LongPoint Asset Management Inc. and ReSolve Asset Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to exchange-traded alternative mutual fund from aggregate leverage exposure limit of 300% of NAV in s. 2.9.1 of NI 81-102 to permit fund to use Absolute Value at Risk to measure leverage exposure -- Relief subject to various conditions.
Relief granted from Items 3.3, 5.1 and 6.1 of Form 41-101F2 and item 3 of Part I of Form 41-101F4 to exempt fund from the requirement to disclose their maximum aggregate exposure to leverage as calculated pursuant to section 2.9.1 of NI 81-102.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.9.1 and 19.1.
Form 41-101F2 Information Required in an Investment Fund Prospectus, Items 3.3, 5.1 and 6.1.
Form 41-101F4 Information Required in an ETF Facts Document, Item 3 of Part I.
January 29, 2025
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF LONGPOINT ASSET MANAGEMENT INC. (LongPoint) AND IN THE MATTER OF RESOLVE ASSET MANAGEMENT INC. (ReSolve and together with LongPoint, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) to grant the Filers and the Return Stacked® Global Balanced & Macro ETF (RGBM) exemptive relief from:
(a) Section 2.9.1 of National Instrument 81-102 Investment Funds (NI 81-102), which limits an alternative mutual fund's aggregate exposure to cash borrowing, short selling and specified derivatives transactions to 300% of the fund's net asset value; and
(b) Sections 3.3, 5.1 and 6.1 of Form 41-101F2 Information Required in an Investment Fund Prospectus and Item 3 of Part 1 of Form 41-101F4 Information Required in an ETF Facts Document, which all require an alternative mutual fund to disclose its maximum aggregate exposure to leverage as calculated pursuant to Section 2.9.1 of NI 81-102
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for this application (the OSC);
(b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each jurisdiction of Canada, other than Ontario (the Other Jurisdictions, and together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following information represented by the Filers, ReSolve Asset Management SEZC (Cayman) (ReSolve Global) and Newfound Research LLC (Newfound), as applicable:
The Filers, and ReSolve Global, Newfound and RGBM
1. LongPoint is registered as a portfolio manager, commodity trading manager, exempt market dealer and investment fund manager in Ontario, and as an investment fund manager in Québec, and Newfoundland and Labrador. LongPoint's head office is in Toronto, Ontario.
2. ReSolve is registered as an investment fund manager, portfolio manager, commodity trading manager, and exempt market dealer in Ontario, as a portfolio manager and exempt market dealer in Alberta, British Columbia, and Newfoundland and Labrador, as an investment fund manager, portfolio manager and derivatives portfolio manager in Québec, and as an investment fund manager in Newfoundland and Labrador. ReSolve's head office is in Toronto, Ontario.
3. ReSolve Global is registered as an adviser by the Cayman Island Monetary Authority and is also regulated as a commodity trading advisor and commodity pool operator with the National Futures Association and is regulated by the Commodity Futures Trading Commission in the United States. ReSolve Global is also relying on the international sub-advisory exemption in the Securities Act (Ontario) and the Commodity Futures Act (Ontario). ReSolve Global's head office is located in George Town, Grand Cayman, Cayman Islands.
4. Newfound is registered as an investment advisor with the Securities Exchange Commission in the United States. Newfound is independent and arms length to ReSolve and ReSolve Global. Newfound's head office is located in St. Petersburg, Florida.
5. LongPoint will act as the manager of RGBM. ReSolve will act as the portfolio manager of RGBM and ReSolve Global will act as the portfolio sub-advisor of RGBM. Newfound will act as a promoter of RGBM, within the meaning of securities legislation of certain provinces and territories of Canada.
6. LongPoint is in the process of launching RGBM as an alternative mutual fund and has filed a preliminary prospectus dated November 22, 2024 to qualify the shares of RGBM which are expected to be listed on the Toronto Stock Exchange.
7. The investment objective of RGBM is to seek long-term capital appreciation by investing, directly or indirectly, in a global balanced strategy consisting of global equity securities and fixed income securities, and using leverage and derivative instruments, to stack on the returns of a systematic macro strategy that provides exposure to major global asset classes including but not limited to equity indices, volatility indices, fixed income indices, interest rates, commodities and currencies. RGBM uses leverage and derivative instruments to stack the returns of a global balanced strategy with those of a systematic macro strategy.
