Ordinance No. 34 of 04.10.2006 on Conditions for Hedging Transactions to Reduce Investment Risk of Additional Pension and Payment Funds

ORDINANCE No. 34 of 04.10.2006 on the conditions for concluding transactions to reduce the investment risk associated with the assets of additional pension insurance funds and payment funds, and on the requirements and restrictions for these transactions (Title amended, Issue 60 of 2021) Published - State Gazette, Issue 86 of 24.10.2006; amended and supplemented, Issue 29 of 18.03.2008; amended and supplemented, Issue 53 of 11.07.2009; amended and supplemented, Issue 21 of 09.03.2018, effective from 19.11.2018; amended, Issue 41 of 21.05.2019; amended and supplemented, Issue 8 of 28.01.2020; supplemented, Issue 81 of 15.09.2020; amended and supplemented, Issue 60 of 20.07.2021; amended and supplemented, Issue 70 of 20.08.2024; supplemented, Issue 90 of 25.10.2024 Adopted with Decision No. 66-N of 4.X.2006 of the Commission for Financial Supervision

Section I General Provisions

Art. 1. (Amended and supplemented - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) This Ordinance determines:

1. the conditions for concluding transactions to reduce investment risk under Art. 179b, para. 1 of the Social Security Code (SSC), as well as the requirements and restrictions for them;
2. (amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) the markets in third countries under Art. 179b, para. 2, item 1 and item 2, letter 'a' of the SSC, on which transactions with futures and options to reduce investment risk may be concluded;
3. (new - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) the third countries under Art. 179b, para. 2, item 2, letter 'b' of the SSC.

Section II Conditions for Conclusion

Art. 2. (Amended and supplemented - State Gazette, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended and supplemented, Issue 60 of 2021.) (1) (Amended - State Gazette, Issue 60 of 2021.) The pension insurance company may conclude, on behalf of and for the account of an additional pension insurance fund or a payment fund managed by it, transactions under Art. 179b, para. 1 of the SSC, hereinafter referred to as "hedging transactions", only if they are aimed at reducing the investment risks associated with the assets of the respective fund. (2) (Repealed - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) (3) (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018; supplemented, Issue 60 of 2021.) Hedging transactions must correspond to the goals and investment risk management strategy, including the strategy for their reduction, determined in the investment policy of the additional pension insurance fund, respectively to the goals, requirements and restrictions under Art. 144a, para. 2, item 7 of the SSC. (4) (Amended - State Gazette, Issue 60 of 2021.) The pension insurance company may conclude a hedging transaction on behalf of and for the account of a fund under para. 1, provided that during the term agreed in the transaction:

1. it holds the hedged asset in the fund's portfolio - when the settlement of obligations under the transaction provides for its physical delivery;
2. it maintains cash and/or highly liquid debt securities in the fund's investment portfolio at a level ensuring the current settlement of obligations under the transaction, as well as the necessary liquid funds at the maturity of the transaction - when the settlement of obligations is carried out in cash. (5) (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) The pension insurance company may conclude hedging transactions only in accordance with the rules under Art. 179v, para. 1 of the SSC. (6) (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) The person responsible for preparing proposals for concluding hedging transactions and for analyses of the impact of hedging transactions on the risk profile of the portfolio of the respective fund under para. 1, the person responsible for approving the conclusion of hedging transactions, and the person responsible for exercising control over the risk of the fund's assets, the risk of hedging instruments and the assessment of their effectiveness, as well as over the risk of the fund's investment portfolio, cannot be the same persons.

Art. 3. (Amended and supplemented - State Gazette, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 8 of 2020; amended, Issue 60 of 2021.) Before the pension insurance company concludes a hedging transaction on behalf of and for the account of a fund under Art. 2, para. 1, the person responsible for preparing proposals for concluding hedging transactions and for analyses of the impact of hedging transactions on the risk profile of the fund's portfolio must:

1. identify the risk associated with the respective fund asset and the risk associated with the hedging instrument;
2. analyze the size of the risk associated with the respective fund asset and prepare a justification for the extent to which it is expected to be reduced;
3. assess the impact of the hedging instrument on the level of risk of the fund's investment portfolio;
4. determine the sources of information that will be used in the assessment of the hedging instrument, and choose a method by which its effectiveness will be assessed;
5. (amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) assess the compliance of the counterparty to the hedging transaction with the requirements under Art. 4, para. 1, items 1 and 2;
6. (amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 8 of 2020.) verify the presence of the chosen market in the list under Art. 5;
7. (amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) prepare a written reasoned proposal for concluding the hedging transaction to the person responsible for its approval.

