Risk Measurement Services for Investment Funds potx

ADVISORY
Risk Measurement
Services for
Investment Funds
Risk Measurement Services for Investment Funds | 1
What KPMG can offer
KPMG Luxembourg S.à.r.l. is specialized in the provision of Audit, Tax, and Advisory
services. Within these units KPMG’s Financial Risk Management department acts
as a risk management service provider for Investment Managers and funds.
This brochure provides you with an overview of the main risk measurement
services KPMG can offer to you as well as the key benefits to your business.
Your Benefits
✓ Luxembourg based risk
management service provider
✓ Highly skilled, qualified and
experienced experts from research
and industry
✓ Risk management service
operated like an integrated group
within your daily risk management
processes under your control
✓ Fully transparent
✓ Solutions can be tailored to your
particular business needs
✓ Risk reports & results available
when needed (even several times
within a day if needed)
✓ Sophisticated solutions operated
in a cost-efficient manner
✓ Luxembourg based risk

management researchers and
hands-on developers from
different topical areas such as
mathematics, statistics,
finance and IT
✓ Regulatory specialists ensure
fully compliance and best practice
application with supervisory
regulation such as Luxembourg
and European regulations
Liquidity Risk
Counterparty Risk Value at Risk
Commitment Approach
Back-
testing
Stress-
testing
Concentration Risk
Leverage
Coverage Rules
SRRI
OTC Derivative
Valuation
Risk Measurement for Funds
Global Exposure
2 | Risk Measurement Services for Investment Funds
Regulatory Framework
As a global and leading Luxembourg based audit, tax and advisory firm, KPMG
follows closely and timely upcoming technical and regulatory developments,
allowing the provision of high quality services to clients.

The following table provides an overview of the current regulatory environment
for UCITS risk management.
Your Benefits
✓ Well known and leading firm for
audit, tax and advisory services in
the financial industry
✓ A team of hands-on regulatory
experts are part of our risk
management team from which
you will benefit
✓ Truly international network, i.e. we
can assist you globally and locally
✓ Own research and excellence
centers to identify new technical
and regulatory developments
Regulatory framework on Risk Management
European Union Luxembourg
Level 1
legislation
Directive 2009/65/EC
Law of 17 December
2010 on Undertakings for
Collective Investment
(2010 Law replaces the
2002 Law)
Level 2
implementing
measures
Commission Directive
2010/43/EU

CSSF Regulation No10-4
CSSF Regulation No10-5
Level 3
guidelines
• ESMA Guidelines 09/178 as regards risk management
principles for UCITS
• ESMA Guidelines 10/673 on the methodology of the
calculation of the SRRI in the KID
• ESMA Guidelines 10/788 on risk measurement and
calculation of global exposure and counterparty risk
for UCITS
• ESMA Guidelines 11/112 as regards risk measurement
and calculation of global exposure for certain types of
structured UCITS
CSSF Circular 07/308
CSSF Circular 11/498
CSSF Circular 11/512
Risk Measurement Services for Investment Funds | 3
KPMG’s risk engineering team with its deep technical and hands-on knowledge as
well as industry experience wants to contribute to your company’s success and
development by adding tailor-made high value solutions in a cost-efficient manner.
Therefore, we have developed and maintain a sophisticated and fully transparent
model to help meet your expectations. The separation of the technical infrastructure
from the market risk model allows us to offer you a great variability of choices in the
Value at Risk calculation method and thus to adapt the model to the special needs
of your business.
Principle of Separation
of Concerns (SoC)
✓ Technical Infrastructure is
implemented in Java

✓ Market Risk Model is
implemented in Matlab
Your Benefits
✓ Technical model is easy to
understand and maintain
✓ Reduced cycle times for model
customizations (e.g. if you request
additional measures)
✓ Full transparency
✓ In-House development allows for
tailor-made solutions
Model Administration & Job Control
Data Access Layer
Risk Engine
Reporting
Market Risk Model
(MATLAB)
Other Risk Measures
Liquidity Risk
SRRI
Commitment Approach
Value at Risk
• Historical Approach
• Variance/Covariance Approach
• Monte Carlo Approach
Database
• Stress Test Report
• Risk Report
• Backtesting Report
Portfolio Data

Market Data
Architectural Overview
4 | Risk Measurement Services for Investment Funds
Value at Risk (VaR)
Applying the Value at Risk approach goes in hand with plenty of qualitative and
quantitative criteria such as completeness, consistency to risk profile, accuracy and
choice of appropriate VaR model as laid down in the ESMA Guidelines 10-788 and
CSSF circular 11/512. We can calculate the Value at Risk as well as other risk and
performance measures on a daily basis and if needed, on an intraday basis.
Covered Financial Instruments and Risk/Performance Measures
Examples: Financial Instruments
• Cash
• Equity
- CFDs
• Fixed-Income Securities
- Floating rate notes
- Fixed rate notes
• Linear Derivatives
- Future & Forwards
- Swap contracts
(CCS, IRS, CCIRS)
• Non-Linear Derivatives
- Plain-Vanilla Options
- Barrier Options
- Asian Options
- Options on volatility indices
- Interest Rate Options
• …
Examples: Risk and Performance
Measures