8. RGBM will be actively managed and will seek to achieve its investment objective by investing in two complimentary investment strategies, a balanced allocation strategy and a systematic macro strategy, together the portfolio strategy. Essentially, one dollar invested in RGBM provides approximately one dollar of exposure to RGBM's balanced allocation strategy and approximately one dollar of exposure to RGBM's systematic macro strategy. The return of the systematic macro strategy is essentially "stacked" on top of the returns of the balanced allocation strategy. RGBM uses leverage and derivatives to "stack" the return of the two strategies.
9. Derivative instruments used by RGBM will primarily include futures contracts and forward agreements. RGBM will generally take long or short positions in futures contracts related to asset classes such as equity indices, fixed income indices, interest rates, commodities, currencies, volatility indices and other alternative asset classes. RGBM will invest in futures contracts that may be based in domestic and foreign markets, including emerging markets.
10. RGBM will hold a portion of its assets in cash, money market mutual funds, treasury securities, or other cash equivalents, some or all of which will serve as margin or collateral for RGBM's investments.
11. RGBM will be managed in accordance with the same value at risk (VaR) model methodology employed by ReSolve and ReSolve Global for the ReSolve Funds (as defined below).
12. RGBM is a class of shares of LongPoint ETF Corp., a mutual fund corporation established under the federal laws of Canada.
13. The Filers, ReSolve Global, Newfound and RGBM are not in default of securities legislation in any of the Jurisdictions.
ReSolve Funds
14. ReSolve and ReSolve Global provide VaR based portfolio management services to the Return Stacked® Balanced Allocation & Systematic Macro Fund (the Balanced Allocation Fund) which was established under the U.S. Investment Company Act of 1940.
15. ReSolve and ReSolve Global provide VaR based portfolio management services to four exchange traded funds, the Return Stacked U.S. Stocks and Managed Futures ETF, the Return Stacked Bonds & Managed Futures ETF, the Return Stacked U.S. Stocks and Futures Yield ETF, and the Return Stacked Bonds & Futures Yield ETF (collectively, the Return Stacked ETFs) which were all established under the U.S. Investment Company Act of 1940 (and together with the Balanced Allocation Fund, the ReSolve Funds).
16. The ReSolve Funds are each managed in accordance with U.S. Securities and Exchange Commission Rule 18f-4 under the Investment Company Act of 1940 (the SEC VaR Rule).
17. Each of the ReSolve Funds has complied with the SEC VaR Rule and have each operated within their VaR limits since inception.
Alternative Mutual Funds
18. The Filers wish to offer RGBM to interested retail investors in Canada by means of a prospectus and fund fact documents as an alternative mutual fund that, with the exception of the Exemption Sought, complies with the requirements of NI 81-102 and all other applicable securities legislation, including National Instrument 41-101 General Prospectus Requirements, National Instrument 81-105 Mutual Fund Sales Practices, NI 81-106 Investment Fund Continuous Disclosure and National Instrument 81-107 Independent Review Committee for Investment Funds.
19. As noted above, except for the Exemption Sought, RGBM will comply with the requirements for alternative mutual funds in NI 81-102.
Leverage
20. The systematic macro strategy to be employed in RGBM is a rules-based, unconstrained (e.g., RGBM will not be constrained from participating in opportunities, long and short, in a variety of asset classes), multi-strategy investment program that is designed to deliver superior, non-correlated returns at critical times.
21. The systematic macro strategy to be employed in RGBM uses a combination of short selling and specified derivatives that at times will result in RGBM's aggregate exposure to cash borrowing, short selling and specified derivatives transactions exceeding 300% of its net asset value, but in a manner that does not expose RGBM to an inappropriate level of leverage risk.
22. The correlations of most alternative investment strategies to equity benchmarks such as the S&P 500® are high. In contrast, most managed futures strategies that are used by commodity trading advisors (each a CTA) like ReSolve and ReSolve Global are historically uncorrelated to traditional equity benchmarks and, at times, have the potential to reduce profit risk.
23. Individual market risk, as measured by futures exchanges, is a function of market volatility and other downside risk metrics. Portfolio risk is therefore a function of individual market risk and cross-market correlations, both of which are captured in the portfolio VaR (as defined in Appendix A). In a well-diversified portfolio, the notional exposure can be unrelated to portfolio risk and therefore does not accurately capture the portfolio risk. As noted below, VaR is a better measure of risk for RGBM.
