1. Sydney December 11, 2006 Seite 1 Lessons from implementations of Basel II and for Solvency II - Market Risk Models for Investment Funds

2. Sydney December 11, 2006 | 13.02.2016Seite 2 Internal models in investment companies Background: Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 (amended „UCITS Directive“): - UCITS are now permitted to employ financial derivatives as part of their general investment policy, not only for the purposes of hedging positions. - Derivatives exposure may reach 100% of NAV, allowing for a total leverage of 200%. The amendment of the UCITS Directive was implemented into German law with the Investmentgesetz that came into force on January 1, 2004. Investment companies are allowed to and might even be required to use internal (VaR) models for risk measurement and the assessment of a UCIT’s leverage.

3. Sydney December 11, 2006 | 13.02.2016Seite 3 Internal models in investment companies Background (continued): In November 2002 the UCITS Contact Committee set up a derivatives task force to propose risk management principles for the use of financial derivatives in investment funds. The report of the task force was approved by the Commission of the EU in May 2003. Based on this report the Commission proposed Recommendations that were submitted to the UCIT Contact Committee for discussion in November 2003. The Recommendations were published on April 27, 2004. Germany pressed ahead with the implementation of the Derivateverordnung which came into force on February 13, 2004 and which is based on the report of the task force.

4. Sydney December 11, 2006 | 13.02.2016Seite 4 Hedge funds Background: The new Investmentgesetz (Chapter 4) allows for the issuance of hedge funds in Germany. So far, no further requirements for risk management comparable to the Derivateverordnung have been published. However, the Derivateverordnung provides minimum standards that will also apply to hedge funds. Responsibilities at the BaFin: A dedicated department (WA 46) for the supervision of the hedge fund business has been set up. Q RM supports the new department by providing advice on risk management issues with a particular focus on risk quantification.

5. Sydney December 11, 2006 | 13.02.2016Seite 5 Differences: Funds – Bank’s trading book UCITS DirectiveMarket risk amendment Basel I goal (§ 51 Abs. 2 InvG): risk potential maximally doubled by the use of derivatives, i.e. portfolio-VaR / benchmark-VaR < 2 Öffnungsklausel bei Modellierungs- vorgaben (§10 (2) DerivateV) credit risk implicitly covered goal: minimum capital requirement absolute VaR (benchmark=0) strict requirements on parameters credit risk in the trading book treated explicitly (specific interest rate risk)