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law of 20 December 2002 - Alfi

law of 20 December 2002 - Alfi

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When the reasons put forth by the UCITS have been deemed acceptable by the Commission,the latter may exceptionally allow the UCITS to use a different management limit if it isconvinced that the principle <strong>of</strong> investor protection is not endangered by the granting <strong>of</strong> sucha derogation.III.1.3.3. Criteria governing the use <strong>of</strong> a VaR model by UCITSThe use <strong>of</strong> an internal model, as described above, is subject to the Commission’s priorapproval. In order to be able to be considered an acceptable model, all the criteria set forth inAppendix 2 must be complied with.III.2. Limitation <strong>of</strong> the counterparty riskIII.2.1. Maximum limit per entity / groupIn compliance with Article 43 (1) <strong>of</strong> the <strong>20</strong>02 <strong>law</strong>, the risk exposure to a counterparty <strong>of</strong> aUCITS in an OTC derivative transaction may not exceed 10% <strong>of</strong> its assets, when the counterpartyis a credit institution referred to in Article 41, paragraph (1), point f), or 5% <strong>of</strong> its assetsin other cases.It is possible to exclude from the calculation <strong>of</strong> the use <strong>of</strong> counterparty risk limitations, alltransactions on financial derivative instruments executed on a market whose clearing housecomplies with the following three conditions:- backing by an appropriate completion guarantee;- daily valuation <strong>of</strong> the market values <strong>of</strong> the positions on financial derivative instruments;and- making margin calls at least once a day.The counterparty risk is thus reduced, in principle, to OTC financial derivative instruments.III.2.2. Counterparty statusPursuant to Article 41 (1), g), counterparties to OTC derivative transactions must be institutionssubject to prudential supervision and belonging to the categories approved by theCommission. In addition, they must be specialised in this type <strong>of</strong> transaction.III.2.3. Determination <strong>of</strong> the counterparty riskIII.2.3.1. Calculation principlesIn order to determine the counterparty risk relating to OTC financial derivative instruments,UCITS must apply the method, set forth in 3 stages, described below. The Commissionmay, subject to appropriate elements <strong>of</strong> justification, allow UCITS to use another method. Aderogation <strong>of</strong> this nature is subject to the Commission’s prior approval.- 1 st stage:For each contract, the UCITS must determine the current replacement cost by carrying out avaluation at market price. Only the contracts with positive replacement cost will be selectedfor stage 1. The rules to be observed during the valuation process <strong>of</strong> OTC financial derivativeinstruments are specified in point IV.2.233

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