24. For example, the total aggregate exposure of RGBM as calculated pursuant to section 2.9.1 of NI 81-102 will typically be between 300% and 700% and is expected to average approximately 500% from inception. Notwithstanding this range, derivative risk will be managed by ReSolve Global at a consistent level, and there is no relationship between aggregate notional exposure and the volatility of returns that ReSolve Global has historically delivered. ReSolve Global expects to target and manage RGBM at a 10% to 20% volatility level, and in order to do so, aggregate notional exposure will vary significantly. Historically, periods of higher than average aggregate notional exposure have not represented periods of higher volatility (or risk), and periods of lower than average aggregate notional exposure have not represented periods of lower volatility (or risk).
25. The systematic macro strategy to be employed in RGBM will use multiple definitions of risk and return to capture un-correlated returns while remaining adaptable to changing market conditions. ReSolve and ReSolve Global will also systematically manage risk across multiple constraints at the sector and the market level.
26. The current regulatory framework in Section 2.9.1 of NI 81-102 does not appropriately or adequately address the uniqueness of the investment strategies that CTAs like ReSolve Global employ.
27. The key differences between the systematic macro strategy to be employed in RGBM versus other typical investment strategies is it:
(a) will trade futures on margin, which is different than stocks and bonds;
(b) employs systematic and technical analysis versus being fundamental and discretionary;
(c) is actively monitored by systematic risk management and capital allocation management techniques; and
(d) provides returns that have the potential to reduce overall profit risk versus risk replacement or adding additional risk.
28. The European Union approved a new regulation of mutual funds in 2010 known as UCITS IV, which introduced a VaR based approach to regulatory risk management for investment funds that extensively use derivatives.
29. This approach allows for two methods of VaR limits, "relative" and "absolute", as defined in Appendix A, and which in general terms can be summarized as follows:
(a) Relative: This approach uses a ratio of up to 200% between the VaR of the portfolio and the VaR of a reference portfolio.
(b) Absolute: This approach is generally used when there is no reference portfolio or benchmark and allows the one-month VaR to be up to 20% of the net asset value of the portfolio.
30. UCITS IV also includes rules for the computation of VaR and requires regular stress- and back-testing to complement the VaR estimation.
31. On October 28, 2020 the U.S. Securities and Exchange Commission adopted the SEC VaR Rule, which modernized the regulatory framework for derivatives use by registered funds. The SEC VaR Rule is generally the same as the UCITS IV rule as it adopted a 200% limit for funds using a relative VaR approach, and a 20% VaR limit for funds using an absolute VaR approach.
32. When dealing with a fund that is managed using a multi-asset approach like what ReSolve, ReSolve Global and other CTAs do, a VaR-based approach is a better means of managing risk because, unlike notional amounts which do not measure risk or volatility, VaR enables risk to be measured in a reasonably comparable and consistent manner.
33. The risk-based approach in the SEC VaR Rule, which relies on VaR, stress testing, and overall risk management, addresses concerns about fund leverage for investment portfolios managed by CTAs like ReSolve Global, while allowing such portfolios to continue to use derivatives for a variety of purposes.
34. ReSolve and ReSolve Global have employed VaR based risk management for the ReSolve Funds for several years that are consistent with both the SEC VaR Rule and the UCITS rules. Since ReSolve and ReSolve Global's inceptions, they have been using volatility-based risk measures as a primary risk metric.
35. RGBM should be managed on the basis that it complies with VaR limits that do not exceed 20% of its net asset value at any time.
36. Allowing RGBM to use an absolute VaR methodology is the better risk mandate that CTAs like ReSolve and ReSolve Global use and should give investors access to an investment product that will diversify their holdings and may result in superior non-correlated returns at critical times. Of the two VaR approaches ("absolute" and "relative") used in the UCITS IV rules and the SEC VaR Rule, the absolute approach is the approach that is most suitable for CTAs as there typically is no reference portfolio that would be appropriate for a CTA strategy.
37. It is expected that RGBM will consistently operate well below a 20% absolute VaR limit.
38. ReSolve and ReSolve Global already use VaR models for the ReSolve Funds and have the necessary policies and procedures in place, and RGBM will adhere to a 20% absolute VaR limit and will operate in accordance with the conditions set out in Appendix A, which are based on the SEC VaR Rule.
39. Newfound already uses a VaR model that is independent from the ReSolve VaR model and has the necessary policies and procedures in place to support daily VaR testing and reporting in accordance with the conditions set out in Appendix A, which are based on the SEC VaR Rule.
40. ReSolve Global will use a historical simulation VaR model, that will not change, to generate the VaR estimate of the RGBM portfolio as an input to the signals for the systematic macro strategy to be employed in RGBM.
41. ReSolve will prepare and maintain VaR testing reports confirming that RGBM is compliant with the applicable VaR test as set out in Appendix A for each business day. ReSolve will disseminate VaR testing reports to LongPoint, ReSolve Global and the DRM (as defined below) on each business day.
