Risk Management under UCITS III/IV shows how assetmanagers, fund administrators, management companies and riskdepartments can satisfy the various financial regulators, whichgovern European markets, that they have adequate risk monitoringprocedures in place for the funds they manage or administer. The book explains all the requirements for risk management underthe new UCITS III/IV regime, as well as the universe of financialinstruments which can be used by portfolio managers, and identifiestheir associated risks and possible mitigation strategies. Itis therefore required reading for anyone trying to fully understandand comply with UCITS III/IV requirements.
Christian Szylar is a Member at Kinetic Partners LLP and heads up Kinetic Partners' risk monitoring solution using sophisticated IT based risk engines to monitor and report on areas such as investment restrictions, liquidity, counterparty risk and VaR. Previously, he was conducting officer of RBS (Luxembourg) SA, a UCITS III Management Company as well as Managing Director of RBS Portfolio Risk Services, based in Luxembourg, where he developed a portfolio of risk management services tailored for asset managers. Christian holds a PhD in Management Science, and specialised in Finance and Corporate Strategy at MIT/Sloan School of Management. Christian is a regular speaker at many industry conferences. In addition he contributes to journals frequently, writing articles for many specialized magazines. Christian also teach in different Master degrees in University of Nancy II and Toulouse.
Introduction xi Acknowledgements xv PART I. WHAT YOU HAVE TO KNOW ABOUT UCITS TO UCITS III1 Chapter 1. UCITS to UCITS III 3 1.1. UCITS primer and market size 3 1.2. UCITS a success story: from UCITS to UCITS III/IV8 1.3. Conclusion focus on risk management 26 Chapter 2. Risk Management History: From Banks to the AssetManagement Industry 33 2.1. Insight on risk management 33 2.2. A Brief History of Risk Management 39 2.3. From Risk Management to Value-at-Risk 49 2.4. From Portfolio Theory and Capital Requirements to UCITS60 Chapter 3. Definition of the Value-at-Risk 63 3.1. VaR calculation models 65 3.2. Monte Carlo simulation 83 3.3. Conclusion 92 PART II. UCITS RISK MANAGEMENT 95 Chapter 4. UCITS III Risk Management Process and Taxonomy ofRisks 97 4.1. Risk manager s role and responsibilities 97 4.2. Taxonomy of risks 98 Chapter 5. Risk Management Organization 103 5.1. Risk standards 104 5.2. Description of the risk management process (RMP) 113 5.3. UCITS risk management process 117 5.4. Disclosure requirements 122 5.5. CSSF 07/308 124 Chapter 6. Financial Derivative Instruments and UCITS127 6.1. Swap 127 6.2. Contracts for difference 137 6.3. The forward contract 138 6.4. The futures contract 139 6.5. Options 141 6.6. Warrant 143 Chapter 7. Global Exposure and Leverage 145 7.1. Global exposure overview 145 7.2. Sophisticated and non-sophisticated UCITS: is there adistinction? 148 7.3. Sophisticated and non-sophisticated UCITS: how to assessmarket risk/global exposure 150 Chapter 8. Stress Testing 163 8.1. Definition and overview of stress testing 163 8.2. Main approaches 166 8.3. Types of scenarios 167 8.4. Stress test scenarios 171 8.5. Scenario management/stress testing with PMS 174 Chapter 9. Backtesting 177 9.1. Overview 177 9.2. Back-testing may also reveal important limitations of VaR183 9.3. Back testing with PMS 186 Chapter 10. Counterparty and Issuer Risk, ConcentrationLimits and Appropriate Cover 191 10.1. Counterparty risk 191 10.2. Issuer risk and concentration limits 196 10.3. Appropriate cover in the absence of cash-settlement196 Chapter 11. Liquidity Risk 199 11.1. Overview 199 11.2. Assessing liquidity constraints 201 11.3. Estimation of portfolio liquidity based on historicalmarket data 201 11.4. LVaR 206 Chapter 12. Other Risk Indicators that can be used in theRisk Management Process 209 12.1. Market risk 209 12.2. Interest rate risk 213 12.3. The case of Greeks for the options 218 12.4. Conclusion 223 Conclusion 225 Appendices 233 Bibliography 265 Index 271