Circulation No. 15/CREPMF/2022 on Risk Management for Collective Investment Undertakings

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UNION MONETAIRE OUEST AFRICAINE crepmf CONSEIL REGIONAL DE L'EPARGNE PUBLIQUE ET DES MARCHES FINANCIERS

CIRCULATION NO. 15/CREPMF/2022
ON RISK MANAGEMENT FOR COLLECTIVE INVESTMENT UNDERTAKINGS (CIUs)

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The General Secretariat of the Regional Council for Public Savings and Financial Markets (CREPMF) draws to the attention of Collective Investment Undertakings (CIUs) and CIU Management Companies (CMCs) approved on the regional financial market of the West African Monetary Union (WAMU) that they must, in accordance with current regulations, comply with the provisions of this Circulation, which specifies, on the one hand, measures relating to risk management systems, their evaluation frequency, specific protective measures against conflicts of interest, and, on the other hand, the content of reports and the procedure to follow for submitting them to the Regional Council.

For the purposes of this Circulation, the term Directive refers to Directive No. 66/CREPMF/2021 on Collective Investment Undertakings and their Management Companies on the regional financial market of the WAMU.

1. Risk Management Policy

CIU Management Companies establish, implement and maintain an appropriate and documented risk management policy that enables them to determine the risks to which the CIUs they manage are or may be exposed.

The risk management policy includes all necessary procedures to enable the CIU Management Company to assess, for each CIU it manages, that CIU's exposure to market, liquidity and counterparty risks, as well as the exposure of CIUs to any other risk, including operational risk, which may be significant for the CIUs it manages.

Risk management policies cover at least the following elements:

a) the techniques, tools and provisions enabling them to comply with the obligations set out in points 2 and 3;

b) the allocation of risk management responsibilities within the CIU Management Company.

CIU Management Companies ensure that the risk management policy specifies the terms, content and frequency of reports submitted by the risk management function referred to in Article 11 of the Directive, to the board of directors and governing bodies as well as, where applicable, the supervisory function.

CIU Management Companies take into account the nature, scale and complexity of their activities and of the CIUs they manage.

2. Evaluation, monitoring and review of the risk management policy

CIU Management Companies evaluate, monitor and review periodically and at least once a year;

a) the adequacy and effectiveness of the risk management policy and the provisions, procedures and techniques referred to in points 3 and 4;

b) the extent to which the CIU Management Company complies with the risk management policy and the provisions, procedures and techniques referred to in points 3 and 4;

c) the adequacy and effectiveness of measures taken to remedy any failures in the functioning of the risk management procedure.

CIU Management Companies notify the Regional Council of any significant change to their risk management procedure.

3. Risk measurement and management

CIU Management Companies take the following measures for each CIU they manage:

a) they put in place sufficient risk measurement provisions, procedures and techniques to ensure that the risks of taken positions and their contribution to the risk profile are reliably measured on the basis of solid and credible data, and that risk measurement provisions, procedures and techniques are appropriately documented;

b) they periodically perform, where applicable, back-testing to assess the validity of risk measurement provisions that include forecasts and model-based estimates;

c) they periodically perform, where applicable, stress testing and scenario analysis to account for risks resulting from possible changes in market conditions that may have a negative impact on CIUs;

d) they establish, implement and maintain a documented internal limits system relating to risk management and control measures for each CIU's exposure, taking into account all risks referred to in point 1 of this Circulation that may be significant for the CIU, and ensuring compliance with the CIUs' risk profile;

e) they ensure that for each CIU, the current risk level complies with the risk limits system referred to in point d) above;

f) they establish, implement and maintain appropriate procedures that, in the event of actual or expected breach of the CIU's risk limits system, lead to prompt corrective measures serving the best interests of unitholders or shareholders.

CIU Management Companies use an appropriate liquidity risk management procedure to ensure that all CIUs they manage can comply at all times with the obligations set out in Articles 12 and 26, and for UCITS, in Articles 40 and 47 of the Directive.

