| NAV | DERIVATIVE EXPOSURE | |
|---|---|---|
| PORTFOLIO OF CONVERTIBLE BONDS | 10,000,000 | 10,015,000 |
| NAV | 10,000,000 | 10,015,000 |
There is a portfolio of £10m of convertible bonds and no other assets.
If these are converted into the equivalent underlying assets the exposure would be 10,015,000.
AIFMD COMMITMENT EXPOSURE
The AIFMD Commitment Exposure is 100.15% (.15% Incremental leverage).
UCITS GLOBAL EXPOSURE
The UCITS Commitment Exposure is unclear, with the range of possible answers ranging from 0% to 100.15% Global Exposure, which is in excess of the 100% limit on global exposure.
In the UCITS Guidelines, it is clearly set-out in Box 2 that the correct approach for calculating the commitment exposure of a convertible bond is as follows:
“Number of reference shares * market value of the underlying reference shares * delta”
This would lead to the calculation that the Global Exposure is 100.15%
FUNDS-AXIS VIEW
The AIFMD approach is clearly preferable. The portfolio is effectively unleveraged and a calculation of 100.15% UCITS Global Exposure is not in keeping with the intention that global exposure is a measure of the incremental leverage.
To be able to conclude that the correct result for UCITS is also 0.15% global exposure / incremental exposure, we need to place emphasis on the words of Article 10 of the ESMA’s guidelines concerning eligible assets for investment by UCITS, which provides that a proportionate approach can be taken to convertible bonds and other such instruments.
We would also note that this approach is consistent with the approach to fully-funded swaps, which are not considered to give incremental exposure. Fully funded swaps are swaps where the fund receives the relevant return and pays over the cash notional to the swap counterparty. In other words, they have been purchased for cash, just like the convertible bond.
The wider point is that this is an issue for UCITS Global Exposure because it refers to the incremental leverage from derivatives and provides a structured methodology for this, rather than simply looking at the total leverage of the whole portfolio.
