RBS Collective Investment Funds Limited

Transcription

1 Derivatives Risk Management Policy RBS Collective Investment Funds Limited Derivatives Risk Management Policy Part 3 Funds Managed by RBS plc

2 Policy Statement This policy document describes the use of derivative instruments within the Capital Protected Funds ( CPI ) sub-funds of the RBS Investment Funds ICVC. In so doing it addresses: this policy will be presented to and approved by the RBSCIFL CPI Investment Management Committee ( InvCo ). The MI reports are presented to the CPI INVCO on a monthly basis however references can be made to the chair of INVCO where appropriate. Derivatives defined or an option. Capital Protected Funds defined Applicable regulations Specific restrictions on the use of derivatives within Collective Investment Schemes are set out in the Financial Conduct Authority s Collective Investment Schemes Fund objectives as for Efficient Portfolio Management in accordance with the following: No agreement by or on behalf of the Company to dispose of property or rights may be made unless the obligation to make the disposal and any other similar obligation could immediately be honoured by the Company and rights above are owned by the Company 1) the risks of the underlying financial instrument of a derivative can be appropriately represented by another financial instrument and the underlying asset classes: safeguards (e.g. haircuts where relevant). closely corresponding to the current valuation of the financial instrument on its own market.

3 Investment policy Instruments used Please note that the example below is only for illustrative purposes and is not necessarily indicative of the objectives and policies of the CPI Funds. Payout of option = Notional Amount multiplied by the Increase alteration to this approach. formally approved.

4 Limits on exposures Schemes Sourcebook Part 5. counterparty is an approved bank. Any issuer concentrations will be considered in terms of risks by the ACD. collateral: Initial oversight is provided by the Investment Manager ( IM ). Their reports are presented to InvCo monthly for discussion and scrutiny. Cover for derivative positions PROTECTION SPECULATION Buy Puts (pay insurance, no downside risk Sell Puts Sell calls (earn premium, give away upside Buys Calls

5 Type of risk Concentration Limits document (see the appendices of the Overall Risk Management Policy and Governance). The risks include: Cash Flow Risk futures contracts are used to hedge long dated OTC transactions or where additional margin calls are made intra-day) and relevant OTC contracts. Regulatory Risk The Risk of disciplinary measures being taken against the fund due to breach of the rules/principles contained within the FCA s handbook. Reputational Risk of RBSCIFL are managed through Operational Risk. Valuation Risk This is the risk that the valuation of specific transactions may not be accurate. The risk increases for OTC bespoke transactions where the counterparty is the primary pricing source and alternative market prices may not be available. The valuation risk associated with OTC derivatives is managed by independent price verification. There are also a variety of risks specific to the instruments that will be used as detailed below: RBS PLC and these are independently validated by BNY Mellon vendor prices. Any breaches of the investment limits set out in the prospectus or the FCA s Rules would be brought to the attention of Aviva Risk and Compliance. The Investment Managers are responsible for measuring and managing the risks associated with the use of derivatives. The Investment Managers are specialists in their respective fields and establish and monitor risk metrics appropriate to their respective investment styles. An Investment Management Agreement ( IMA ) is negotiated and agreed which sets out that the Investment Manager is responsible for the day to day management of the assets and that it must abide by applicable laws and regulations including those set out by the FCA. Reference should be also made to the DRMP. of Incorporation under the section entitled Valuations. The Net Asset Value of each sub-fund shall be calculated by the Company as at the Valuation Point for each Dealing Day by valuing the assets of each fund and deducting them from the liabilities of each fund. The Instrument of Incorporation and the Prospectus provides for the method of valuation of the assets and liabilities of each fund as follows. The price of a Share in the Company is calculated by reference to the Net Asset Value (or the relevant proportion of the Net Asset Value) of the Fund to which it relates. The Scheme Property attributed to each Fund will be valued at each Valuation Point on each dealing day. The value of the Scheme Property attributed to the Fund will be the value of its assets less the value of its liabilities. All the Scheme Property attributed to the Fund will be included in each valuation. In adverse market circumstance and availability of pricing please refer to the Market Risk and credit spreads. Hedging of a portfolio via derivative transactions can often reduce these risks but is not always appropriate. Market fluctuations and volatility may adversely affect the value of these positions or may reduce the willingness to enter into some new transactions. Liquidity Risk will compound its market risk. Operational Risk by a disruption in the infrastructure that supports the business and the communities in which they are located. Credit Risk Credit risk represents the loss that would be incurred if a counterparty fails to perform under its contractual obligations. The credit risk associated with Over The ratings of each derivative counterparty are contained within the CSA.

