Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Risk management under UCITS IV. Organizational requirements. Bartłomiej Kurzeja

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Risk management framework under UCITS IV Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) Level 1 Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company Level 2 CESR/ Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS Level 3

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /65/EC, Article 51.1 …enables it to monitor and measure at any time: the risk of the positions, their contribution to the overall risk profile of the portfolio. …employ a risk- management process, which… …employ a process for accurate and independent assessment of the value of OTC derivatives. the types of derivative instruments, the underlying risks, the quantitative limits the methods which are chosen in order to estimate the risks associated with transactions in derivative instruments regarding each managed UCITS …communicate to the competent authorities of its home Member State regularly in regard to… A management or investment company shall…

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /65/EC, Article 51.2 Member States may authorise UCITS to employ techniques and instruments relating to: o transferable securities and o money market instruments under the conditions and within the limits which they lay down provided that such techniques and instruments are used for the purpose of efficient portfolio management. When those operations concern the use of derivative instruments, the conditions and limits shall conform to the provisions laid down in this Directive. Under no circumstances shall those operations cause the UCITS to diverge from its investment objectives as laid down in the UCITS’ fund rules, instruments of incorporation or prospectus.

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /65/EC, Article 51.3 UCITS global exposure relating to derivative instruments (also embedded derivatives) ≤ NAV current value of the underlying assets the counterparty risk future market movements time available to liquidate the positions calculated including

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /65/EC, Article 51.4 the Commission shall adopt, by 1 July 2010, implementing measures specifying the following: criteria for assessing the adequacy of the risk management process employed by the management company in accordance with 51.1 detailed rules regarding the accurate and independent assessment of the value of OTC derivatives detailed rules regarding the content of and procedure to be followed for communicating the information referred to in 51.1 to the competent authorities of the management company’s home Member State.

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Commission Regulation 583/2010 – KII Simplified prospectus of a fund will be replaced by Key Investor Information (KII), cointaining stardized set of information Each fund will be obliged to calculate synthetic risk and reward indicator (SRRI), based on the volatility of the fund. Next fund will be assigned a category on a 7 – grade scale SRRI should be supplemented with: o Statements about the fund (e.g. „past performance/repo is may not be a reliable indication of fufture performace/risk”) o Mestrial risks for investors

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 12 PERMANENT RISK MANAGEMENT FUNCTION Duties implement the risk management policy and procedures ensure compliance with the UCITS risk limit system, provide regular reports to the senior management (UCITS current level of risk & actual or foreseeable breaches to their limits) provide advice to the board of directors as regards the identification of the risk profile of each managed UCITS review and support the arrangements and procedures for the valuation of OTC derivatives provide regular reports to the board of directors and, where it exists, the supervisory function Features MC must demonstrate that appropriate safeguards against conflicts of interest hierarchically and functionally independent from operating units (*)

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 38 (1) RISK MANAGEMENT POLICY Management company identifies the risks that UCITS are or might be exposed to establish, implement and maintain comprise such procedures as are necessary to enable the management company to assess for each UCITS it manages the exposure of that UCITS to: market risk liquidity risk counterparty risk operational risk all other risks which may be material comprise such procedures as are necessary to enable the management company to assess for each UCITS it manages the exposure of that UCITS to: market risk liquidity risk counterparty risk operational risk all other risks which may be material comprise

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 38 (2) RISK MANAGEMENT POLICY MC must take into account nature, scale and complexity of UCITS techniques, tools and arrangements that enable MC to comply with the obligations set out in Articles 40 and 41 Article 40 Measurement and management of risk Article 41 Calculation of global exposure the allocation of responsibilities within the management company pertaining to risk management terms, contents and frequency of reporting of the risk management function to the board of directors, senior management and to the supervisory function

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 39 Member States shall require management companies to: o assess, monitor and periodically review: the adequacy and effectiveness of the risk management policy and of the arrangements, processes and techniques referred to in Articles 40 and 41; the level of compliance by the management company with the risk management policy and with arrangements, processes and techniques referred to in Articles 40 and 41; the adequacy and effectiveness of measures taken to address any deficiencies in the performance of the risk management process. o notify to competent authorities of their home Member State any material changes to the risk management process.3. Members States shall ensure that these requirements are subject to review by the competent authorities of the MC’s home Member State on an on-going basis and accordingly when granting authorisation.

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 40 (1) Member States shall require MCs to adopt adequate and effective arrangements, processes and techniques in order to MC must take into account nature, scale and complexity of UCITS measure and manage at any time the risks which the UCITS they manage are or might be exposed to ensure compliance with limits concerning global exposure (Article 41) counterparty risk (Article 43) ensure compliance with limits concerning global exposure (Article 41) counterparty risk (Article 43) MCs must take necessary actions

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 40 (2) For the purposes of Article 40.1, Member States shall require MCs to take the following actions for each UCITS they manage: o put in place such risk measurement arrangements, processes and techniques (accurate measurement of risk & adequate documentation, o conduct, periodic back-tests in order to review the validity of risk measurement arrangements which include model-based forecasts and estimates, o conduct, periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact the UCITS, o establish, implement and maintain a documented system of internal limits for all relevant risks for each UCITS, o ensure that the current level of risk complies with the system of internal limits for each UCITS, o establish, implement and maintain adequate procedures that, in the event of actual or anticipated breaches to the system of internal limits of the UCITS, result in timely remedial actions in the best interests of unit-holders.

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 40 (3) Member States shall ensure that MCs employ an appropriate liquidity risk management process in order to ensure that each UCITS they manage is able to comply at any time with Article 84(1) of Directive 2009/65/EC. o Article 84.1 – A UCITS shall repurchase or redeem its units at the request of any unit-holder.) Where appropriate, management companies shall conduct stress tests which enable assessment of the liquidity risk of the UCITS under exceptional circumstances. Member States shall require management companies to ensure that for each UCITS they manage the liquidity profile of the investments of the UCITS is appropriate to its redemption policy.

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level /43/EC, Article 41 (d) UCITS portfolio (a) derivatives (b) securities lending agreements (SLA) (c) repurchase agreements (repo) at least daily calculation of global exposure, as either of at least daily calculation of global exposure, as either of the incremental exposure and leverage generated by the managed UCITS through the use of financial derivative instruments (a), (b), (c) the incremental exposure and leverage generated by the managed UCITS through the use of financial derivative instruments (a), (b), (c) the market risk of the UCITS portfolio (d) the market risk of the UCITS portfolio (d) Commitment approach UCITS Value-at-Risk (VaR) approach

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX Level 3 – Global exposure – choice of method It is the responsibility of the UCITS to select an appropriate methodology to calculate global exposure. More specifically, the selection should be based on the self-assessment by the UCITS of its risk profile resulting from its investment policy (including its use of financial derivative instruments). A UCITS must use an advanced risk measurement methodology to calculate global exposure (supported by a stress testing program) – the Value-at-Risk (VaR) approach, if: o it engages in complex investment strategies which represent more than a negligible part of the UCITS’ investment policy, o it has more than a negligible exposure to exotic derivatives; o the commitment approach doesn’t adequately capture the market risk of the portfolio.

Ukraine (nr 46514): Expert Mission on Supervision of Investment Funds` Activities - TAIEX 17 Opened part