• Value at Risk
• Expected Shortfall
• Marginal Value at Risk
• Incremental Value at Risk
• Risk Factor Value at Risk
• Sharpe Ratio
• Maximum Drawdown
• Tracking Error
• Annualized Volatility
• Annualized Semi-Standard
Deviation
• …
Global Exposure
According to CSSF Circular 11/512, management companies are required to assess
the risk profile for each UCITS on the basis of the investment policy and strategy
in order to choose an appropriate method of calculating global exposure.
UCITS may consider for the calculation of global exposure the use of the Value
at Risk or the Commitment Approach.
Your Benefits
✓ VaR and related measures
calculation on at least a daily basis
and if requested intraday basis
✓ Calculation of the Commitment
Approach
✓ Accurate risk measurement
Global Exposure
Value at Risk Commitment Approach
Risk Measurement Services for Investment Funds | 5
Calculation Approaches
Based on your business needs, different approaches may turn out to be the most

appropriate for your situation. KPMG can apply one of the following methods:
Advanced Time Series Modeling
KPMG employs industry leading time series models, which allow the
implementation of methods which quickly adapt to new circumstances. Examples
of included models are the GARCH-approach with a variety of implementations, e.g.
T-GARCH (with a t-distribution) or GARCH models with leverage (e.g. EGARCH).
Your Benefits
✓ Thorough selection, calibration
and testing of time series models
and related parameters
✓ Fast and flexible inclusion of new
types of financial instruments
✓ Industry leading coverage of
financial instruments and risk
factors
✓ Variability allowing a tailor-made
solution
✓ Full transparency
Historical
Simulation
Monte Carlo
Simulation
Variance Covariance
Weights Time Series Models
Simulation and Full Valuation Closed Formula
Daily Returns
Volatility Forecast
Historical
GARCH
EGARCH (with leverage)

6%
4%
2%
0%
15%
10%
5%
0%
-5%
-10%
6 | Risk Measurement Services for Investment Funds
(Alternative) Commitment Approach
KPMG can calculate for all financial derivatives including embedded derivatives the
global exposure using commitment conversion methodology (conservative as well
as exact calculation). KPMG’s broad experience in fair valuation assists in capturing
the exposure of complex derivative instruments.
The Commitment Approach solution offered by KPMG takes into account:
• Netting and hedging arrangements to reduce global exposure
• The duration-netting rules which allow partial duration netting for the interest
rate derivatives which are not included in hedging arrangements
• Efficient Portfolio Management Techniques (EPM)
Your Benefits
✓ Wide range of financial derivative
instruments covered
✓ Complex derivative instruments
handled
✓ Structured Funds can
be handled
Scope Methodology Specifics
• All financial

derivative
instruments:
- Standard derivatives
- Embedded
derivatives
- Exotic derivatives
• Hedging
agreements
• Netting agreements
(inc. Duraction-
netting rules)
• Efficient Portfolio
Management
Techniques (EPM)
• Commitment
Conversion
Methodology
(Conservative and
Exact calculation)
• Alternative
commitment
approach for certain
types of structured
UCITS
Risk Measurement Services for Investment Funds | 7
Backtesting
The calculation of the Value-at-Risk involves many statistical and mathematical
assumptions. Since they may not always be fulfilled, VaR models have to be tested.
KPMG offers you either a clean or a dirty backtesting solution based on five steps:
1. Graphical analysis

2. Traffic light approach
3. Statistical testing
4. Production of a backtesting report
5. Assessing with you to change the VaR model (different VaR models are available
and one might fit better to your funds).
Your Benefits
✓ Efficient realization of advanced
backtesting methods
✓ Automated algorithms for regular
backtesting on a daily basis
✓ Sound analysis based on KPMG’s
five steps of backtesting
✓ Awareness of weaknesses of
the applied VaR model and thus a
more efficient control of your risks
Statistical
Tests
Kupiec
POF Test
Markov
Test
Mixed
Kupiec Test
Interval
Forecast
Test
Pearson’s
Q Test
8 | Risk Measurement Services for Investment Funds
(Reverse) Stress Testing

According to the ESMA 10-788 Guidelines, each UCITS using the VaR approach
should conduct a rigorous, comprehensive and risk adequate stress testing program,
which should be adequately integrated into the UCITS risk management process.
Stress tests should cover all risks affecting the value of the UCITS to a significant
degree. Furthermore, UCITS should take into account the breakdown of common
relationships and standards. For instance, correlations can heavily change due to
stress situations.
KPMG can perform such stress tests on your behalf. We can also assist you in
building up a solid stress testing your process in line with the regulatory framework
and the goals of your business. This includes forward as well as reverse stress
testing, the choice of appropriate stress scenarios, sensitivity analysis and the
integration of the program into your risk management process.
Your Benefits
✓ Development and implementation
of a stress testing process
✓ Integration of the developed
method into your risk
management process
✓ Running of stress testing on
your behalf
Result: Reverse Stress Testing
Risk Measurement Services for Investment Funds | 9
Synthetic Risk and
Reward Indicator (SRRI)
According to the regulator, the aim of the SRRI is to bring increased comparability of
products and greater ease of understanding. It translates the volatility of the returns
into a general indication concerning the overall risk of the fund. Depending on the
result, the fund is allocated into one of seven risk classes.
We can assist you in the classification of your funds into one of the required
categories: Market, Absolute Return, Total Return, Life cycle or Structured Fund.