6 Forward Foreign Exchange Risk negotiating each transaction on an individual basis. Forward trading is substantially unregulated and there is no limitation on daily price movements and Collateral Risk The Risk arising from under-collateralisation (when receiving collateral) or over collateralisation when giving collateral) which gives rise to counterparty risk or the risk arising from the reinvestment of collateral which could give rise to a capital loss. Legal Risk The risks are minimised in respect of OTC derivatives by ensuring that ISDA agreements are in place with counterparties prior to trading. There are also a variety of risks specific to the instruments that will be used as detailed below: Purchased Options Written Options is therefore linked to the marked-to-market value of the notional underlying asset. Risk control framework of the Investment Manager Governance The Investment Manager s governance structure in relation to derivatives risk management is as follows: Investment Manager Investment Supervisory Committee of derivatives. The Investment Supervisory Committee will be responsible for establishing an independent framework of controls to include the following: of the related fund. and administering transactions. Investment Team immediate notification of all breaches to the Depositary. Operational and Risk Team The Operational and Risk Team has a separate reporting line to the Investment Team. On a monthly basis the Operational and Risk Team will provide sign-off that the investment programme has been managed in accordance with the IMA and Investment and Operational Guidelines. Formal reporting is provided on

7 Exposure Calculation & Monitoring Basis for calculation approach adopted for the CPI funds: The calculation method is the commitment approach as described in the General Guidelines but a) The formula-based investment strategy for each pre-defined payoff is broken down into individual payoff scenarios. Criteria to be fulfilled: Scenarios Scenarios used in the global exposure calculation methodology: final payoff scenarios: Other considerations of the methodology and limits set out for the global exposure calculation: the guidelines.

8 EXAMPLE Current payoff scenario Fund Name NAV NAV per share Number of Shares Global Exposure Calculations under the 3 possible final payoff scenarios Valuation Date MTM Max Loss for switching payoff Capital Protected Accelerator Fund 1 Capital Protected Accelerator Capital Protected Accelerator Capital Protected Fund 4 Capital Protected Fund 5 Capital Protected Positions are downloaded from the accounting system into a series of spreadsheets which flag breaches of the limits approved by RBSCIFL. A breach of any will depend on the type of breach. All breaches will be reported to RBSCIFL.

9 Valuation the options are valued by the Counterparty. The Counterparty bases its computation of the price upon a bespoke model. The valuation produced by this bespoke undertaken on a weekly basis every Wednesday. Eligible Counterparties The Investment Manager will trade in derivatives via approved counterparties. In order to ensure that counterparties are suitable and reliable the Investment Manager has adopted an approved counterparties list. A counterparty will be considered deemed to be approved if: The process of approving new counterparties is the responsibility of the Investment Operations team. Currently the CPI funds are provided by RBS PLC and this fulfils the regulatory standards as an approved Bank. In the event of the derivative provider not being an approved bank detailed below would be the considered due diligent considerations: Collateral management Counterparty. Margin calculation Dealing authority Compliance Procedures Reporting Chairman of InvCo. oversight is maintained and shared through InvCo.

10 Appendix 1 Glossary Term Capital Protected Price Capital Protection Rate Cash Investment Period Derivative Investment Date Growth Potential Period Investment Cycle Non-sophisticated Fund Participation Rate Plain Vanilla Option Protection Date Definition The minimum share price the fund aims to achieve on a Protection Date applicable Capital Protection Rate The percentage of capital that is protected on each Protection Date in these types of asset. The start date of the Growth Potential Period on which assets in the fund move from cash or similar investments in to derivatives. The date at which a funds Growth Potential Period can end early if the relevant Early Trigger Index Growth Level is reached on that date. Growth Potential Period to end early. Early Trigger Index Growth Level is reached on the Early Trigger Date. The period of time the fund invests primarily in derivatives. The period starting on the first day of a Cash Investment Period Protection Date or the Early Trigger Date if the Early Trigger Index Growth Level is reached. Growth Potential Period (if any) multiplied by the Participation Rate. of the transactions should also be considered. Growth Potential Period to determine An option that has a basic structure. The end date of a Growth Potential Period Capital Protected Price applies

11 Appendix 2 Capital Protected Funds, Investment Objectives, Policy and Strategy Fund Investment Objective Investment Policy Investment Strategy CPI Accelerator To provide growth during each Cash Investment Period Growth Potential Period and a return linked to the performance of Investment Cycle will be made up of a Cash Investment Period followed by Growth Potential Period an initial Cash Investment Period. During the Cash Investment Period rated money market schemes or other collective investment schemes which market schemes. to provide shareholders with a Capital Protected Price per share on the first Protection Date after an investment the price of a share on the Derivative Investment Date (plus the value of any initial charge that applied to that share). The Capital Protected Price is dependent upon the Capital Protection Rate the ACD. The Capital Protection Rate will have risen over the Growth Potential Period Index Linked Return will provide accelerated growth by applying the Participation Rate to the During a Cash Investment Period investment policy of the fund is to invest market schemes or other collective to AAA rated money market schemes. During a Growth Potential Period scheme property will be invested in over the counter (OTC) derivatives designed shares are held until the Protection Date. to terminate the fund after any Growth Potential Period. Such termination would Cash Investment Period and shareholders of such termination. During the Growth Potential Period the fund will invest in either a single purchased OTC option or a combination of both purchased and written OTC Index Linked Return shareholders should receive back the Capital Protected Price per share at the Protection Date.

12 Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.