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Compliance

UCITS IV focuses attention on Risk Management Processes

Posted on 7 Jun 2011

On 30 May 2011 the CSSF released Circular 11/512, which is specific to Risk Management Process (“RMP”) of management companies subject to Chapter 13 of the law of 20 December 2002 (“ManCos”) and self-managed investment funds established as UCITS SICAVs.

The Circular 11/512 describes the RMP in detail, including the requirement to establish an independent risk management function performed by a functionally independent internal or external risk manager. It also covers the requirements of tracking the legal limits on the overall risk and counterparty risk.

How does it fall in line with the RM 1,2,3

The ManCos are required to demonstrate the assessment of various risks, such as market risk, operational risk, counterparty risk and liquidity risk.

The UCITS IV regulation was already in place in the United Kingdom, however there are additional rules that will be applicable. The implementation of the enhanced RMP will be mandatory in the United Kingdom by 31 December 2011.

The ManCos are required to submit evidence that they have the relevant procedures in place, including compliance, internal audit and risk management.

They are also required to have internal arrangements in order to ensure that data, such as portfolio transactions and subscriptions and redemptions, is gathered and processed in an efficient way. In addition, procedures like complaints handling and personal transactions, have to be recorded in a readily available format.

The UCITS IV regulation places an increased emphasis on third party oversight, which is particularly evident in the RMP.

Best Execution – reporting on execution venues, trading counterparties and pricing.

Business Continuity Planning

The ManCos are required to update their compliance manuals in order to reflect the new changes.

Laven Legal Services Ltd, whose focus is to offer its clients a practical view of compliance and regulatory requirements combined with legal advice, has already started guiding its clients on how to implement the above mandatory UCITS IV procedures, subject to proportionality where possible so as not to unduly burden the client where it can be avoided.