UCITS Risk Management


                           MARILYN RAMPLIN
                         CEO - RAMPLIN CAPITAL
        ...
New CESR Risk Management Proposals


             •V A R
             •C O M M I T M E N T A P P R O A C H
             •S...
New CESR Risk Management Proposals


 Old system of sophisticated vs. unsophisticated funds will be
   abandoned
 The ne...
VaR

 Both VaR & the commitment approach upheld, but
    standardised to ensure harmonisation
   VaR more suitable for f...
Commitment Approach

 New limitations on the commitment approach
 Mainly used by funds with no derivatives
 Funds will ...
Stress Testing

Stress Testing for :
 Liquidity risk
 At least once a month
 Performed as part of the risk management p...
Core tools to measure and manage market risk



                              VAR
                         STRESS TESTING
...
VaR
 VaR
 • Potential loss from simulated historical market moves based on
   worst days over the last year
 • Useful for ...
Stress Testing
      Stress Testing
      • Useful for understanding non-linear exposures
      • Large number of stresses...
Safety of Assets



                                  CUSTODIANS
                                PRIME BROKERS
           ...
Custodians


   The Madoff affair has shown that the obligations of
   the depositaries to return assets to investors are
...
Prime Brokerage

   Lehman has increased the awareness of restitution
   risk, i.e. restoring to the rightful owner assets...
OTC Counterparty Exposure

       Max 5% or 10% counterparty exposure for OTC derivatives


Measure :
   •   Notional is a...
Managing Counterparty Exposure

   •   Choose financially strong , quality counterparties, balance
       sheet
   •   Man...
Collateral Management —Fact vs. Fiction

            Fiction                          Fact

                  Collateral… ...
Managing Counterparty Risk
Netting is allowed
Regulation allows for early termination of derivatives with
counterparties...
Ramplin Capital

   Ramplin Capital can help clients implement a holistic risk
   management process by managing the risks...
Ramplin Capital




Marilyn Ramplin
CEO Ramplin Capital
Founder UCITS for Hedge Funds
+44 20 7266 4423
+44 7515 692480
mar...
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Ucits Hedge Fund Risk Management

