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Print articleHong Kong: Risk Management Policies and Procedures for the Use of Expanded Investment Powers Under UCITS III
January, 2007 -
Under UCITS Regulations, UCITS III funds are permitted to use financial derivative instruments (FDIs) not only for hedging but also as part of their general investment policies. The Irish Financial Regulator requires that the risks involved in using FDI are properly managed, measured and monitored in an ongoing basis through designing and implementing a comprehensive risk management process (RMP). In other words, if a UCITS III fund is not using FDIs for investment purpose but is using the other expanded investment powers under the UCITS Regulations such as expanded powers regarding investment in money market instruments and other collective investment schemes, the Irish Financial Regulator does not require that the fund’s RMP be submitted for its approval.
However, it should be noted that the SFC does not take the same position. Even though the RMP is usually FDI-oriented in its content, the SFC prefers a fund which uses the UCITS III expanded investment powers to submit its RMP for its approval even if the fund does not seek to use FDIs for investment purpose. Fund managers of UCITS III funds should therefore be aware that an RMP may still be required to be approved by the SFC even though it is not required by the home regulator.
To ensure that UCITS III funds can fully utilise the non-FDI-related expanded investment powers under the UCITS Regulations 2003, it is recommended that fund managers should submit the RMP to the SFC for approval even if it is not currently envisaged that the funds will invest in FDIs. The RMP should be prepared in accordance with the SFC’s Circular on Information relating to the Risk Management and Control Process of UCITS III Funds applying for SFC authorisation issued in August 2006. According to that Circular, the RMP for non-FDI users should contain the following information:
• details and expertise of the personnel responsible for risk measurement and management, whom is expected to be independent from the personnel responsible for making investment decisions;
• details on counterparty risk exposure (where applicable); and
• details of internal reporting procedures.
However, it should be noted that the SFC does not take the same position. Even though the RMP is usually FDI-oriented in its content, the SFC prefers a fund which uses the UCITS III expanded investment powers to submit its RMP for its approval even if the fund does not seek to use FDIs for investment purpose. Fund managers of UCITS III funds should therefore be aware that an RMP may still be required to be approved by the SFC even though it is not required by the home regulator.
To ensure that UCITS III funds can fully utilise the non-FDI-related expanded investment powers under the UCITS Regulations 2003, it is recommended that fund managers should submit the RMP to the SFC for approval even if it is not currently envisaged that the funds will invest in FDIs. The RMP should be prepared in accordance with the SFC’s Circular on Information relating to the Risk Management and Control Process of UCITS III Funds applying for SFC authorisation issued in August 2006. According to that Circular, the RMP for non-FDI users should contain the following information:
• details and expertise of the personnel responsible for risk measurement and management, whom is expected to be independent from the personnel responsible for making investment decisions;
• details on counterparty risk exposure (where applicable); and
• details of internal reporting procedures.
