UCITS contradiction leads to VaRs errors
26 May 2009
Written by Sophie Baker
VaR calculations are at odds with one another in some European
countries due to a contradiction in UCITS Rules, says EM Applications.
The investment risk solutions supplier is concerned that the European
Commission’s UCITS rules recommend that VaR calculations be made
using “recent volatilities (i.e. NO MORE THAN one year)”,
which EM Applications says became a stipulation that this should state
“NOT BE LESS THAN 1 year” when it was transposed into national
regulations in Luxembourg, Ireland and Germany.
EM Applications says that this works under interpretation by each country,
therefore, and will produce very different results and lead to confusion.
However, the company said this is not due to an error on the part of the
EC or the Luxembourg, Irish or German regulators, but is recognition that
the historical period used is intrinsic to the purpose of the VaR calculation.
“Whether by design or accident, the UCITS Regulators have come up
with the solution to the main issues raised about VaR – collectively
they have required investment managers to calculate both a short-term
and a long-term VaR,” commented Peter Ainsworth, managing director
of EM Application. “Had the banks been doing this they would not
have operated with so little capital and would have suffered much less
harm as a consequence of the sub-prime crisis. All that is needed now
is or the EU to amend the UCITS rules to require all jurisdictions to
compute both long and short-term VaR and we will have a practical way
forward that addresses a major shortcoming of the previous regime.”
