law of 20 December 2002 - Alfi

At the very least, the Commission expects that the work listed below be part of Risk Management’sscope of activities:- determination and follow-up of the global exposure (see point III.1.),- determination and follow-up of the counterparty risk associated with OTC financialderivative instruments (see point III.2.),- check and follow-up of the minimum requirements associated with the determinationof the global exposure and the counterparty risk (see points III.1., III.2., Appendix 1or 2),- determination of and/or follow-up of the use of concentration limits (see point III.3.),- follow-up and check of coverage rules (see point IV.1.),- determination and/or check, if applicable, of the valuations of the OTC financial derivativeinstruments (see point IV.2.),- establishment of the risk monitoring reports for the persons who conduct the businessof the management company, respectively of the SIAG.Depending on the risk profile noted, the Commission may impose more strict measures.III. Limitation of risks applicable to UCITS investmentsThe 2002 law defines a certain number of limitations with respect to the investments whichcan be made by UCITS; these are meant to ensure that the UCITS is not exposed tounreasonable risks which might imperil its continuity and, consequently, the principle of theinvestors’ protection. The limitations shall be briefly introduced at this level, before beingfurther detailed later in this circular:- In compliance with Article 42 (3), “A UCITS shall ensure that its global exposurerelating to derivative instruments does not exceed the total net value of its portfolio.The exposure is calculated taking into account the current value of the underlyingassets, the counterparty risk, foreseeable market movements and the time availableto liquidate the positions”.In its application of this Article, the Commission deems that the global exposure ofUCITS may at most be doubled by the use of financial derivative instruments. TheUCITS’ total commitment is thus limited to 200%. The implications of this limitationare explained more explicitly in point III.1. Given that the counterparty risk associatedwith OTC financial derivative instruments is specifically limited for a given entity bythe provisions of Article 43, the Commission restricts the concept of global exposuresolely to the market risk.To this may be added the possibility for UCITS to borrow up to 10% of its net assets,as long as these are temporary borrowings and that such borrowings may not be usedfor investment purposes.- Pursuant to Article 43 (1), “The risk exposure to a counterparty of the UCITS in anOTC derivative transaction may not exceed 10% of its assets when the counterpartyis a credit institution referred to in Article 41, paragraph (1) f), or 5% of its assets inother cases”. Point III.2. shall deal with the rules with respect to the determination ofthe counterparty risk in greater detail.- Pursuant to Article 42 (3), a UCITS may invest in financial derivative instruments,provided that the exposure to the underlying assets does not exceed in aggregate theinvestment limits laid down in Article 43. The Commission also extends this limitationto the units of UCIs and UCITS referred to in Article 46. The purpose of these limitsis to restrict the exposure which the UCITS may take with respect to a given issuer229