Art. 4. (Supplemented - State Gazette, Issue 53 of 2009; amended and supplemented, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 8 of 2020; amended, Issue 60 of 2021.) (1) (Previous text of Art. 4, amended and supplemented - State Gazette, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) The pension insurance company may conclude foreign exchange forward contracts and interest rate swap transactions on behalf of and for the account of a fund under Art. 2, para. 1 under the following conditions:

1. (amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) the counterparty to the hedging transaction is a bank or an investment intermediary, authorized to carry out activities in accordance with the legislation of a Member State of the European Union, another State party to the Agreement on the European Economic Area, or a State with prudential supervisory and regulatory requirements equivalent to those applied in the European Union towards credit institutions, respectively towards investment intermediaries, determined by a decision of the European Commission in accordance with Art. 107, paragraph 4 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment intermediaries and amending Regulation (EU) No 648/2012 (OJ, L 176/1 of 27 June 2013), hereinafter referred to as "Regulation (EU) No 575/2013", and which have: a) (amended - State Gazette, Issue 8 of 2020.) a long-term credit rating corresponding to a credit quality grade not lower than "4" in accordance with Annex III of Commission Implementing Regulation (EU) 2016/1799 of 7 October 2016 laying down implementing technical standards with regard to the mapping of external credit assessments for credit risk in accordance with Article 136, paragraph 1 and Article 136, paragraph 3 of Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ, L 275/3 of 17 October 2016), hereinafter referred to as "Implementing Regulation (EU) 2016/1799", or b) (amended - State Gazette, Issue 8 of 2020.) a long-term credit rating corresponding to a rating under letter 'a' and assigned by a credit rating agency registered or certified in accordance with Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (OJ, L 302/1 of 17 November 2009), which is not included in Annex III of Implementing Regulation (EU) 2016/1799;
2. the counterparty to the transaction is not a related party to the pension insurance company within the meaning of § 1, para. 2, item 3 of the SSC;
3. the hedging instrument is subject to daily fair value assessment, which can be verified;
4. the hedging instrument can be sold by the fund at any time or the position taken by the fund can be closed out or offset by an offsetting transaction.
5. (new - State Gazette, Issue 53 of 2009; supplemented, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) the conclusion of the hedging transaction does not violate the investment restrictions provided for in the SSC and in the investment policy of the additional pension insurance fund, respectively in the rules of the payment fund. (2) (New - State Gazette, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 8 of 2020.) When the pension insurance company concludes a foreign exchange forward contract or an interest rate swap transaction with a bank or an investment intermediary with a credit rating assigned by an agency under para. 1, item 1, letter 'b', it submits to the Commission for Financial Supervision a justification for the compliance of this rating with a credit rating under para. 1, item 1, letter 'a'. (3) (New - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) The justification under para. 2 is submitted by the pension insurance company at:
6. the first conclusion of a foreign exchange forward contract or interest rate swap transaction with the respective bank or investment intermediary - within three working days from the day of conclusion of the hedging transaction;
7. a change in the compliance of the minimum levels of credit ratings under para. 1, item 1, letter 'b' with those under para. 1, item 1, letter 'a' - within three working days from the day of knowledge.

