The Issue – SIF are now required to comply with tighter risk management and conflict of interest requirements
The CSSF Regulation 12-01 introduced implementing measures regarding Article 42bis of the amended Law of 13 February 2007 on Specialised Investment Funds. All SIFs must now:
- Establish a risk management function, hierarchically and functionally independent from operating units including portfolio management;
- Oversee and monitor delegated risk management activities - the conducting officers remain fully liable for the adequacy and efficiency of the risk management system;
- Implement and maintain a documented risk management policy and procedures covering at least market risk, liquidity risk, counterparty risk, and all other risks material to the fund including operational risk;
- Implement processes to monitor risks material to the SIF and their contribution to the risk profile of the fund, as well as, when appropriate, monitoring of compliance with an internal risk limitation system;
- Establish, implement and maintain an appropriate conflicts of interest policy, including identification, mitigation, management, record and disclosure policies;
- Communicate to the CSSF a description of the risk management policy and of the conflict of interest policy as part of the authorisation file, and following any material change.
Regarding point 1 above, obligation of independence can be waived based on proportionality principle and when appropriate safeguards against conflicts of interest have been adopted.
- New SIFs must comply with this Regulation since inception
- Existing SIF have until 31 December 2012 to comply with this Regulation
Defining the target operating model in order to meet these new requirements may be challenging for an industry previously accustomed to low regulation regarding risk management.
Furthermore, anticipating the transposition of the AIFM Directive into Luxembourg Law, Regulation 12-01 brings also the opportunity for management companies and investment funds to benchmark their existing risk management procedures for Part II Funds against market practices and forthcoming new requirements.
Our approach – towards better risk governance and reporting
We propose our client to develop a risk management framework based around the following building blocks, taking into account the scale, nature and complexity of the SIF:
- Organisation & governance
- Risk governance model, roles and responsibilities
- Risk appetite and risk tolerances / limits / guidelines
- Risk mitigation policies
- In-house vs. delegated activities
- Review procedures
- Systems, measures & control
- Initial due diligence and pre-investment risk assessment
- Risk measurement framework (e.g. risk metrics, key risk indicators, key performance indicators, etc.)
- Control and monitoring procedures
- Reporting & escalation procedures
- Meaningful and actionable risk reporting
- Interactions with portfolio management and investment decisions
- Escalation procedures
Our approach towards conflicts of interest policy is articulated around the following steps:
Our approach prioritizes and addresses areas that are of most regulatory criticality in a pragmatic and tailored-made manner.
Our risk management services and solutions for SIF
Deloitte’s value proposition for risk management and conflict of interest for SIF the following areas:
- Review, gap analysis and update of your risk management procedures and conflicts of interest policies in light of new regulatory requirements;
- Preparation and conducting of dedicated workshops to assist you in structuring your risk management procedures and conflicts of interest policies;
- Assistance in specific areas such as: key risk indicators development, risk modelling, risk reporting design, stress testing design and implementation, initial due diligences, valuation methodologies review, vendor or service provider selection, etc.
- Support your market, liquidity, credit or counterparty risk measurement and reporting;
- Support your due diligence on contemplated acquisition;
- Support your valuation of illiquid assets (for non-audit clients).