Derivative Risk

The FSA has published proposed guidance on derivative risk management practices following a survey of twelve asset managers.

Although a ‘derivative risk management process’ is normally associated with authorised funds (COLL 5.2.24), the thematic review looked beyond COLL (‘taking a holistic and outcomes approach ..’) with the survey taking in the management of hedge funds and ‘unregulated off-shore funds’. The guidance also reminds us of Principle 2 (‘A firm must conduct its business with due skill, care and diligence’) and Principle 3 (‘A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’).

The guidance consultation is reasonably short (19 pages) and has the advantage in that Appendix 2 collates the FSA’s expectations in respect of areas such as counterparty risk monitoring and oversight structure.