COLL 6.12 Risk management policy and risk measurement

1This section applies to an authorised fund manager and a depositary of a UCITS scheme.6

1. (1) 3
   1. (a)

      An authorised fund manager of a UCITS scheme 6 must use a risk management process enabling it to monitor and measure at any time the risk of the scheme's positions and their contribution to the overall risk profile of the scheme.3

   2. (b)

      In particular, an authorised fund manager of a UCITS scheme 6 must not solely or mechanistically rely on credit ratings issued by credit rating agencies, as defined in article 3(1)(b) of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, or credit rating agencies as defined in the CRA Regulation,6 for assessing the creditworthiness of the scheme's assets.3

2. (2)

   An authorised fund manager 6 must regularly notify the following information5 to the FCA and at least on an annual basis:

   1. (a)

      a true and fair view of the types of derivatives and forward transactions to be used within the scheme together with their underlying risks and any relevant quantitative limits; and

   2. (b)

      the methods for estimating risks in derivative and forward transactions.

5An authorised fund manager 6 subject to COLL 6.12.3R(2) must notify the FCA of the information specified in points (a) and (b) of that rule:

1. (1)

   annually, within 30 business days of 31 October, with information that is accurate as of 31 October of that year;

2. (2)

   using the form in COLL 6 Annex 2R; and

3. (3)

   by submitting it:

   1. (a)

      online through the appropriate systems accessible from the FCA’s website; or

   2. (b)

      if the appropriate systems are unavailable, via email to fundsupervision@fca.org.uk.

1. (1)

   An authorised fund manager of a UCITS scheme 6 must establish, implement and maintain an adequate and documented risk management policy for identifying the risks to which that scheme is or might be exposed.

2. (2)

   The risk management policy must comprise such procedures as are necessary to enable the authorised fund manager 6 to assess the exposure of each UCITS it manages to market risk, liquidity risk and counterparty risk, and to all other risks, including operational risk, that might be material for that scheme.

3. (3)

   The risk management policy must address at least the following elements:

   1. (a)

      the techniques, tools and arrangements that enable the authorised fund manager 6 to comply with the obligations set out in this section and COLL 5.3 (Derivative exposure);

   2. (b)

      the allocation of responsibilities within the authorised fund manager 6 pertaining to risk management; and

   3. (c)

      the terms, contents and frequency of reporting of the risk management function referred to in COLL 6.11.2 R (Permanent risk management function) to the governing body, senior personnel and, where appropriate, to the supervisory function.

4. (4)

   To meet its obligations in (1), (2) and (3) an authorised fund manager 6 must take into account the nature, scale and complexity of its business and of the UCITS it manages.

1. (1)

   An authorised fund manager of a UCITS scheme 6 must assess, monitor and periodically review:

   1. (a)

      the adequacy and effectiveness of the risk management policy and of the arrangements, processes and techniques referred to in COLL 6.12.5 R;

   2. (b)

      the level of compliance by the authorised fund manager 6 with the risk management policy and with those arrangements, processes and techniques referred to in COLL 6.12.5 R; and

   3. (c)

      the adequacy and effectiveness of measures taken to address any deficiencies in the performance of the risk management process.

2. (2)

   The authorised fund manager 6 must notify the FCA of any material changes to the risk management process.

1. (1)

   An authorised fund manager of a UCITS scheme 6 must adopt adequate and effective arrangements, processes and techniques in order to:

   1. (a)

      measure and manage at any time the risks to which that UCITS is or might be exposed; and

   2. (b)

      ensure compliance with limits concerning global exposure and counterparty risk, in accordance with COLL 5.2.11B R (Counterparty risk and issuer concentration) and COLL 5.3 (Derivative exposure).

2. (2)

   For the purposes of (1), the authorised fund manager 6 must take the following actions for each UCITS it manages:

   1. (a)

      put in place such risk measurement arrangements, processes and techniques as are necessary to ensure that the risks of positions taken and their contribution to the overall risk profile are accurately measured on the basis of sound and reliable data and that the risk measurement arrangements, processes and techniques are adequately documented;

   2. (b)

      conduct, where appropriate, periodic back-tests in order to review the validity of risk measurement arrangements which include model-based forecasts and estimates;

   3. (c)

      conduct, where appropriate, periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact the UCITS;

   4. (d)

      establish, implement and maintain a risk limit system for each UCITS;

   5. (e)

      ensure that the current level of risk complies with that risk limit system; and

   6. (f)

      establish, implement and maintain adequate procedures that, in the event of actual or anticipated breaches to that risk limit system, result in timely remedial actions in the best interests of unitholders.

3. (3)

   The arrangements, processes and techniques referred to in (1) should be proportionate in view of the nature, scale and complexity of the business of the authorised fund manager 6 and the UCITS it manages and be consistent with the UCITS' risk profile.

1. (1)

   An authorised fund manager 6 must employ an appropriate liquidity risk management process in order to ensure that each UCITS it manages is able to comply at any time with COLL 6.2.16 R (Sale and redemption)6.

2. (2)

   Where appropriate, the authorised fund manager 6 must conduct stress tests to enable it to assess the liquidity risk of the UCITS under exceptional circumstances.

An authorised fund manager 6 must ensure that, for each UCITS it manages, the liquidity profile of the investments of the scheme is appropriate to the redemption policy laid down in the instrument constituting the fund2 or the prospectus.