--Olivia Thetgyi
Proposed guidelines from the Commission of European Securities Regulators on how structured undertakings for collective investments in transferable securities (UCITS) measure risk and calculate exposure could impact the amount of collateral counterparties have to post when entering derivatives trades with the funds.
CESR yesterday began a consultation in response to a request from market participants to provide methodology specifically for structured UCITS. CESR published its risk measurement guidelines for UCITS in general in July.
In the proposed guidelines, CESR has defined structured UCITS as passively managed vehicles structured to achieve a predefined payoff at maturity. The funds must hold the assets needed to ensure the payoff at all times, have a maturity of no more than nine years and be closed to new subscriptions after the initial marketing period.
According to the proposal, UCITS can calculate their global exposure either through a commitment approach or a value-at-risk approach. The commitment methodology for a derivative represents a calculation of the equivalent position in the underlying asset. The value-at-risk approach measures the maximum potential loss for all positions of the UCITS portfolio due to market risk at a given probability over a certain period of time.
The proposed guidelines could impact how much collateral counterparties will have to post when they enter into derivatives with UCITS, said Andrew Sulston, partner at Allen & Overy in London. How much the amount of collateral could change is hard to estimate because the consultation is in its early stages and the amount would differ depending on each fund’s situation, he said.
The consultation poses a raft of new questions. One of the most fundamental ones is if market participants agree with the regulatory body’s definition of a structured UCITS. ”This is a good example of proposed changes to the UCITS regime where it is vital to get it right for the structured UCITS market and avoid unintended consequences,” Sulston said.
Market participants can submit responses to the proposed rules until Dec. 31. The agency will collect feedback in the early part of next quarter, and the revised rules will then be fed into existing regulations for all UCITS, a CESR spokesman said.
