FUND 3.7 Risk management

This section applies to a full-scope UK AIFM of:

1. (1)

   a UK AIF;

2. (2)

   an EEA AIF; and

3. (3)

   a non-EEA AIF.

1. (1)

   An AIFM must functionally and hierarchically separate the functions of risk management from the operating units, including from the functions of portfolio management.

2. (2)

   An AIFM must, in any event, be able to demonstrate that:

   1. (a)

      specific safeguards against conflicts of interest allow for the independent performance of risk management activities; and

   2. (b)

      the risk management process satisfies the requirements of this section and is consistently effective.

[Note: article 15(1) of AIFMD]

1. (1) 1
   1. (a)

      An AIFM must implement adequate risk management systems to identify, measure, manage and monitor all risks relevant to each AIF investment strategy and to which each AIF is, or may be, exposed.1

   2. (b)

      In particular, an AIFM must not solely or mechanistically rely on credit ratings issued by credit rating agencies, as defined in article 3(1)(b) of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, for assessing the creditworthiness of the AIF's assets.1

2. (2)

   An AIFM must, at least:

   1. (a)

      implement an appropriate, documented and regularly updated due diligence process when investing on behalf of the AIF, according to the investment strategy, objectives and risk profile of the AIF;

   2. (b)

      ensure that the risks associated with each investment position of the AIF and their overall effect on the AIF's portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures; and

   3. (c)

      ensure that the risk profile of the AIF corresponds to the size, portfolio structure and investment strategies and objectives of the AIF as set out in the instrument constituting the fund, prospectus and offering documents.

[Note: article 15(2) first paragraph and article 15(3) of AIFMD]

An AIFM must:

1. (1)

   review the risk management systems with appropriate frequency and, in any event, at least once a year; and

2. (2)

   adapt them whenever necessary.

[Note: article 15(2) second paragraph of AIFMD]

1. (1)

   An AIFM must:

   1. (a)

      set a maximum level of leveraging which it may employ on behalf of each AIF it manages; and

   2. (b)

      where the leverage arrangement allows the right to reuse collateral or the granting of a guarantee, set out the extent of that right or guarantee.

2. (2)

   An AIFM, in complying with (1), must take into account relevant matters including:

   1. (a)

      the type of AIF;

   2. (b)

      the investment strategy of the AIF;

   3. (c)

      the sources of leverage of the AIF;

   4. (d)

      any other link or relevant relationship with other financial services institutions which could pose systemic risk;

   5. (e)

      the need to limit the exposure to any single counterparty;

   6. (f)

      the extent to which the leverage is collateralised;

   7. (g)

      the asset-liability ratio; and

   8. (h)

      the scale, nature and extent of the activity of the AIFM on the markets concerned.

[Note: article 15(4) of AIFMD]

An AIFM must demonstrate that the leverage limits it sets under FUND 3.7.7R (1)(a) are reasonable and that it complies with those limits at all times.

[Note: article 25(3) first sentence of AIFMD]