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

3. Proposal towards Better Management of Non-Financial Risks

While the depositary will adhere to the highest standards for the management of non-financial risks, it will also need to exclude certain assets, techniques, structures, jurisdictions, and counterparties. Assets carrying counterparty risk (not to be confused with credit risk) and all transactions giving rise to counterparty risk and not secured by CCPs would be off-limits: structured products and notes, certificates and depositary receipts, funds that are not restricted UCITS themselves, OTC derivatives and EPM operations would be prohibited; Other assets that cannot be held in custody would be excluded e.g. assets that cannot be physically delivered to the depositary or are not registered or held in an account in the name of the depositary; investments in privately-held companies and interests in partnerships; Transactions that would take place in jurisdictions that do not adequately protect property rights and/or would require the use of market infrastructures that are not compliant with the standards jointly put forward by the Bank for International Settlement (BIS) Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO) and/or would entail relying on insufficiently capitalised, regulated or supervised sub-custodians. In practice, the bulk of European funds are invested in areas were the legal and market infrastructures are robust; a transition towards restricted UCITS would primarily require them to exclude assets and transactions that give rise to counterparty

risk that is not dealt with by CCPs and assets that cannot be held in custody.

74

An EDHEC-Risk Institute Publication