A Better Grasp of Non-financial Risks

The European Fund Management Industry Needs a Better Grasp of Non-financial Risks — December 2010

Executive Summary

EU rules would be drafted as regulations, not only as directives. These rules should specify the duties of all parties and the legal proceedings involved when losses occur. The ESMA should be responsible for the direct supervision of funds or at least have very clear direct authority over country supervisors. Last, if the member states of the European Union are unable to agree on reform, UCITS not exposed to non-financial risks should be distinguished from more modern UCITS that have potentially greater exposure to these risks. Secure UCITS funds would be investment funds for which the depositary has unconditional responsibility for returning assets. The eligibility of assets—by regulation or by the contract between the fund and the depositary—would then depend on both financial and operational criteria. These funds, with the necessary changes having been made, would be akin to those of the 1980s, when the UCITS label was created: for the most part, their assets would be listed European financial securities admitted to central securities depositories systems. It is clear that this distinction between secure UCITS and other UCITS can be considered an option only by default; we believe that incentives to manage non-financial risks, increased disclosure of these risks, and regulatory harmonisation are better ways for the UCITS framework to take non-financial risks into account.

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An EDHEC-Risk Institute Publication