VPD Risk & Performance: Automated workflow producing SRRI - part of the Key Information Document disclosures for UCITS

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30 September 2015

In its technical advice to the European Commission on the Key Information Document for UCITS, the Committee of European Securities Regulators (CESR) proposed the use of a synthetic indicator (SRRI) for funds’ risk and reward disclosure and, where relevant, the risks that are not fully captured by the indicator. The aim was to ensure that all UCITS funds are classified into the risk and reward scale according to the same criteria throughout the European Union.

The advice stated that the SRRI should be based on the volatility of the weekly returns, or monthly if there is limited frequency. The SRRI would translate the volatility of the returns to an integer number ranking the overall risk of the fund on a scale from 1 to 7, according to its increasing level of volatility. However a structured fund with complex instruments make its return distribution asymmetrical and their risk profile can change drastically over time. In these cases, the SRRI of structured funds should compute the VaR at maturity through historical simulation and then transforming this measure into the corresponding annualized returns volatility.

VPD Risk & Performance has been used by our clients in setting up the flow of necessary logic from an external risk engine to provide the Historic VaR of the fund. The flow is taking in the daily/monthly performance from the central performance library for the fund and/or simulation series, reconciling this data, and calculating the necessary ex-post calculations. VPD Risk & Performance also downloads and reconciles the data from the external risk provider, slicing the performance series and transferring it to the appropriate share-classes for simulation.

The VPD solution has automated the data capture, reconciliation and calculation, including:

•       Capturing VaR.

•       Calculating the Volatility level.

•       Translating the simulated performance series into the right currency given hedging conditions.

•       Handling the logic around the number of weeks the KIID has been unchanged.

•       Data reconciliation to capture errors at an early stage.

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