PIB A5.7 PIB A5.7 Collective Investment Fund Risk Capital Requirement
PIB A5.7 Guidance
This section presents the method for the calculation of
Collective Investment FundRisk Capital Requirementfor the purpose of PIB Rule 5.9.1(b).
Authorised Firmwhich calculates its Collective Investment FundRisk Capital Requirementin accordance with PIB Rule 5.9.1(b) must apply the Rulesin this section.
Authorised Firmmust calculate its Collective Investment FundRisk Capital Requirementby:(a) identifying all applicable positions in Fundswithin the scope of the requirement, including notional positions derived from certain instruments;(b) identifying the positions in Fundswhich will be subject to the risk Capital Requirementsspecified under this section;(c) converting on a daily basis net positions in every Fundto the Authorised Firm'sbase currency at the prevailing spot foreign exchange rate;(d) calculating a Collective Investment FundRisk Capital Requirementfor each individual position in a Fund; and(e) summing the resultant Capital Requirementscalculated in (d).
PIB A5.7.3(1) For the purposes of PIB Rule A5.7.2, an
Authorised Firmmust calculate its Collective Investment FundRisk Capital Requirementfor all Trading Bookpositions in Funds, unless they are covered under one of the Fundlook through methods and included in the risk Capital Requirementcalculations for the relevant underlying Investmentsor subject to an Option Risk Capital Requirement.(2) An Authorised Firmmust also calculate its Collective Investment FundRisk Capital Requirementfor notional positions arising from Trading Bookpositions in options or warrants on Funds.
Calculation of the Collective Investment Fund Risk Capital Requirement
Calculation of the Collective Investment Fund Risk Capital Requirement Guidance
There are two main approaches for calculating the
Collective Investment FundRisk Capital Requirement. The first approach involves directly calculating a risk Capital Requirementfor any position in any Fund. The second approach involves using a look-though method which involves calculating the risk Capital Requirementsfor the positions or Exposuresin underlying assets or investments of the Fund, using the relevant or applicable risk Capital Requirementcalculation methods. As the name suggests, a look-through method involves looking through the Fundto identify the underlying positions and trying to calculate the capital required to address the risk of loss arising from volatility in market prices of such underlying positions.
Look Through Methods
Authorised Firmmay determine the Collective Investment FundRisk Capital Requirementfor positions in Funds, using the standard Collective Investment Fundlook-through method, provided the relevant positions meet the criteria set out in PIB Rule A5.7.6.
Authorised Firmmay use the standard Fundlook-through method, only if the positions are in Fundswhich meet the following eligibility criteria:(a) the Fund'sprospectus or equivalent document must include:(i) the categories of assets the Fundis authorised to invest in;(ii) if investment limits apply, the relative limits and the methodologies to calculate them;(iii) if leverage is allowed, the maximum level of leverage; and(iv) if investment in OTC financial derivatives or repo-style transactions are allowed, a policy to limit Counterparty Riskarising from these transactions;(b) the Fundmust publish half-yearly accounts and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period;(c) the Unitsof the Fundare redeemable in cash, out of the Fund'sassets, on a daily basis at the request of the Unitholder;(d) investments in the Fundmust be segregated from the assets of the Fund Manager; and(e) there must be adequate risk assessment, by the investing firm, of the Fund.
[Not currently in use]
Standard Collective Investment Fund Look Through Method: General
In the case of an
Authorised Firmbeing aware of the underlying assets or investments of the Fundon a daily basis, the Authorised Firmmay look through to those underlying investments in order to calculate the Market Risk Capital Requirement( General Market Riskand Specific Risk) for those positions in accordance with the methods set out in the relevant section of PIB chapter 5 for calculating the relevant Market Risk Capital Requirement.
In this method, positions in
Fundsmust be treated as positions in the underlying investments of the Fund. Nettingis permitted between positions in the underlying investments of the Fundand other positions held by the Authorised Firm, as long as the Authorised Firmholds a sufficient quantity of Unitsto allow for redemption/creation in exchange for the underlying investments.
Standard Collective Investment Fund Look Through Method: Index or Basket Funds
PIB A5.7.10(1) An
Authorised Firmmay calculate the risk Capital Requirementsfor positions in Fundsin accordance with the methods set out in various sections of PIB chapter 5 applicable to various underlying assets or investments, on assumed positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities or debt securities, subject to the following conditions:(a) the Fund'smandate is to replicate the composition and performance of an externally generated index or fixed basket of equities or debt securities; and(b) a minimum correlation of 0.9 between daily price movements of the Fundand the index or basket of equities or debt securities it tracks, exists over the previous six month period.(2) Correlation as referred to in (1)(b) means the correlation coefficient between daily returns on the Fundand that on the index or basket of equities or debt securities it tracks.