On Jun. 8, RSA FSCA proposed standard on conditions for investment.
RSA FSCA proposed conduct standard on pension investment in derivative instruments.
As per Regulation 28(7) of regulations made under pension funds act 1956, section 36.
Act allows funds to invest in derivative instruments, empowers FSCA to set conditions; to date no conditions prescribed for funds when investing in derivative instruments.
Conditions for pension funds investing in derivative instruments as part of its strategy.
Need for Standard
Derivative instruments held by a pension fund, can be used for a variety of purposes.
Basic derivative contracts can be used by pension funds to hedge risk exposure to specific financial instruments, applicable on both the asset and the liability side.
Furthermore, derivatives can also be used to change the characteristics of the fund’s portfolio investments, for example, the duration of the fixed income portfolio.
Major risks of derivatives are market transparency, counterparty risk and liquidity risk.
Complex, illiquid or opaque, require closer monitoring, analysis, intrusive supervision.
When vulnerable investors, of pension fund members and beneficiaries, are involved.
Draft Conditions
FSCA draft standard sets out general principles for fund use of derivative instruments.
Conditions on the permissible uses of derivative instruments; and how they are valued.
Net derivative positions must at all times be covered by appropriate reference assets.
Determining the allowable counterparties for purposes of derivative instruments.
Setting out the allowable netting provisions for derivative instruments; determining the conditions in respect of collateral; and prescribing the conditions for reporting.
Standard also includes guidance on calculation of exposure to derivative instruments.
Effectiveness
Responses to the consultation are requested by Jul. 31, 2020.
May 2023 Conduct Standard Published
On May 11, 2023, RSA FSCA published FSCA conduct standard 1/2023 on conditions for investment in derivative instruments for pension funds.
Conduct standard sets out overarching principles for uses of derivative instruments.
Sets conditions re permissible use of derivative instruments i.a.: net derivative positions must at all times be covered by appropriate reference assets; valuation of derivative instruments; allowable counterparties for purposes of derivative instruments.
Provides guidance on the calculation of exposure to derivative instruments; sets out allowable netting provisions for derivative instruments; determining conditions in respect of collateral; and prescribing the conditions for reporting.
Conduct Standard comes into operation 12 months after publication, on May 11, 2024.
