institutional investors: latest trends and impacts for ... · Breakout Session 2 Risk transparency...
Transcript of institutional investors: latest trends and impacts for ... · Breakout Session 2 Risk transparency...
Breakout Session 2
Risk transparency reporting for investment funds’
institutional investors: latest trends and impacts for
risk managers
Adela Baho, Senior Risk Manager AIF, Credit Suisse, Multiconcept
Fund Management S.A.
Michael Derwael, Risk Manager, Lombard Odier Funds (Europe)
S.A.
Xavier Zaegel, Partner, Deloitte
Risk transparency reporting
for institutional investors
19 May 2015
Latest trends and impacts
for risk managers
Xavier Zaegel
Adela Baho
Michael Derwael
General context 03
SCR & Solvency II Reports for investment funds
• What is Solvency II 05
• Implementation timeline 06
• Solvency II reporting for investment funds 07
• Impact for risk management functions 08
Beyond Solvency II and regulatory requirements
• The new norm 11
• Practical cases 13
Transparency: Why does it matter? 16
Agenda
4
EU sovereign debt
CHF
Subprimes
Banking
crisis
Russia crisis
5
RegulatorsFinancial
Markets
The new norm - DisclosureDisclosure is ingrained in the regulatory regime as one of its three
pillars
Investors and market
operators
Management
Companies
1765
1776
1787
1798
1809
1820
1831
1842
1853
1864
1875
1886
1897
1908
1919
1930
1941
1952
1963
1974
1985
1996
2007
History of financial crises
A broad range of regulations trigger transparency
reporting needs for your institutional investors
6
Solvency I (VAG)
Solvency II:
Club-Ampère / BVI / IMA
SCR Market reporting
QRT as per D1/S.06.02.f and D4/S.06.03.a
Client bespoke templates
Insurers
RWA (Solva, SolvV)
CVA-risk & ECD
Large Exposures (GroMiKV)
LCR & NSFR
Credit Institutions
Transparency reporting (QMV, FTK)
Risk measurement (FTK)
Pension Funds
Retail26%
Insurance Companies29%
Pension Funds24%
Banks 2%
Other Institutionals19%
Institutional74%
European Asset Management industryClient portfolio breakdown
Source: EFAMA, April 2015
SOLVENCY II
Assets & liabilities
valuation
Technical
provisions
Own fundsSolvency capital
requirements
Minimum capital
requirementInvestment rules
Governance
system
Supervisory
review
Groups control
Supervisory
reporting
Public
information
Impacts for Assets
Managers / Services
What is Solvency II?
PILLAR I
Capital requirements
PILLAR II
Governance & supervision
PILLAR III
Disclosures
Two thresholds:
Solvency capital requirements (SCR)
Minimum capital requirements (MCR)
Harmonised standards for:
Valuation of assets and liabilities
Eligibility criteria of own funds
Effective risk management system
Own risks and solvency assessment
(ORSA)
Supervisory review & intervention
Insurers are required to publish
details on risks, capital adequacy and
risk management
Transparency and open information
are intended to assess market forces
in imposing greater discipline to the
industry
Our focus of today
Full implementation is approaching
Solvency II reporting for investment funds
9
Preparatory phase Solvency II
FY 2014 FY 2015 FY 2016
FY 2014 Solo
reporting (22 weeks)
Q3 2015 Solo
reporting (8 weeks)
22 8 7 7 7# Weeks
Risk management
closing deadlines
3 6
Quarter report
Annual report
Solvency II deadlines have been set as follows:
• The preparatory measures will start as from January 2015 on FY 31 December 2014 figures.
• The full scope reporting will start as from January 2016 on FY December 2015 figures.
