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

Appendix: Illustration of Good Practices for the Management of Non-Financial Risks

Reinvestment of collateral cash and re-hypothecation of non-cash collateral probably need to be limited to facilitate access to collateral in times of crisis; the easiest way to do so 83 is to disallow reinvestment and re-hypothecation and would be the natural inclination of most regulators (e.g. BCBS and IOSCO); this would further restrict the availability of much-sought after collateral and increase costs since revenues and other benefits enjoyed by the party reinvesting or re-hypothecating would disappear. To secure non centrally cleared transactions, tripartite agreement can be used where a third-party custodian or international clearing organisation acts as an intermediary. The tri-party agent is responsible for the administration of the transaction and the collateral, according to the agreement between the two other counterparties, which will govern eligible collateral, applicable haircuts, and authorised transactions. Such agreements can thus be used to secure transactions with a combination of less liquid instruments and high haircuts (over-collateralisation).

83 - Alternatives may require significant changes in bankruptcy laws.

82

An EDHEC-Risk Institute Publication