EFAMA members strongly believe that the proposed calculation methodology by scenario is

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1 EFAMA Reply to CESR s Consultation Paper on CESR s Guidelines on Risk Measurement and the Calculation of Global Exposure for certain types of structured UCITS EFAMA 1 is very grateful to CESR for proposing a specific approach for the application of the guidelines on the calculation of the global exposure for certain types of structured UCITS. Our members welcome the availability within the CESR s risk measurement guidelines of either the VAR method or the commitment method. General Comments EFAMA members strongly believe that the proposed calculation methodology by scenario is appropriate for certain types of structured UCITS. Structured UCITS are a very important category of UCITS in several Member States (particularly in France, Spain, Luxembourg, Belgium). They offer useful features (that are in high demand among investors and cannot be replicated by retail investors). Should it become impossible to deliver these payoffs under the UCITS framework, they would be created under other legal wrappers providing far less investor protection and transparency (for example as structured products under the Prospectus Directive, or as banking or insurance products). EFAMA strongly believes that appropriate disclosure is key to help investors understand the features of structured UCITS and the payoff structure, and the scenarios included in the future KID will play an important role in this respect. 1 EFAMA is the representative association for the European investment management industry. Through its 27 member associations and 46 corporate members, EFAMA represents about EUR 14 trillion in assets under management, of which EUR 7.7 trillion was managed by approximately 53,000 funds at the end of September Square de Meeûs B 1050 Bruxelles Fax e mail : info@efama.org

2 2 Detailed replies 1. Do you agree with the proposed approach for the calculation of global exposure by certain types of structured UCITS which satisfy the criteria in paragraph 2 of Box 29? A large majority of EFAMA members broadly agrees, but please see our reply to Questions 2 through 7. We would welcome a clarification from CESR whether all criteria in Box 29 should apply. 2. Do you agree with the proposed criteria for these structured UCITS? 3. Do you agree with the scope of the application of the alternative approach that derives from the criteria and global exposure calculation approach laid down in paragraph 2 of Box 29? If there are any specific criteria which could present difficulties for certain UCITS, could you elaborate on the reasons for your views and describe the types of UCITS concerned? 4. Can you suggest any alternative criteria? EFAMA agrees with many of the criteria mentioned, with the following exceptions: Para. 2 (a): EFAMA agrees, but with regard to passively managed our members wish to reiterate that it should not rule out any portfolio management, and in particular prevent the manager from actively managing his relations with derivatives counterparties, actively entering and unwinding derivatives, changing counterparties, managing counterparty risks, managing inflows and outflows, etc. Para. 2(c): EFAMA disagrees with the statement that the investor can only be exposed to one scenario at any time during the life of the UCITS, which conflicts with reality and existing fund structures. At any time before maturity there are usually several scenarios the investor could be exposed to. Only at maturity there is clarity about the past performance of the underlying assets and therefore only one payoff profile is relevant. We therefore suggest modifying the wording as follows: at any given time during the life of the UCITS only one payoff profile applies to the investor. For Para. 2 (e), (f) and (h) please see our answers to Questions 5, 6 and 7.

3 3 5. Do you agree with the proposal to limit the maturity of structured UCITS which may apply the provisions of Box 29 to 9 years? Do you have any alternative suggestions? EFAMA members suggest limiting the maturity to 15 years instead of 9 years. They believe that longer maturities up to 15 years are needed in order to respond to specific needs in terms of longer investment periods (for example for pension/retirement products or for insurance products). Furthermore, the maturity is understood to start after the initial marketing period. 6. Do you agree with the proposal to prohibit these structured UCITS from accepting new subscriptions after the initial offer period? EFAMA believes that it is sufficient if the UCITS is no longer actively marketed after the initial marketing period. A complete closing of the fund would have a negative impact on the pricing of the derivatives obtained by the fund, as counterparties would know that trades in the secondary market would be only in one direction (selling). 7. Do you agree with the proposed criteria to limit the maximum loss the UCITS can suffer under any individual scenario on any given day? Can you suggest any methods by which this loss can be limited or other safeguards which would deal with the risks posed by barrier type features as described in Box 29? EFAMA members agree because the maximum loss is inherently limited by the diversification requirements. 8. Do you agree with the proposals regarding structured UCITS which were authorised before 1 July 2011? Do you have any alternative suggestions? Yes. EFAMA welcomes the grandfathering provisions. 9. Are the examples provided in paragraph 97 useful in illustrating the diversification requirement?

4 4 10. Can you suggest alternative examples? Examples are useful, but some corrections are necessary. Examples 1 and 2 on page 6: the payoff structures are incorrect, as the formula is not "closed". In both examples 1 and 2, the two bullet points are not mutually exclusive. It is possible for one of the shares to be positive and, at the same time, one of the shares to be negative. The language in the first bullet point should therefore be modified from if the performance of one of the shares is positive to if the performance of all the shares is positive. 11. Do you think the examples in paragraph 98 correctly explain how global exposure is calculated in different scenarios? 12. Do you have alternative examples? First of all, the mathematical notation in the box at the top of Page 7 (scenario 1) requires correction: EUR 1,000*120%*30%=EUR 1360 should be changed into EUR 1000*(100%+(30%*120%))=EUR1360. With regard to the cases, EFAMA partially agrees with CESR. We have comments on Case 1 and 3. Case 1: The case of a UCITS invested in a total return swap with a counterparty leads to a calculation of global exposure that complies under the provisions of Box 3 with the global exposure requirements (case 1). The structure that involves a total return swap is one of the technical set ups under Box 3. however, structures that involve 1. [set up of a fully collateralised repo with a counterparty + a performance swap]; 2. [an investment portfolio + a performance swap + an external guarantee of the payoff] also comply with Box 3 and may be seen as an equivalent structure to the one detailed under the Case 1 [an investment portfolio + a total return swap]. All three structures are technical practices that implement an equivalent structure depicted in paragraph 98, Case 1. This structure complies with global exposure requirements under the provisions of Box 3 of the guidelines.

5 5 Case 3: the difference in treatment between risk free assets in Case 2 and low risk but not risk free assets in Case 3 results in lack of compliance with the alternative approach, but this is not justified by the economic difference. EFAMA agrees that cash invested in non risk free assets should lead to an increment of the product s global exposure, but finds CESR s distinction between risk free and high quality low risk arbitrary, and is concerned it will lead to instability in the future. In view of the current turmoil in EU government bond markets, the definition of risk free assets has already become very difficult, and CESR does not foresee any transition mechanism from one to another calculation: what would happen if a risk free asset suddenly lost that characteristic? As a result, the use of the commitment approach should be allowed also for Case Do you agree with the proposed prospectus disclosure requirements in Box 30? Yes, EFAMA fully agrees. Disclosure is crucial for this type of fund 14. Is the terminology used in the guidelines clear? Are there any terms used for which you feel it would be helpful to have a definition? Yes. We stand ready to answer any questions in regard to our reply. Sincerely, Peter De Proft Director General 23 December 2010 [ ]