• Insurers will need risk transparency data on their investment funds holdings on a quarterly basis
starting from January 2016
• Transparency could be requested earlier during the preparatory phase
28%
42%0%
30%
10%6%
0%-14%
100%
0%
20%
40%
60%
80%
100%
120%
140%
Interest rate Equity Property Spread Currency Concentration IlliquidityPremium
Diversification Market risk
SCR Market
Solvency II reporting for investment funds
10
Market risk for the European insurance industry
• Market risk is the largest component (56%) of the standard SCR formula for the European industry
• Insurers will require from asset managers transparency data (Club Ampère / BVI template) or
sub-SCR Market calculations
• The equity, currency, spread and interest rate components are usually the largest elements for
investment funds
Source: illustrative calculation
Challenges for risk management functions
Solvency II reporting for investment funds
11
• Contact / Organization
• Collection, enrichment, and
preparation of data
• Scarcity and complexity of data
• Look-through on investment
vehicles
Data
Management
SCR
Calculation
Regulatory
Context
Reporting
Frequency &
Reporting
• Mark-to-Market valuations
• Pricing of complex derivatives and
structured products
• Shocks & risk mitigation techniques
• Sensitivities
• Ressourcing
• Frequency
• EIOPA Guidelines
• Entry in force of Solvency II
in March 2016
• Regulatory watch
1929 1973 1981 1987 1989 1991 1992 1994 1997 1998 2000 2001 2002 2008 2009 2010 2014 2015
Wa
ll S
tre
et cra
sh
&
Gre
at D
ep
ressio
n
Crisis…
The new norm:
13
• Market events the new transparency
norm
• Shocks require a short reaction time
to avoid crisis escalation
Financial Markets
1765
1776
1787
1798
1809
1820
1831
1842
1853
1864
1875
1886
1897
1908
1919
1930
1941
1952
1963
1974
1985
1996
2007
History of financial crises
Oil
cri
sis
La
tam
de
bt cri
sis
Bla
ck M
on
da
y
US
Sa
vin
gs &
Lo
an
s c
risis
Sca
nd
ies b
an
k
cri
sis
Bla
ck W
ed
ne
sd
ay +
att
acks o
n E
RM
Me
xic
o d
eb
t cri
sis
&
de
fau
lt
Asia
n c
risis
Russia
n d
efa
ult
Tu
rke
y c
risis
Dotc
om
bu
bb
le +
9/1
1
Arg
en
tin
a d
efa
ult
Le
hm
an
de
fau
lt &
Glo
ba
l cri
sis
Ice
lan
d c
risis
EU
so
ve
reig
n d
eb
t
cri
sis
Russia
cri
sis
Sw
iss F
ran
c d
ep
eg
Complexity…
The new norm:
1609
Equities
1685
Futures
1750
Bonds
1970
MBS
1973
Listed options
1981
IRS & ExoticsOptions
1982
Cap, floors & Swaptions
1987
CDO
1993
ETF
1995
Variance Swaps, VolatilityFutures
1997
CDS
2004
CDS index
2004 - present
Synthetic, structured multi-layer securitizations
Broad variety of structured products (single asset class and hybrids, Cocos, etc.)
Lessons for a risk manager:
15
Subprime securities
Funds FundingHigh street
banksApocalypse
nowGovernments
step in
ABS/MBS
holdings
Underlying
portfolios
Sponsors
Need
look-through
Review of
MMF for ABCP
holdings
Counterparts
funded short
term
All financials &
banks
Cut exposures
when possible
Keep ptf liquid
Issuer
FDI ctpy
Interbank
Repo
Collateral
Guarantor
_ _ _ _ _ _ _
x mult entities
First bank
runsLending programs
Bailouts
Seizures
Guarantees
Capital injections
PMs
Credit dept
Promoters
PMs
Credit dept
Trading floor
PMs
Credit dept
Trading floor
Management
Answer management, clients requests in short delays and consistently while adapting toolHelp them face redemptions, maintain quality of portfolios, ensure sound valuation.
