AIFMD - Risk Management and the related reporting challenges Where do we stand?

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2 Business Unit AIFMD - Risk Management and the related reporting challenges Where do we stand? Strictly Private and Confidential 22 April 2015

3 Agenda Page 1 Risk Management under AIFMD Rules or principles? 1 2 Risk Management principles 3 3 Risk Management distance between theory and 6 practice 4 Risk Management reporting rules 8 5 Consistency the new challenge? 12

4 Section 1 Risk Management under AIFMD Rules or principles? 1

5 Section 1 Risk Management under AIFMD Rules or principles? Risk Management The big picture and key difference Governance Risk Measurement Disclosure An independent Risk Management function must be created Remuneration policy should be consistent with effective Risk Management A clear Risk Management process needs to be implemented Each AIF s risk profile must be defined All risks associated with AIF strategies need to be measured and monitored (Market risk, Counterparty risk, Operational risk, ) The importance of having a strong Liquidity risk management process is particularly stressed Leverage levels as well as methods used need to be cleared identified and monitored Transparency being one of the key overall objectives of the Directive, the level of quantitative and qualitative disclosures to authorities and investors is unprecedented Principle based! Rule based 2

6 Section 2 Risk Management principles 3

7 Section 2 Risk Management principles Risk Management Principles Governance Risk Measurement Disclosure An independent Risk Management function must be created Remuneration policy should be consistent with effective Risk Management A clear Risk Management process needs to be implemented Each AIF s risk profile must be defined All risks associated with AIF strategies need to be measured and monitored (Market risk, Counterparty risk, Operational risk, ) The importance of having a strong Liquidity risk management process is particularly stressed Leverage levels as well as methods used need to be cleared identified and monitored Transparency being one of the key overall objectives of the Directive, the level of quantitative and qualitative disclosures to authorities and investors is unprecedented Principle based 4

8 Section 2 Risk Management principles Risk Management Principles Identify Measure Manage Monitor Market Credit Counterparty 4 key dimensions At least 5 main risk categories Operational Liquidity => Risk profile as a starting point => Include back-testing, stress-testing, risk limits and leverage 5

9 Section 3 Risk Management distance between theory and practice 6

10 Section 3 Risk Management distance between theory and practice Risk Management Distance between theory and practice Regulator expectations The example of the AMF DOC AMF 7

11 Section 4 Risk Management reporting rules 8

12 Section 4 Risk Management reporting rules Risk Management Rules Governance Risk Measurement Disclosure An independent Risk Management function must be created Remuneration policy should be consistent with effective Risk Management A clear Risk Management process needs to be implemented Each AIF s risk profile must be defined All risks associated with AIF strategies need to be measured and monitored (Market risk, Counterparty risk, Operational risk, ) The importance of having a strong Liquidity risk management process is particularly stressed Leverage levels as well as methods used need to be cleared identified and monitored Transparency being one of the key overall objectives of the Directive, the level of quantitative and qualitative disclosures to authorities and investors is unprecedented Rule based 9

13 Section 4 Risk Management reporting rules Risk Management Reporting Rules! Net equity delta, DV01, CS01 Top 5 counterparties Concentration per transaction market VaR, Vega, FX delta These Risk factors must be measured (part of Level 2 guidelines) but computation methods are not defined. Net Equity delta, what shock to apply then? Not only relevant for OTC derivatives but for all counterparty exposures! Aggregation at group level Transparency on derivatives underlying! How to properly reflect the exposure to transaction market? Any acceptable shortcut? Mandatory or not? What shock to apply for delta exposures? 10

14 Section 4 Risk Management reporting rules Risk Management Reporting Rules! Liquidity Leverage How to properly populate the liquidity buckets at assets level? Liability side should be based on prospectus rules. What about discrepancies with the asset side? Attention: Usual interpretation of financial leverage does not correspond to ESMA leverage Both Gross and Net must be computed and, in some scenarios, Gross can be higher than net!!! Bear in mind the reporting in the annual report as well as for the investors! 11

15 Section 5 Consistency the new challenge? 12

16 Section 5 Consistency the new challenge? Consistency Metrics Metrics Financial understanding UCITS Leverage Slope / Beta Sum of notionals AUM Value of assets managed Not defined AIFMD Gross and commitment exposure / NAV Cash + portfolio value + converted value of derivatives Global exposure? Commitment or VaR? Market risk FX, Commodities, IR and Equities VaR Commitment? Net eq delta, CS01, DV01, Vega, VaR, Net FX delta, Net commodity delta 13

17 Section 5 Consistency the new challenge? Consistency Through key documents UCITS Annual Report VaR; Leverage. Investor Prospectus; Factsheet; KIID. Regulato r RMP; Derivatives; Efficiency and adequacy. AIFM Annual Report Remuneration; Investor Prospectus; Factsheet; Information to be available. Regulato r Annex IV; RMP. 14

18 Contacts Benjamin Gauthier Director, Financial Services Risk Office: (+352) Fax: (+352) This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, Société coopérative, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, refers to PricewaterhouseCoopers, Société coopérative, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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