BVV Derivatives Fachempfehlung – Highwire Extensions

BBV Funds & Derivative Commitment Exposure

Since 2015, Swiss Investments funds under the CISA apply what is referred to as “Commitment II” approach for calculating derivatives exposure. Click here for more information on the 2015 changes and the differences between Commitment I and Commitment II approaches.

For Swiss Occupational Funds, the approach to derivatives is described in the 1996 “Fachempfehlung zum Einsatz und zur Darstellung der derivative Finanzinstrumente” (Fachempfehlung). This document is only available in German.

This Fachempfehlung approach is different from both Commitment I and Commitment II approaches, although it is much closer to Commitment I approach. The similarities and differences are explained below.

Similarity between Fachempfehlung and Commitment I

Similarities include:

Both approaches prohibit leverage by covering all exposure increasing derivatives with liquid assets;
Both approaches prohibit short positions by covering all exposure decreasing derivatives with the underlying instrument.

Differences between Fachempfehlung and Commitment I

There are, however, differences between Fachempfehlung and Commitment I.

Fachempfehlung does not provide for Delta Adjustment.

The “economic exposure” (“Basiswertäquivalent”) as defined in CISO-FINMA and UCITS regulations equals the exposure which is equivalent to holding the respective amount of the underlying directly. This includes delta adjustment.

In contrast the “Fachempfehlung” does not include delta adjustment. Although not explicitly stated, Article. 56a.6 states that derivative coverage needs to be equivalent to the maximum commitment in case the contract is exercised.
Under Art.56a.5, the Fachempfehlung, when calculating diversification exposure (as regards the limits in Art.54 and Art.55), the deduction of exposure reducing asymmetric derivatives (i.e. short calls, long puts) is not allowed. Referring back to point 1, this makes sense in the context of non-delta adjusted exposures, since the deductible amount would be too large.
Art.50.4. Fachempfehlung explicitly points out that the…
Under the Fachempfehlung, calculating the net exposure of derivative strategies is only allowed for derivatives with the same maturity. In contrast, delta adjusted exposures would reflects the time value of derivatives.

Conclusion

Based on the above, a decision needs to be made as regards the approach to be applied to derivatives usage by occupational pension schemes. The decisions could involve:

Apply a literal interpretation of the Fachempfehlung;
Apply Commitment I; or
Apply Commitment II.

An argument can be made for not applying the Fachempfehlung literally. In this regard, note:

Commitment I is the more restrictive approach;
The “Fachempfehlung” explicitly states that it only “offers aid to interpretation and suggestions” for BVV2 Art. 56a (see p.57 in the “Fachempfehlung”).
The Fachempfehlung states “the development of financial derivatives is a dynamic process and the “Fachempfehlung” most likely needs to be adjusted in the future”.

As regards the last point in particular, note the “Fachempfehlung” dates back to 1996 since which time the commitment approach has become internationally accepted and widely used approach, following the European UCITS regulations and ESMA Guidelines and indeed the UCITS approach is now Swiss CISA funds since the introduction of Commitment II in 2015.