Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry

Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry - December 2012

Executive Summary

EDHEC-Risk Institute recommends that the depositary guarantees the full restitution of all assets for this new UCITS category . Such a guarantee would allow the “ Restricted UCITS” to be marketed without any duty to advise or any restriction 1 when dealing with retail clients. Furthermore, so that the depositary is not put at risk and obliged to make restitution commitments that it would not be able to fulfil, we recommend that the range of assets and operations eligible under this new form of UCITS be restricted to only assets that can be held in custody by the depositary and operations that do not involve counterparty risk (aside from regulated central counterparties as per the European definition). Additionally, the only transactions that will be authorised will be those conducted in jurisdictions that sufficiently guarantee ownership rights and have market infrastructures that conform to the Bank for International Settlements’ CPSS-IOSCO standards. This restriction of the scope of investments would certainly lead to a fall in the profits generated from the markets and financial innovations such as security lending/ borrowing or the use of OTC derivatives; however, on the other hand of this reduction, full protection 2 against non-financial risks would be ensured, and at a very low cost for investors. In this sense, the performance of Restricted UCITS would also serve as a benchmark for Non Restricted UCITS , which would have to justify increased risks and management fees via a significant increase in performance.

To conclude this summary, we would like to emphasise the positive contribution of our proposals to the development of the European fund management industry. By introducing more stringent requirements in terms of information and proper management of non-financial risks for all UCITS at a reasonable cost, the proposals put forward by EDHEC-Risk Institute are responding to the demands of the investor community and, on a broader scale, to the demands of professionals within the European fund management industry. Moreover, the creation of a new UCITS category that carries virtually no non-financial risk would allow the UCITS label to benefit from a renewed international image in the post-crisis world, thus offering retail clients across the globe an easy-to- understand product, whose guarantee of restitution would enable it to be marketed across all distribution platforms with no specific restriction.

1 - Assuming their financial risks can be easily understood. 2 - Except, of course, in the unlikely event of the default of a regulated central counterparty.

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An EDHEC-Risk Institute Publication