In addition, we can offer you a weekly automated SRRI calculation covering all
fund categories. To enhance the quality of output, we can provide self developed
methodologies in order to cope with some practical challenges (e.g. automated
benchmark selection, etc.). Finally, we can provide you with a clear process
description and full transparency over the process.
Your Benefits
✓ Reliable and competent partner
for outsourcing the SRRI
✓ All type of funds are handled in a
single solution
✓ Sound methodology validated by
KPMG’s experts
✓
Validation of the Fund Classification
✓ Full transparency
Fund
Classification
Finding Suitable
Benchmark or
Asset Mix
Verification
Reporting
SRRI Process
SRRI
Calculation
Data
Handling
10 | Risk Measurement Services for Investment Funds
Valuation of OTC
Derivatives

According to CSSF Regulation 10-4 management companies are required to
establish, implement and maintain arrangements and procedures which ensure
appropriate, transparent and fair valuation of UCITS exposures to OTC derivatives.
Further, they are required to ensure that the fair value of OTC derivatives is subject to
adequate, accurate and independent assessment.
KPMG’s experts can assist you in building up a sound valuation process and provide
you with independent valuation of OTC derivatives, including complex ones,
e.g. Asian options on commodity indices or knock-out options included in
bonus structures.
Your Benefits
✓ Experienced third party valuation
provider for OTC products
✓ Broad range of products covered
✓ Best practice and self-developed
methodologies
Volatility surface as a basis for knock out option valuation
Risk Measurement Services for Investment Funds | 11
Liquidity Risk
KPMG has developed, based on sound research methods, a liquidity risk
measurement framework which has the flexibility to be adapted to different liquidity
risk profiles and can be integrated into a variety of different risk management
strategies. Our approaches do not impose a certain risk management strategy,
rather they can be aligned to your existing risk management strategy.
Your Benefits
✓ Unique approach fully compliant
with regulations as it integrates
redemption policy and considers
stress testing procedures in
line with KPMG’s stress testing
program

✓ Can be tailored to a UCITS risk
profile based on sound and
successful empirical research
✓ Integrates a range of different
approaches from simple liquidity
indicators which are easy to grasp
towards advanced stochastic
methods
✓ Assistance in integrating the
selected measures into your risk
management
✓ Coverage of a wide range of
different types of financial
instruments
Market Liquidity Risk
Holistic View on a Fund’s Liquidity Risk
Redemption Risks (Investor
Behavior Risk)
Liquidity Monitoring (Trading
Volume, Amihud’s Ratio, etc.)
Scenario based simulations
&
Statistical based
assessments using a fund’s
own historical time series
Liquidity Adjusted
Conditional-VaR (based on
stochastical jump process)
Simulation of liquidity
risk impact on portfolio

composition and risk profile
12 | Risk Measurement Services for Investment Funds
Global Benefits
High Quality Proposition
We understand our services in a modern way, which means that we will not only
perform the risk measurement, but operate like an integrated group within your
daily risk management process under your control.
Reliable and Fair Prices
KPMG is widely known for the reliability of its services and the open communication
combined with fair and fix prices.
Transparency
We will provide you with full transparency over the models and processes used.
In-House Research and Development Group
Within our group of risk experts, we have a number of experts who come from
and who are still strongly connected to academic research in the relevant fields of
mathematical finance, statistics/stochastic and IT.
Proactive Knowledge Transfer
We offer you training and recurring up-date sessions on risk management
including general risk management principles and details of our methodologies -
proactively. Further, we provide you with assistance in coping with new regulatory
requirements in respect of risk management.
Tailor-made Solutions
The combination of self-developed methods with highly trained experts from
finance, mathematics, statistics and IT allows to adapt all methods to the particular
needs of your business.
Luxembourg Based Specialist
As a Luxembourg based risk and regulatory specialist, KPMG can identify regulatory
and technological changes specific to Luxembourg and turn this knowledge into
opportunities for you.

For more information, please contact:
Sven Muehlenbrock
Director
Head of Financial Risk Management
T:
+352 225151-6819
E:
Dr. Martin Reinhard
Manager
Financial Risk Management
T:
+352 225151-7978
E:
KPMG
9, Allée Scheffer
L-2520 Luxembourg
T: +352 22 51 51 1
F: +352 22 51 71
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a thorough examination of the particular situation.
© 2011 KPMG Luxembourg S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the
KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
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