With the FCA Derivatives Use Reporting deadline fast approaching, it’s the perfect time to discuss the reporting requirements and how Funds-Axis can assist you in making your filings.
In 2016, the UK Financial Conduct Authority (FCA) made changes to its Collective Investment Schemes (COLL) sourcebook. The changes introduced a new report which revised the Derivative Risk Management Process (DRMP) report and included the information required by FCA Rule COLL 6.12.3AR on derivatives/risk management process.
Prior to the introduction of the new Rules, an AFM of a UCITS scheme was required, under COLL 6.12.3R(2), to notify details of its derivative risk management process to the FCA on a regular basis (and at least annually).
This notification included details of the derivatives and forward transactions used in each UCITS scheme, together with the underlying risks and any quantitative limits, and the methods for estimating the relevant risks.
However, the format for submitting this information to the FCA was not defined and no standard template was required to be used.
As a consequence, the FCA found that the information they received was often incomplete or in a format that was not easy to assess or compare.
What is Derivatives Use Reporting?
UK authorised fund managers or UK management companies of an EEA UCITS scheme are required to complete returns to the FCA providing data on the use of derivatives in UCITS schemes.
COLL 6.12.3R(2) requires an authorised fund manager or a UK UCITS management company of an EEA UCITS scheme to report at least annually on their use of derivatives, their underlying risks, any relevant quantitative limits and methods for estimating risks. COLL 6.12.3AR sets out that this information must be submitted within 30 business days of 31 October using the standardised template form FSA042.
Content of the report
The report contains required fields for providing detailed information for each UCITS scheme, or sub-fund where applicable, managed by the AFM, including:
- Gross long and short derivatives positions;
- Details of risk measures used;
- Information on fund leverage including average leverage, maximum expected level, usually expected level and internal maximum level;
- Confirmation as to whether derivatives are being used for EPM purposes.
Timeline for regular reporting
AFMs will have to submit the Derivatives Use Report annually within 30 business days of 31st October, containing information on the derivatives as of 31st October of that year.
AFMs should submit additional reports at any time during the year if there has been a significant change to a fund’s risk profile since its last report.
A significant change could include:
- the first use of derivatives for investment purposes, if derivatives have previously been used only for efficient portfolio management;
- investment in non-standard derivatives, if only standard derivatives have been used previously;
- a change in the type of risk measure used to calculate the global exposure (commitment method, relative VaR or absolute VaR); or
- where a VaR measure is used, a change in the parameters of the calculation.
Reports of significant changes need only contain new information for the period since the previous report.
- The first use of derivatives for investment purposes, if derivatives have previously been used only for efficient portfolio management;
- Investment in non-standard derivatives, if only standard derivatives have been used previously;
- A change in the type of risk measure used to calculate the global exposure (commitment method, relative VaR or absolute VaR); or
- Where a VaR measure is used, a change in the parameters of the calculation.
- Reports of significant changes need only contain new information for the period since the previous report.
Method of reporting
AFMs should submit the report to the FCA online via the FCA GABRIEL system. If GABRIEL is unavailable, then the report should be submitted via email to email@example.com.
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HOW CAN FUNDS-AXIS HELP?
We offer a fully automated reporting solution as well as a simple excel to XML conversion solution. Our FCA Derivative Use Reporting solution offers the following:
Derivative exposure calculations
Review and logic validation
Gabriel upload support