PMs
Credit dept
2008 crisis unfolding
How a market event can reshape risk
management and disclosures
16
Event
• January 2015, unexpected decision from SNB to switch back to free-floating CHF
• Investors requesting information about exposures and impact of a forthcoming quantitative easing
Illustrative context
• Multi-Asset “Fund” : 20% net short exposure to CHF with multi hedged and unhedged share
classes
Risk management response
• Adjust the shock at 20% (and not 10%) on CHF in stress tests
• Stress other similar currencies, such as RMB (dirty-floating)
• Stress variables strongly correlated to CHF or similar (spillover effects)
• Hedge ratio and efficiency per share class
• Analysis per share class
• Detailed currency exposures
Risk disclosures
Target funds held by funds: transparency and the
look-through approach
17
Context
• Lack of market data for underlying funds
• Lower visibility on underlying exposures and risks
• Difficulty to assess and measure risks ex-ante
Possible approaches
• Qualitative selection of publicly traded proxies: indices, model portfolio, asset mix
• Quantitative methods: Dimension reduction -Parametric assumptions- Stress Tests
• Partial / Full look-through
Risk management challenge
• Historical volatility can be a bad proxy of historical or current risks
• Misconception of low volatility and high returns
• Overestimation of diversification benefits
From a necessity to an opportunity
Transparency: why does it matter?
18
• More accuracy in assessing risks inherent in the portfolios
• More efficient monitoring and risk-based decision making
Understanding of risks
A focus on transparency will create added value for all market participants
Evolution of the Risk Management function
• Unique entry point for multiple communication channels
• Driver for evolution of information systems incl. standardization & drill-down
capabilities
• Pairing of products with client risk profile
A broad range of regulations triggering
transparency reporting needs
21
• Alternative Investment Fund Managers Directive (AIFMD)
• Banking Union (CRD IV / CRR / BRRD / DGSD / SSM / SRM)
• European Market and Infrastructure Regulation (EMIR)
• Key Investor Information Documents for Packaged Retail and Insurance-based Investment
Products (PRIIPs)
• Markets in Financial Instruments Directive and Regulation (MiFID II / MiFIR)
• UCITS V & CSSF Circular 14/587 (UCITS V)
• European Long Term Investment Funds (ELTIFs)
• Insurance Mediation Directive (IMD II)
• Money Market Funds (MMFs)
• Solvency II and Omnibus II
Top 2015 regulatory priorities
SCR Market shocks
Solvency II reporting
• Equity: 39% (type 1) or 49% (type 2) + equity dampener (9.85% as at 31 Mar 15)
• Currency: 25% except pegged currency and insurer’s local currency
• Interest rate: depends on maturity, relative upward and downward shock on the yield
curve used for valuation
• Spread: depends on type of exposure (sovereign, corporate, mortgage, covered…), credit
quality step and duration
• Spread for credit derivatives: absolute upward and relative downward shock on the credit
spread curve used for valuation
22
Data essentials and sample Solvency II report
Appendix
23
Counterparty/Issuer/Broker Name;
Counterparty/Issuer/Broker Credit Rating; Hedging/Not
Hedging1 for derivatives; Hedging1 type
Instrument unique ID allowing matching of both leg of
each instrument; Currency Class Hedging purpose Y/N
Underlying ISIN/Ticker; Underlying Description; Buy/Sell
information for Credit Default Swaps; Running spread (or
fixed coupon) for Credit derivatives; Trade dates;
Instrument unique ID allowing matching of both leg of
each instrument
Underlying ISIN/Ticker; Underlying Description;
Underlying price; Contract Size; Strike; Delta; Call/Put
Information; Distinction OTC/ Listed
Security description; Security type; ISIN /ticker; currency;
FX Rates; Notional/Quantity; Dirty Market Value; Maturity
Date; Modified Duration; Rating
All Investment lines
NAV Date; Fund Name; Fund ISIN; Fund TNA; Fund
Currency; Hedged class (Y/N)
Fund and Target Funds
Treasury & all derivatives
FX Forwards
Swaps
Options