December 2010
flash info Regulation: latest developments The next two years will see a number of changes in regulations, notably: • the implementation of Solvency II reforms for the insurance sector (insurance companies, mutual insurers, pension institutions) and Basel III, the equivalent reform for the banking industry • introduction of a new AMF classification for money market UCITS, • the UCITS IV directive. Topical outline…
Christophe Point, Head of Sales of Natixis Asset Management Regulatory change: what will this mean for Natixis Asset Management? "Natixis Asset Management pays very close attention to any changes in regulations (Solvency II, Basel III, UCITS IV, etc.). We aim to take a proactive approach to adopting new regulations. Thus, in 2010, we have sought to: • train the management and sales teams to help insurance companies to apply the new rules laid down in Solvency II to their activities; • integrate “increased transparency” into our insurance management processes; • establish reporting channels in order, in the interests of transparency, to state the solvency capital requirement (SCR)* for a range of UCITS, dedicated funds and mandates sold in relation to insurance firms. Our sales teams are available now to advise our clients on these subjects and to offer them investment services and solutions that meet their needs."
Solvency II or the integration of the dimension "risks" in the regulation of insurance compagnies Solvency II was launched in 2004, and represents the future framework for prudential regulation in the insurance sector. It will enter force in October 2012. The aim of Solvency II is to integrate risk management more fully into the regulation of insurance companies. This reform imposes a profoundly different approach to capital adequacy, moving away from a straightforward asset/
liability approach; as a result, insurance companies will have to have sufficient capital to cover the risks in their portfolios. This means that they must hold enough capital to guarantee 99.5% of their obligations over a one year period. The optimization of capital will therefore be necessary. This is intended to increase transparency.
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Flash info / December 2010
Asset and liability sight of Solvency II liabilities
Assets
Surplus Increased transparency
Current assets
SCR* SCR*
Required capital
MCR* Risks margin Valuation in the market value or the fair value
Assets Valuation in the market value
Liabilities Valuation in the market value
Liabilities Valuation in Best estimate* type
Asset/liability management
Technical reserves Valuation in the market or Best estimate + prudential margin Source: Natixis Asset Management
*key terms used Increased transparency Optimization of the amount of regulatory capital supported by investments deemed risky under Solvency II, for the same level of risk and expected performance. SCR (Solvency Capital Required) Amount of capital necessary to absorb the shock caused by a major risk (e.g.: an exceptional incident, an asset shock, etc.).
MCR (Minimum Capital Required) Minimum level of stockholders' equity below which the intervention of the supervisory authority will be automatic. Best estimate (la meilleure estimation) The weighted average by their probability of the future cash flows considering the time value of the money (likely present value of the future cash flows determined from the rate curve without relevant risks).
The capital required to insure the solvency is defined by the ratio SCR and is a function of 2 main categories of risks.
Operational risks
Solvency Capital Requirement (SCR)
Basic risks
Market risks n Rate risk n Global equity risk n Other equity n Spread/credit risks n Real estate risk n Forex risk Counterparty risk "non-life" risk "life" risk "Health" risk
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Source: Natixis Asset Management
Flash info / December 2010
The required level of cover can be summarized by type of asset held as follows:
Capital requirement by type of asset (standard formula)
Capital requirement (% stock market value)
“Other equities” category
Listed stocks
Real estate
8-year zero-coupon A rating (credit risk)
Private equity
Hedge funds
Commodities
Emerging markets
Source: Natixis Asset Management
Money market UCITS: new AMF classification Initiated by the CESR, the new European regulations provide for the introduction of two categories of money market funds on July 1, 2011: n short-term money market funds n money market funds These new categories for classifying money market funds will have their own characteristics (notably in terms of average
life and maximum maturity) and will increase the operational scope of money market UCITS. A transition period will be allowed until December 31, 2011 for existing European money market UCITS to be brought into line with one of these classifications.
UCITS IV The UCITS IV directive, which will enter force on July 1, 2011, is aimed at improving the efficiency of the single market by strengthening the competitiveness of the asset management industry in facilitating fund distribution, while at the same time maintaining current levels of protection for investors. The directive has four main objectives. n Introduction of Key Investor Information (KII) From July 1, 2011, KII will replace the simplified prospectus. This new format will be common to all EU countries. The provision of information in standard format will make cross-border comparison of UCITS IV-type funds much easier. n Cooperation of local regulators The directive will be transposed by all local regulators, thereby securing the principle of cooperation ensured by the CESR*and a level of protection for investors at least equivalent to that established in their home country.
n Simplified registration procedure The time needed to obtain authorization to distribute a UCITS in another country will be a maximum of 10 days, compared to an average of two months at present. In addition, a fund manager will be able, if it has obtained approval in its home country, to create and manage funds in other member states without being established there. n Increase in the size of European UCITS and economies of scale UCITS IV also allows for: • cross-border merger of EU-domiciled funds • the option to have a master fund registered in one country, and feeder funds registered in other EU countries
CESR : Committee of European Securities Regulators.
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Flash info / December 2010
Conclusion Solvency II, Basel III, the reclassification of money market UCITS and UCITS IV all represent major regulatory changes for 2011, which Natixis Asset Management, as an asset manager at European and international level, is already seeking to take into account within its organization and range of investment solutions. Written on 24/11/2010 by Antoine Tiago, Deputy Head Sales Natixis Asset Management
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Disclaimer This document is destined for professional clients. It may not be used for any purpose other than that for which it was conceived and may not be copied, diffused or communicated to third parties in part or in whole without the prior written authorization of Natixis Asset Management. None of the information contained in this document should be interpreted as having any contractual value. This document is produced purely for the purposes of providing indicative information. It constitutes a presentation conceived and created by Natixis Asset Management from sources that it regards as reliable. Natixis Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, nor in the use that a third-party may make of it.
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This document has been prepared by the Communications Department - December 2010.
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Flash info / December 2010
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