EC May Limit Exposure to High Risk Derivatives

As part of a European Commission review of its Undertakings for Collective Investment in Transferable Securities (UCITS) initiative, The EC is considering curbing the use of so-called non-eligible assets, derivatives instruments that may aggregate excessive levels of hidden risk.

The commission is reportedly gauging the potential impact of new restrictions on this type of instrument. A move in this direction would mostly affect alternative asset managers.

The news follows the release of European Securities and Markets Authority (ESMA) guidelines governing UCITS funds, including eligible asset diversification and the use of financial indices to circumvent UCITS diversification rules.

“That’s just one step,” said Mirzha de Manuel, financial regulation researcher at the Centre for European Policy Studies. “The commission’s consultation asks deeper questions about eligible assets.”

In addition, the EC is also weighing the possibility of applying the commitment method of measuring risk, as opposed to the value at risk (VAR) approach widely used today. The commitment method takes leverage into account, while VAR does not.

The EC’s consideration of these and similar new rules mirror attempts by the CFTC, as well as other regulators around the world, to prevent a buildup of risk that could lead to a repeat of the 2008 global financial crisis.

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Photo credit: tiseb

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