  1. 1. UCITS Risk Management MARILYN RAMPLIN CEO - RAMPLIN CAPITAL FOUNDER - UCITS FOR HEDGE FUNDS www.ramplincapital.com
  2. 2. New CESR Risk Management Proposals •V A R •C O M M I T M E N T A P P R O A C H •S T R E S S T E S T I N G www.ramplincapital.com
  3. 3. New CESR Risk Management Proposals  Old system of sophisticated vs. unsophisticated funds will be abandoned  The new proposals should result in improved risk management and measurement by UCITS, which are key elements of investor protection.  Disclosure of risk management methodology used for calculation of global exposure will result in greater transparency www.ramplincapital.com
  4. 4. VaR  Both VaR & the commitment approach upheld, but standardised to ensure harmonisation  VaR more suitable for funds with complex derivatives  VaR calculation to be standardised across both relative and absolute VaR to increase harmonisation  VaR likely to be the preferred measure due to proposed changes in commitment approach  Effort to improve the use of VaR, the advisory body also wants to enforce back-testing in all European member states, which is not the case today. www.ramplincapital.com
  5. 5. Commitment Approach  New limitations on the commitment approach  Mainly used by funds with no derivatives  Funds will have to:  Calculate the leverage levels for each individual derivative  Identify netting and hedging arrangements  Calculate their ―net commitment‖ (ongoing liability to the market).  Market Fear - new measures to increase cost of risk management www.ramplincapital.com
  6. 6. Stress Testing Stress Testing for :  Liquidity risk  At least once a month  Performed as part of the risk management process ―The stress-testing programme should be designed to measure any potential major depreciation of the UCITS value as a result of unexpected changes in the relevant market parameters and correlation factors,‖ says CESR.‖ www.ramplincapital.com
  7. 7. Core tools to measure and manage market risk VAR STRESS TESTING www.ramplincapital.com
  8. 8. VaR VaR • Potential loss from simulated historical market moves based on worst days over the last year • Useful for understanding the risks within a range under normal market conditions A UCITS may assess its exposure by the use of a VAR model. Recommended parameters for calculating VaR: •99% confidence interval •holding period of one month •'recent' volatilities, i.e. no more than one year from the calculation date IF YOU CANNOT MEASURE IT, YOU CANNOT MANAGE IT www.ramplincapital.com
  9. 9. Stress Testing Stress Testing • Useful for understanding non-linear exposures • Large number of stresses across all asset classes • Combine in many ways to search for vulnerabilities For long short leveraged UCITS funds trading derivatives, example of elements to stress: • Financing rates – what if my financing rates change due to a counterparty downgrade or change in market conditions • Collateral - Change in in collateral terms • Significant redemptions on the fund • Significant decrease in liquidity in the market NOW IMAGINE THEM ALL HAPPENING AT THE SAME TIME www.ramplincapital.com
  10. 10. Safety of Assets CUSTODIANS PRIME BROKERS OTC DERIVATIVES COUNTERPARTY www.ramplincapital.com
  11. 11. Custodians The Madoff affair has shown that the obligations of the depositaries to return assets to investors are subject to legal interpretations and domestic discrepancies (Luxembourg vs. France); agenda now is a move towards a better definition and a strengthening of depositaries’ responsibilities www.ramplincapital.com
  12. 12. Prime Brokerage Lehman has increased the awareness of restitution risk, i.e. restoring to the rightful owner assets that has been taken away, lost, or surrendered.  Segregation of assets (sub-custody agreement)  Rehypothecation of assets / collateral  General creditor status  Balance Sheet exposure (securities / cash) www.ramplincapital.com
  13. 13. OTC Counterparty Exposure Max 5% or 10% counterparty exposure for OTC derivatives Measure : • Notional is a reference amount and not a good gauge of risk exposure • Mark to market exposure is the current value of a derivative contract and is a key measure • Calculation under UCITS: Mark to market of the derivatives + Independent Amount posted under your ISDA www.ramplincapital.com
  14. 14. Managing Counterparty Exposure • Choose financially strong , quality counterparties, balance sheet • Manage concentration risk of counterparties through: • Collateral • Resetting derivatives positions on a periodic basis • Risk is not just default of the counterparty, but change in credit rating of the counterparty • What is the risk of a single counterparty • More dynamic monitoring of counterparty ratings – CDS credit spreads ITS A RELATIONSHIP, MANAGE IT www.ramplincapital.com
  15. 15. Collateral Management —Fact vs. Fiction Fiction Fact Collateral… Collateral… • Eliminates credit risk • Mitigates credit risk and • Reduces probability of transforms it into: default • Legal risk • Operational risk • Guarantees zero losses • Market risk • Doesn’t cost anything • Liquidity risk • Always works • Is a risk diversification strategy www.ramplincapital.com
  16. 16. Managing Counterparty Risk Netting is allowed Regulation allows for early termination of derivatives with counterparties Collateral must satisfy the following requirements : • Subject to a daily mark to market • Appropriate haircuts • Government bonds or cash • Held by a third party custodian other than the collateral provider • Enforceable at any time Collateral can be posted to manage this counterparty exposure www.ramplincapital.com
  17. 17. Ramplin Capital Ramplin Capital can help clients implement a holistic risk management process by managing the risks associated with activities that affect both return ON assets and return OF assets. Your expert partners in:  Risk Management  OTC derivatives  Safety of assets  UCITS hedge funds structuring & distribution www.ramplincapital.com
  18. 18. Ramplin Capital Marilyn Ramplin CEO Ramplin Capital Founder UCITS for Hedge Funds +44 20 7266 4423 +44 7515 692480 marilyn@ramplincapital.com www.ramplincapital.com www.ucitsforhedgefunds.com www.ramplincapital.com

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