The 11th Annual Fund Compliance & Risk Management Conference

Updating Risk & Collateral Management Updating Risk & Collateral Management Updating Risk & Collateral Management Updating Risk & Collateral Management for UCITS using EPM techniquesfor UCITS using EPM techniquesfor UCITS using EPM techniquesfor UCITS using EPM techniques

Yves de Naurois

18-06-2013

Efficient Portfolio Management Techniques

- Repos

- Reverse Repos

- Securities Lending

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Repos & Reverse ReposRepurchase agreement (spot sale + forward contract)

Open, term, overnightOpen, term, overnightOpen, term, overnightOpen, term, overnight

Seller Buyer

First legFirst legFirst legFirst leg

Securities

Cash

Second legSecond legSecond legSecond leg

Securities

Cash “+”(repo rate)

RepoRepoRepoRepoReverse Reverse Reverse Reverse RepoRepoRepoRepo

Title of securities legally transferred

Coupons passed back to repo seller

Global exposure remains with repo seller

Buyer has a counterparty exposure

4

Repos & Reverse ReposRepurchase agreement (spot sale + forward contract)

Borrower LenderLoan

Collateral

RepoRepoRepoRepoReverse Reverse Reverse Reverse RepoRepoRepoRepo

Securitised loanSecuritised loanSecuritised loanSecuritised loan

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Securities Lending

LenderSecurities

Collateral

Title transferred to borrower

Coupon + dividends passed backed to lender

Lender receives a fee

Lender securitised loan is securitised by collateral

Securities Lending House

Short SellerSecurities

Collateral

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Efficient portfolio management techniques - Disclosures

Prospectus should:Prospectus should:Prospectus should:Prospectus should:

– Disclose the usage of EPM techniques (risks, counterparties, conflicts of interests involved)

– Include costs/fees policy of the techniques. Who receives them (Related parties to the UCITS management company or depositary)

Annual Report Annual Report Annual Report Annual Report should should should should also contain:also contain:also contain:also contain:

– Exposure through EPM techniques

– The identified counterparties

– Type and amount of the collateral received (to reduce the counterparty exposure)

– Revenues arising from EPM techniques

Security lending:Security lending:Security lending:Security lending:

– UCITS should ensure to be able to recall any security lent at any time (7 days)

Reverse repo:Reverse repo:Reverse repo:Reverse repo:

– UCITS should ensure to be able to recall the full amount of cash at any time (7 days)

EPM EPM EPM EPM techniques should techniques should techniques should techniques should be taken into account in the liquidity risk be taken into account in the liquidity risk be taken into account in the liquidity risk be taken into account in the liquidity risk process to process to process to process to meet redemption meet redemption meet redemption meet redemption –––– All revenues minus cost benefit the UCITSAll revenues minus cost benefit the UCITSAll revenues minus cost benefit the UCITSAll revenues minus cost benefit the UCITS

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Repurchase Agreement

Global Exposure

Counterparty Risk

Repo Repo Repo Repo SellerSellerSellerSeller

Securities sold (posted)

Reinvestment of loan

(if r > risk free rate)

Leverage

++++

Value of securities sold (posted)

loan

(vs > L)

minusminusminusminus

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Reverse Repurchase Agreement

Global Exposure

Counterparty Risk

Repo Repo Repo Repo BuyerBuyerBuyerBuyer

None

Value of reinvestment

Leverage

Cash lent + repo rate

Value of securities posted

Adjusted by haircut

idemReinvestment of collateral

HQ Gov. BondsHQ Gov. BondsHQ Gov. BondsHQ Gov. Bonds

ReposReposReposRepos

No reinvestment of collateral minusminusminusminus

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Securities Lending

Global Exposure

Counterparty Risk

Securities Securities Securities Securities lenderlenderlenderlender

None

Value of reinvestment

Leverage

Value of Securities lent

Reinvestment of collateral (cash only)

HQ Gov. BondsHQ Gov. BondsHQ Gov. BondsHQ Gov. Bonds

ReposReposReposRepos

No reinvestment of collateral

Adjusted value of collateral VC > SL

idem

minusminusminusminus

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Collateral management for OTC Derivatives and EPM techniques

Liquidity

• Highly liquid

Valuation

• Daily Basis at least

Issuer Credit Quality

• High quality

Correlation

• Issuer of collateral independent from counterparty

Risk of Collateral Management

• Identification and mitigation of legal and operational risks

Holding of the Collateral

• Depositary• Third party custodian

Non-cash Collateral

• Not be sold or reinvested

Cash Collateral can only be invested in:• Deposits• HQ Bonds• Reverse repo • Short-term money market funds

IFIFIFIF the associated collaterals of OTC derivatives and EPM Techniques are compliant with the following criteria:

They reducereducereducereduce the associated counterpartycounterpartycounterpartycounterparty exposureexposureexposureexposure

Prospectus should include the collateral policy of the UCITS

(types, levels, re-investment policy)

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Should you have any questions…

ContactContactContactContact

Yves de NauroisExecutive Chairman+352 42 26 11 301ynaurois@arkus-fs.com