42. Newfound will, independently, prepare and deliver VaR testing reports for RGBM to LongPoint, ReSolve and ReSolve Global for the parties to verify that RGBM is compliant with the applicable VaR test as set out in Appendix A for each business day.
43. The ReSolve and Newfound VaR testing reports will be available to the OSC promptly (within 24 hours) upon request.
44. ReSolve has appointed a "derivatives risk manager" (a DRM) and has developed a "Derivatives Risk Management Program" (the ReSolve DRMP) that is consistent with and adheres to the conditions set out in Appendix A, which are based on the SEC VaR Rule. A copy of the ReSolve DRMP will be available to the OSC promptly (within 24 hours) upon request.
45. Newfound has developed a "Derivatives Risk Management Program" (the Newfound DRMP) that is consistent with and adheres to the conditions set out in Appendix A, which are based on the SEC VaR Rule. A copy of the Newfound DRMP will be delivered to the OSC promptly (within 24 hours) upon request.
46. The ReSolve DRMP and the Newfound DRMP incorporate policies and procedures for risk monitoring, risk management, and risk reporting of a fund's VaR methodology.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
1) The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
a) ReSolve has appointed a DRM;
b) RGBM will comply with the absolute VaR test, as defined in Appendix A, and will comply with all of the additional leverage conditions for funds set out in Appendix A;
c) LongPoint will disclose in the prospectus and ETF facts document of RGBM the maximum VaR that RGBM is permitted to incur, and LongPoint will disclose in the annual and interim management report of financial performance the maximum amount of VaR incurred by RGBM over the applicable period;
d) ReSolve will notify the OSC promptly (within 24 hours) of any material changes to its DRMP;
e) No later than 30 days after the end of each month, ReSolve will prepare and retain a monthly portfolio investment report containing the elements set out in its DRMP, and no later than 60 days after the end of each fiscal quarter, upon request, will file promptly (within 24 hours) with the OSC the monthly portfolio investment reports for that quarter;
f) Neither the Filer nor ReSolve Global will change the VaR model that it is being employed to manage the assets of RGBM;
g) ReSolve will prepare and maintain daily VaR testing reports to confirm that RGBM is compliant with the applicable VaR test as set out in Appendix A for each business day. ReSolve will disseminate VaR testing reports to LongPoint, ReSolve Global and the DRM daily, and which will be available to the OSC promptly (within 24 hours) upon request;
h) Newfound will, independently, prepare and deliver VaR testing reports for RGBM to LongPoint, ReSolve and ReSolve Global for the parties to verify that RGBM is compliant with the applicable VaR test as set out in Appendix A for each business day.
i) The ReSolve and Newfound VaR testing reports will be available to the OSC promptly (within 24 hours) upon request.
j) LongPoint or ReSolve will notify the OSC within one business day if RGBM is offside the 20% VaR test for more than five consecutive business days, providing the information set out in the ReSolve VaR Breach Memo, as defined in the DRMP;
k) LongPoint or ReSolve will promptly (within 24 hours) provide the OSC with any other information that the OSC may request regarding the calculations and risk metrics that ReSolve and Newfound are using for its VaR calculations; and
l) The Filers appropriately document their risk methodology for RGBM in accordance with the requirements of paragraph 15.1.1(a) of NI 81-102 and items 2 and 4 of Appendix F Investment Risk Classification Methodology to NI 81-102.
Expiration
2) The Exemption Sought will expire four years from the date of this decision.
Application File #: 2024/0705
SEDAR+ File #: 6217392
APPENDIX A
ADDITIONAL LEVERAGE CONDITIONS
In these conditions,
"absolute VaR test" means that the VaR of a fund's portfolio does not exceed 20% of the value of the fund's net assets;
"board", with respect to a fund, means the fund manager's board of directors;
"derivatives risk manager" means an officer or officers of the fund's investment adviser responsible for administering the program and policies and procedures required by condition 1 below, provided that the derivatives risk manager:
(1) may not be a portfolio manager of the fund, or if multiple officers serve as derivatives risk manager, a majority of the derivatives risk managers must not be portfolio managers of the fund; and
(2) must have relevant experience regarding the management of derivatives risk;
"derivatives risks" means the risks associated with a fund's derivatives transactions or its use of derivatives transactions, including leverage, market, counterparty, liquidity, operational, and legal risks and any other risks the derivatives risk manager deems material;
"derivatives transaction" means
(1) any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument, under which a fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination, whether as margin or settlement payment or otherwise; and
(2) any short sale borrowing.
