The below is copied from the SEC website.
Limits on Value-at-Risk (VaR)
- Any appropriate VaR methodology
- VaR methodology adopted should account for equity price risk, interest rate risk, credit (spread) risk, (foreign) currency risk, etc.
- Modelling should account for non-linear movements in securities, e.g. options and also volatility effects.
- VaR metric:
- With 99% confidence,
- Over 20 business days, and with
- 3 years of data
- Relative VaR (against reference portfolio/benchmark ~ if appropriate)
- VaR limit at 200% the reference portfolio)
- Absolute VaR
- VaR limit at 20% the portfolio value
If the above limits are breached for 5 business days, this must be reported to portfolio management with corrective steps proposed/implemented.
Require a risk management program as well appointing a derivatives risk manager
Various reporting is required (to SEC & others)
Exceptions are available
- If an exception is gained, the derivative exposure must remain below 10% the portfolio value
Additional requirements
- Identify derivative securities & their risks
- Guidelines must be available for the derivative(s) risk
- Stress testing must be performed on the portfolio
- Backtesting must be performed on the portfolio
