReeeeppppoooo SSSSeeeelllllllleeeerrrr Securities sold (posted) + Reinvestment of loan (if r > risk free rate) Leverage Value of securities sold (posted) mmmmiiiinnnnuuuussss loan (vs > L)
- 8. 8 Reverse Repurchase Agreement Global Exposure Counterparty Risk RRRReeeeppppoooo BBBBuuuuyyyyeeeerrrr No reinvestment of collateral None mmmmiiiinnnnuuuussss Value of reinvestment Leverage Cash lent + repo rate Value of securities posted Adjusted by haircut Reinvestment of collateral idem HHHHQQQQ GGGGoooovvvv.... BBBBoooonnnnddddssss RRRReeeeppppoooossss
- 9. 9 Securities Lending Global Exposure Counterparty Risk SSSSeeeeccccuuuurrrriiiittttiiiieeeessss lllleeeennnnddddeeeerrrr None Value of reinvestment Leverage Value of Securities lent No reinvestment of collateral Reinvestment of collateral (cash only) HHHHQQQQ GGGGoooovvvv.... BBBBoooonnnnddddssss RRRReeeeppppoooossss mmmmiiiinnnnuuuussss Adjusted value of collateral VC > SL idem
- 10. 10 Collateral management for OTC Derivatives and EPM techniques Liquidity Highly liquid Valuation Daily Basis at least Issuer Credit Quality High quality Correlation Issuer of collateral independent from counterparty Risk of Collateral Management Identification and mitigation of legal and operational risks Holding of the Collateral Depositary Third party custodian Non-cash Collateral Not be sold or reinvested Cash Collateral can only be invested in: Deposits HQ Bonds Reverse repo Short-term money market funds IIIIFFFF the associated collaterals of OTC derivatives and EPM Techniques are compliant with the following criteria: They rrrreeeedddduuuucccceeee the associated ccccoooouuuunnnntttteeeerrrrppppaaaarrrrttttyyyy eeeexxxxppppoooossssuuuurrrreeee Prospectus should include the collateral policy of the UCITS (types, levels, re-investment policy)
- 11. 11 Should you have any questions CCCCoooonnnnttttaaaacccctttt Yves de Naurois Executive Chairman +352 42 26 11 301 ynaurois@arkus-fs.com