The CSSF issued, on 31 July 2012, a press release that clarifies how Luxembourg undertakings for collective investments in transferable securities (UCITS) using a value at risk (VaR) approach in determining their global exposure should take into account the recent clarifications issued by the European Securities and Market Authority (ESMA). Specifically, on 25 July 2012, ESMA issued a document entitled “Questions and Answers: Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS (2012/ESMA/429)” dealing with the disclosure of leverage levels.
Clarifications regarding Leverage Disclosure
The CSSF considers that the leverage disclosure standard for UCITS using a VaR approach to determine their global exposure should be based on the so-called “sum of the notionals approach”.
This means that the leverage disclosure to be included in the prospectus and annual reports should be determined based on the sum of the notionals of derivative instruments used while allowing these UCITS to supplement this calculation using leverage figures calculated based on the commitment approach.
The CSSF states that the purpose of the calculation of the level of leverage using the VaR approach should allow:
- a close monitoring of the level of leverage as required in CESR’s “Guidelines on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS (ref: CESR/10- 788)” of 28 July 2010; and
- the disclosure, in the UCITS’ annual report, of the level of leverage employed during the financial year to which it refers.
Timelines for Application of the Sum of the Notionals Approach by Luxembourg UCITS
Newly established UCITS (including their sub-funds) will have to determine, from their launch, their level of leverage on the basis of the sum of the notionals approach, and not on the basis of the commitment approach.
Existing UCITS (including their sub-funds) will have to determine their level of leverage on the basis of the sum of the notionals approach as quickly as possible, and in any event by no later than 1 January 2013. Until then, they may continue to use the commitment approach (either alone or alongside the sum of the notionals approach).
Newly established UCITS (including their subfunds) must base the disclosure of leverage in the prospectus on the sum of the notionals approach as from inception. If this calculation is complemented by leverage figures determined on the basis of the commitment methodology or other methods, this must be clearly stated and a detailed explanation given on the underlying method of calculation.
Existing UCITS (including their sub-funds) must base the prospectus leverage disclosure on the sum of the notionals approach in any update of the prospectus issued after the CSSF press release and in any event by no later than 31 December 2012.
For any financial year ending after 31 December 2012, the leverage information to be included in a UCITS’ annual report must be based on the sum of the notionals approach for accounting periods starting on or after 1 January 2013.
This does not however prevent a UCITS from using other figures, such as those derived from the commitment approach calculation or another basis of calculation, provided that this is clearly stated and explained.
The CSSF will update circular 11/512 on risk management in order to incorporate the above clarifications and guidelines.