Delegation has gained increasing importance in the financial industry over the last decade, not least within the investment funds universe. The regulatory framework has evolved along with regulators’ expectations to make the accompanying requirements increasingly demanding. The ESMA opinion, published in July 2017, has confirmed, among other things, the (new) standard regarding delegation and oversight as seen by the independent European authority. It’s with this same objective in mind that the CSSF published its circular 18/698 in late August, precisely defining the oversight and delegation framework for Luxembourg. Beyond this, the circular covers governance, risk management and asset-money-laundering. This article puts the spotlight on delegation and oversight.
There are several aspects to the delegation process. It covers not only the due diligence work to be done and how it has to be done, but the whole spectrum of oversight. How, for instance, to organise the oversight? How to select delegates? How to be consistent over time? From there, how do you monitor the delegate? Such monitoring is not only about performing the annual check through a questionnaire, but also about continually monitoring several aspects, not least operational issues, trading checks and sensible policies such as best execution. In other words, the fundamental priority is to define the policies and procedures for selecting and monitoring the delegate. The second part of the process deals with the due diligence aspects; the formal checks of the PPSS as we call them, People, Process, Structure and Systems. This involves identifying the potential sources of risk through a system of enquiry that should include onsite visits. This in turn leads to continuous monitoring, defining performance and risk indicators and building reports to monitor them.
There are several elements to these new standards regarding delegation and oversight. The perspective we take is based on a mix between the regulator’s expectations and market practices. Our objective is not to be exhaustive but to outline the general trends and most important factors. We start with the most common elements that are not, generally speaking, defined by the type of delegates involved. By contrast our last section focuses on specific requirements regarding portfolio management delegation.
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