Section III Requirements and Restrictions for Hedging Transactions

Art. 5. (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018; supplemented and supplemented, Issue 8 of 2020; supplemented, Issue 81 of 2020.) The markets in third countries under Art. 179b, para. 2, item 1 and item 2, letter 'a' of the SSC are:

1. Australian Securities Exchange ASX (Australia);
2. Montreal Exchange MX (Canada);
3. Singapore Exchange SGX (Singapore);
4. NASDAQ Futures Exchange NFX (United States of America);
5. (new - State Gazette, Issue 8 of 2020.) NASDAQ PHLX (United States of America);
6. (new - State Gazette, Issue 8 of 2020.) NYSE Arca (United States of America);
7. (new - State Gazette, Issue 8 of 2020.) NYSE MKT (United States of America);
8. (new - State Gazette, Issue 8 of 2020.) One Chicago (United States of America);
9. (previous item 5 - State Gazette, Issue 8 of 2020.) Chicago Board Options Exchange CBOE (United States of America);
10. (previous item 6 - State Gazette, Issue 8 of 2020.) Intercontinental Exchange ICE (United States of America);
11. (previous item 7 - State Gazette, Issue 8 of 2020.) CME Group (United States of America);
12. (previous item 8 - State Gazette, Issue 8 of 2020.) EUREX US (United States of America);
13. (previous item 9 - State Gazette, Issue 8 of 2020.) Japan Exchange Group JPX (Japan);
14. (previous item 10 - State Gazette, Issue 8 of 2020.) Tokyo Financial Exchange TFX (Japan);
15. (new - State Gazette, Issue 8 of 2020, effective a) from the day following the day of expiration of the transition period under Art. 126 of the Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, in case this Agreement enters into force; b) from the day on which the Treaty on the Functioning of the European Union and the Treaty on European Union cease to apply to the United Kingdom in accordance with Article 50, paragraph 3 of the Treaty on European Union, in case the Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community does not enter into force.) ICE Futures Europe (United Kingdom);
16. (new - State Gazette, Issue 81 of 2020, effective from 01.01.2021.) London Stock Exchange LSE (United Kingdom);
17. (new - State Gazette, Issue 81 of 2020.) Tel Aviv Stock Exchange TASE (Israel);
18. (new - State Gazette, Issue 81 of 2020.) Bolsa de Valores de Colombia BVC (Colombia);
19. (new - State Gazette, Issue 81 of 2020.) Bolsa de Derivados De Mexico MexDer (Mexico);
20. (new - State Gazette, Issue 81 of 2020.) New Zealand Exchange NZX (New Zealand);
21. (new - State Gazette, Issue 81 of 2020.) Borsa Istanbul Futures & Options Market VIOP (Turkey);
22. (new - State Gazette, Issue 81 of 2020.) Santiago Stock Exchange (Chile);
23. (new - State Gazette, Issue 81 of 2020.) Korea Exchange KRX (South Korea).

Art. 5a. (New - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) The third countries under Art. 179b, para. 2, item 2, letter 'b' of the SSC are the States with prudential supervisory and regulatory requirements equivalent to those applied in the European Union towards credit institutions, determined by a decision of the European Commission in accordance with Art. 107, paragraph 4 of Regulation (EU) No 575/2013.

Art. 6. (Amended and supplemented - State Gazette, Issue 29 of 18.03.2008; amended and supplemented, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 41 of 2019; amended, Issue 60 of 2021; amended, Issue 70 of 2024.) (1) (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) In the event that the pension insurance company concludes a transaction under Art. 179b, para. 2, item 2, letter 'b' or item 3 or 4 of the SSC on behalf of and for the account of a fund under Art. 2, para. 1, it is obliged to determine the value of the risk of default of the counterparty to the transaction. (2) (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) The risk value under para. 1 is equal to the value of the unrealized profit from the concluded transaction. (3) (New - State Gazette, Issue 29 of 18.03.2008.) The value of the unrealized profit is equal to the market value of the contract when it is positive. (4) (New - State Gazette, Issue 29 of 18.03.2008; supplemented, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 41 of 2019; amended, Issue 60 of 2021; amended, Issue 70 of 2024.) The market value of the contract is determined in compliance with the requirements under Art. 10a, para. 4, 5 or 6 of Ordinance No. 9 of 19.11.2003 on the valuation of assets and liabilities of the pension insurance company and of the funds managed by it, for the calculation of the net asset value, of the unit value and of the yield from their investment properties and for the keeping of individual accounts, the accounts for the pan-European pension product (PEPP) and of the analytical accounts in a fund for deferred payments (State Gazette, Issue 109 of 2003) (Ordinance No. 9), as well as in accordance with the rules for the valuation of assets and liabilities of the pension insurance company and of the funds managed by it. (5) (Previous para. 3 - State Gazette, Issue 29 of 18.03.2008.) When determining the value of the unrealized profit under para. 2, fees and commissions paid upon the conclusion of such transactions are not taken into account. (6) (Previous para. 4 - State Gazette, Issue 29 of 18.03.2008; amended, Issue 60 of 2021.) In the event that a fund under Art. 2, para. 1 holds hedging instruments under several transactions with one counterparty, the value of the risk of default of the counterparty to these transactions is equal to the difference between the unrealized profits and losses from all these transactions, if:

