RM-6.1 RM-6.1 Derivative Transactions Risk
RM-6.1.1
Investment firm licensees must seek prior CBB approval before starting to undertake derivative transactions.Investment firm licensees that engage in derivatives trading for their own account or forclients must evaluate the systems needs for such activity.Adopted: July 2007RM-6.1.2
Rule RM-6.1.1 requires a one-off approval, before undertaking derivatives activity, rather than approval for each such transaction. With the complexity of derivatives products and the size and rapidity of transactions, it is essential that
licensees capture all relevant details of transactions, identify errors and process payments or move assets quickly and accurately. This requires a staff of sufficient size, knowledge and experience to support the volume and type of transactions.Adopted: July 2007RM-6.1.3
Current and projected volumes should be considered together with the nature of the derivatives activity and the users' expectations. Consistent with other systems plans, a written contingency plan for derivative products should be in place.
Adopted: July 2007RM-6.1.4
Investment firm licensees must ensure that a mechanism exists whereby derivatives contract documentation is confirmed, maintained and safeguarded.Adopted: July 2007RM-6.1.5
Investment firm licensees should establish a process through which documentation exceptions are monitored and resolved and appropriately reviewed by senior management and legal counsel.Adopted: July 2007RM-6.1.6
The
licensee should also have approved policies that specify documentation requirements for derivatives activities and formal procedures for saving and safeguarding important documents that are consistent with legal requirements and internal policies.Adopted: July 2007RM-6.1.7
Investment firm licensees must have adequate systems support and operational capacity to accommodate the types of derivatives activities in which it engages.Adopted: July 2007RM-6.1.8
Systems design and needs may vary according to the size and complexity of the derivatives business. However, each system should provide for accurate and timely processing and allow for proper risk exposure monitoring. Operational systems should be tailored to each
licensee's needs. Limited end-users of derivatives may not require the same degree of automation needed by more active trading institutions. All operational systems and units should adequately provide for basic processing, settlement and control of derivatives transactions.Adopted: July 2007RM-6.1.9
For the purposes of RM-6.1.7, the systems should consider:
(a) The firm's ability to efficiently process and settle the volumes of transactions;(b) The firm's ability to monitor and predict margin calls and settlement calls;(c) Availability of data sets including statistical factors particularly in respect of derivatives (betas, gammas etc.);(d) Processes to ensure that the data sets used are current and subject to validation processes to provide support for the complexity of the transaction booked;(e) The integrity of the valuation models used for derivative transactions — theinvestment firm licensee should have appropriate policies and processes ensuring accuracy and completeness of the related data flows including the data sets mentioned above, stress testing, backtesting for ensuring; and(f) Support systems and the systems developed to interface with the core applications or databases should generate accurate information sufficient and to allow business unit management and senior management to monitor risk exposures in a timely manner.Adopted: July 2007RM-6.1.10
The more sophisticated the
licensee's activity, the more need there is to establish automated systems to accommodate the complexity and volume of the deals transacted, to report position data accurately and to facilitate efficient reconciliation.Adopted: July 2007