Where applicable, CIU Management Companies perform stress tests enabling them to assess the liquidity risk to which CIUs are exposed under exceptional circumstances.

CIU Management Companies ensure that, for each CIU they manage, the liquidity profile of the CIU's investments complies with the redemption policy set out in the Fund Regulations, constituent documents or Prospectus.

4. Leverage calculation

A CIU's leverage is expressed as a ratio between that CIU's exposure and its net asset value.

The exposure of a managed CIU is calculated by the CIU Management Company according to the gross method mentioned in point 6 of this Circulation.

CIU Management Companies may choose, in addition to the methodology mentioned in point 2 of this Circulation, to calculate their CIU's exposure using another method.

Exposure attached to financial or legal structures involving third parties controlled by the relevant CIU is included in the exposure calculation, when those structures have been specifically created to increase exposure directly or indirectly at the CIU level. For CIUs whose main investment policy consists of acquiring control of unlisted companies or issuers, the CIU Management Company does not include in the leverage calculation the existing exposure at the level of these unlisted companies and issuers, if the CIU or the CIU Management Company acting on behalf of the CIU is not required to bear potential losses beyond its investment in those companies or issuers.

CIU Management Companies exclude contracted borrowing agreements if they are of a temporary nature and fully covered by the contractual capital contribution commitments from the CIU's investors.

A CIU Management Company has duly documented procedures to calculate the exposure of each CIU it manages according to the gross method and according to the commitment method. The calculation is applied consistently over time.

5. Overall risk

A CIU's overall risk corresponds to the market risk of the CIU's portfolio calculated according to the gross method referred to in point 6 below.

6. Gross method applied to the calculation of CIU exposure

A CIU's exposure calculated according to the gross method corresponds to the sum of the absolute values of all positions evaluated in accordance with Article 13 of the Directive.

For the calculation of a CIU's exposure according to the gross method, a CIU Management Company:

a) excludes the value of cash and cash equivalents, which correspond to highly liquid investments held in the CIU's principal currency, are quickly convertible into a known amount of cash, are exposed to an insignificant risk of value change, and provide a yield not exceeding the interest rates of a high-quality three-month government bond;

b) converts derivative instruments into equivalent positions on their underlying assets using an appropriate method;

c) excludes liquidity borrowings that remain in the form of cash or cash equivalents as designated in point a) and for which the amounts due are known;

d) includes exposure resulting from the reinvestment of borrowed liquidity, taking, to express it, either the market value of the investment made or the total amount of borrowed liquidity;

e) includes positions held in repurchase or securities lending agreements and borrowing or lending agreements for securities or other assets.

7. Valuation procedures for over-the-counter derivative instruments

Exposures to over-the-counter derivative instruments are subject to fair value assessments that do not rely solely on market quotations provided by counterparties for transactions in over-the-counter derivative instruments.

CIU Management Companies establish, implement and maintain terms and procedures ensuring an adequate, transparent and fair assessment of CIU exposure to over-the-counter derivative instruments.

The fair value assessment of over-the-counter derivative instruments is appropriate, precise and independent.

The valuation terms and procedures must be appropriate and proportionate to the nature and complexity of the relevant over-the-counter derivative instruments.

The valuation terms and procedures referred to in paragraph 2 above are appropriately documented.

8. Reports on derivative instruments

CIU Management Companies provide the Regional Council, at least once a year, with a report containing information giving a true and fair view of the types of financial instruments used for each managed CIU, underlying risks, quantitative limits and methods chosen to assess risks associated with transactions in derivative instruments.

This Circulation takes effect from its publication.

Done in Abidjan, on 03 JAN 2022

The General Secretary Ripert BOSSOKPE

Avenue Joseph ANOMA P.O. Box 1878, Abidjan 01/Côte d'Ivoire Website: http://www.crepmf.org TEL.: (225) 27 20 21 57 42 / 27 20 31 56 20 Fax: (225) 27 20 33 23 04 Email: sg@crepmf.org