1. the transactions are concluded on the basis of a netting agreement with the counterparty;
2. the netting agreement under item 1 provides that in the event of default, insolvency or liquidation of the counterparty to the transaction, only one obligation (in the case of a net negative market value) or only one claim (in the case of a net positive market value) to the fund is calculated, as the claims and obligations that are the subject of the netting agreement are considered extinguished;
3. the insolvency of the counterparty is grounds for termination of the contract. (7) (New - State Gazette, Issue 29 of 18.03.2008.) In the cases under para. 6, the pension insurance company determines on a net basis the value of the risk of default of each counterparty to the contracts included in the netting agreement, as a positive difference between the unrealized profits and losses from these contracts. (8) (Previous para. 5 - State Gazette, Issue 29 of 18.03.2008; amended, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) The value of the risk of default of the counterparty in connection with one or more transactions concluded with it under Art. 179b, para. 2, item 2, letter 'b', item 3 and 4 of the SSC cannot exceed 5 percent of the net assets of the respective fund under Art. 2, para. 1.

Art. 7. (Amended and supplemented - State Gazette, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 41 of 2019; amended, Issue 60 of 2021.) (1) (Amended in its entirety - State Gazette, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018.) The pension insurance company is obliged to determine every working day the value of the market risk of the hedging instruments and of the risk of default of the counterparty to transactions concluded under Art. 179b, para. 2, item 2, letter 'b', item 3 and 4 of the SSC and to prepare a daily risk value report containing data according to the form under Art. 9, para. 4. (2) (Amended - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) The sum of the values of the risk of default of the counterparties to all transactions under Art. 179b, para. 2, item 2, letter 'b', item 3 and 4 of the SSC and the sum of the values of the market risk of all hedging instruments cannot exceed the value of the net assets of the fund for the respective day. (3) (New - State Gazette, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 41 of 2019; amended, Issue 60 of 2021.) The value of the market risk of futures contracts, foreign exchange forward contracts and interest rate swap transactions is determined by the market valuation method and is equal to the current exposure of the fund under Art. 2, para. 1 to the respective contract, to which an add-on is added, calculated in accordance with para. 5. The current exposure to the contract is the absolute value of the market value of the contract, assessed in accordance with Art. 10a, para. 1, 3, 4, 5 or 6 of Ordinance No. 9 and in accordance with the rules for the valuation of assets and liabilities of the pension insurance company and the funds managed by it for the day to which the assessment of the value of the market risk relates, when this market value is positive, and zero when it is negative. (4) (New - State Gazette, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) The value of the market risk of an option is equal to the current exposure of the fund under Art. 2, para. 1 to the underlying asset of the option, to which an add-on is added, calculated in accordance with para. 5. The current exposure to the underlying asset of the option is determined by the delta equivalent, which is a product of the market value of the underlying asset for the day to which the assessment of the value of the market risk relates and the delta coefficient of the option. (5) (New - State Gazette, Issue 53 of 2009.) The add-on under para. 3 and 4 is calculated as a percentage of the value of the underlying asset (the contracted amount, multiplied by the contracted price) or of the notional principal depending on the type of underlying asset and the remaining term to maturity of the respective contract, according to the following table:

Type of Underlying Asset	Remaining term to maturity up to 1 year	Between 1 and 5 years	Over 5 years
Interest Rate	0.0%	0.5%	1.5%
Exchange Rate	1.0%	5.0%	7.5%
Stocks, Indices, etc.	6.0%	8.0%	10.0%

(6) (New - State Gazette, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018.) When the interest rate swap transaction contains conditions for periodic settlement of all remaining payments to predetermined dates and revision of the contract terms so that the value of the contract is zero on these dates, the remaining term to maturity of this contract for the purposes of para. 5 is determined with reference to the next predetermined date for periodic settlement and revision of the contract. For contracts meeting these conditions and with a total remaining maturity of more than one year, a minimum percentage of 0.5 percent is applied. (7) (Previous para. 3 - State Gazette, Issue 53 of 2009; amended, Issue 60 of 2021.) The conclusion of hedging transactions cannot lead to an increase in the exposure of the respective fund under Art. 2, para. 1 to risks associated with a given category of investments or a given issuer to a level higher than that permissible for direct investments.

Art. 8. (Amended and supplemented - State Gazette, Issue 21 of 2018, effective from 01.01.2018; amended, Issue 60 of 2021.) (1) (Amended - State Gazette, Issue 60 of 2021.) A hedging instrument ceases to fulfill its purpose of reducing the investment risk associated with a respective asset of a fund under Art. 2, para. 1 when:

1. the fund's position in this asset is partially or fully closed;
2. (amended - State Gazette, Issue 21 of 2018, effective from 01.01.2018.) the effectiveness of hedging, defined as the ratio between the changes in fair value or cash flows of the hedged position due to the hedged risk and the changes in fair value or cash flows of the hedging instrument, is outside the range of 80 - 125 %; or
3. (new - State Gazette, Issue 21 of 2018, effective from 01.01.2018.) the fair value or cash flows of the hedged position, which are due to the hedged risk, or the fair value of the hedging instrument, cannot be reliably assessed. (2) (Amended - State Gazette, Issue 21 of 2018, effective from 01.01.2018.) In the cases under para. 1, item 1, when the position is fully closed, as well as in the cases under para. 1, item 2, the pension insurance company is obliged to close the position and the corresponding hedging instrument within the period specified in the rules under Art. 179v, para. 1 of the SSC. (3) In the cases under para. 1, item 1, when the position is partially closed, the pension insurance company is obliged within the period under para. 2 to close the position and the corresponding hedging instrument to the extent corresponding to the residual risk of the assets hedged with this instrument. (4) (New - State Gazette, Issue 21 of 2018, effective from 01.01.2018.) Hedging is assessed constantly and actual results are determined within the reporting periods under Art. 9, para. 1.

Art. 9. (Amended and supplemented - State Gazette, Issue 29 of 18.03.2008; amended and supplemented, Issue 53 of 2009; amended, Issue 21 of 2018, effective from 19.11.2018; amended, Issue 60 of 2021.) (1) (Previous text of Art. 9 - State Gazette, Issue 29 of 18.03.2008; amended, Issue 60 of 2021.) The pension insurance company prepares and submits to the Commission for Financial Supervision within 20 days after the end of each calendar quarter an analysis of the impact of the concluded hedging transactions on the risk profile of the portfolio of each fund under Art. 2, para. 1 and an assessment of their effectiveness. (2) (New - State Gazette, Issue 29 of 18.03.2008.) The analysis under para. 1 must contain at least the following:

1. hedged asset - type, quantity and value;
2. hedged risk - type, value and method of measurement;
3. hedging instrument - type, underlying asset, quantity and value;
4. hedging relationship, goals and risk management strategy, including the goal of hedging;
5. hedging ratio - the ratio between the risk exposure of the hedging instrument and the value of the risk exposure of the hedged asset;
6. date of conclusion of each hedging transaction and the term of hedging;
7. (repealed - State Gazette, Issue 21 of 2018, effective from 19.11.2018.) ;
8. (amended in its entirety - State Gazette, Issue 53 of 2009.) methods for assessing the effectiveness of hedging, determined according to the goals and strategy of hedging and risk management; pension insurance companies may apply the following methods: a) method of comparison of the main characteristics and elements of the hedged asset and the hedging instrument; this method is used only in hedging where the main characteristics of the hedged and hedging instrument are identical to a very large extent; b) method of offsetting changes ("dollar offset"), in which the changes in the value or cash flows of the hedging instrument are compared with the changes in the value or cash flows of the hedged asset due to the hedged risk; c) method based on regression analysis...