"designated index" means an unleveraged index that is approved by the derivatives risk manager for purposes of the relative VaR test and that reflects the markets or asset classes in which the fund invests and is not administered by an organization that is an affiliated person of the fund, its investment adviser, or principal underwriter, or created at the request of the fund or its investment adviser, unless the index is widely recognized and used. In the case of a blended index, none of the indexes that compose the blended index may be administered by an organization that is an affiliated person of the fund, its investment adviser, or principal underwriter, or created at the request of the fund or its investment adviser, unless the index is widely recognized and used;
"designated reference portfolio" means a designated index or the fund's securities portfolio. Notwithstanding the first sentence of the definition of designated index in these conditions, if the fund's investment objective is to track the performance (including a leverage multiple or inverse multiple) of an unleveraged index, the fund must use that index as its designated reference portfolio;
"independent director" means a director who would be independent within the meaning of section 1.4 of National Instrument 52-110 Audit Committees;
"relative VaR test" means that the VaR of the fund's portfolio does not exceed 200% of the VaR of the designated reference portfolio;
"securities portfolio" means the fund's portfolio of securities and other investments, excluding any derivatives transactions, that is approved by the derivatives risk manager for purposes of the relative VaR test, provided that the fund's securities portfolio reflects the markets or asset classes in which the fund invests (i.e., the markets or asset classes in which the fund invests directly through securities and other investments and indirectly through derivatives transactions);
"value-at-risk" or "VaR" means an estimate of potential losses on an instrument or portfolio, expressed as a percentage of the value of the portfolio's assets (or net assets when computing a fund's VaR), over a specified time horizon and at a given confidence level, provided that any VaR model used by a fund for purposes of determining the fund's compliance with the relative VaR test or the absolute VaR test must:
(1) take into account and incorporate all significant, identifiable market risk factors associated with a fund's investments, including, as applicable:
(i) equity price risk, interest rate risk, credit spread risk, foreign currency risk and commodity price risk;
(ii) material risks arising from the nonlinear price characteristics of a fund's investments, including options and positions with embedded optionality; and
(iii) the sensitivity of the market value of the fund's investments to changes in volatility;
(2) use a 99% confidence level and a time horizon of 20 trading days; and
(3) be based on at least three years of historical market data.
Conditions
1. Derivatives risk management program. The fund must adopt and implement a written derivatives risk management program (program), which must include policies and procedures that are reasonably designed to manage the fund's derivatives risks and to reasonably segregate the functions associated with the program from the portfolio management of the fund. The program must include the following elements:
i. Risk identification and assessment. The program must provide for the identification and assessment of the fund's derivatives risks. This assessment must take into account the fund's derivatives transactions and other investments.
ii. Risk guidelines. The program must provide for the establishment, maintenance, and enforcement of investment, risk management, or related guidelines that provide for quantitative or otherwise measurable criteria, metrics, or thresholds of the fund's derivatives risks. These guidelines must specify levels of the given criterion, metric, or threshold that the fund does not normally expect to exceed, and measures to be taken if they are exceeded.
iii. Stress testing. The program must provide for stress testing to evaluate potential losses to the fund's portfolio in response to extreme but plausible market changes or changes in market risk factors that would have a significant adverse effect on the fund's portfolio, taking into account correlations of market risk factors and resulting payments to derivatives counterparties. The frequency with which the stress testing under this paragraph is conducted must take into account the fund's strategy and investments and current market conditions, provided that these stress tests must be conducted no less frequently than weekly.
iv. Backtesting. The program must provide for backtesting to be conducted no less frequently than weekly, of the results of the VaR calculation model used by the fund in connection with the relative VaR test or the absolute VaR test by comparing the fund's gain or loss that occurred on each business day during the backtesting period with the corresponding VaR calculation for that day, estimated over a one-trading day time horizon, and identifying as an exception any instance in which the fund experiences a loss exceeding the corresponding VaR calculation's estimated loss.
v. Internal reporting and escalation --
A. Internal reporting. The program must identify the circumstances under which persons responsible for portfolio management will be informed regarding the operation of the program, including exceedances of the guidelines specified in paragraph 1.ii. of these conditions and the results of the stress tests specified in paragraph 1.iii. of these conditions.
B. Escalation of material risks. The derivatives risk manager must inform in a timely manner persons responsible for portfolio management of the fund, and also directly inform the board as appropriate, of material risks arising from the fund's derivatives transactions, including risks identified by the fund's exceedance of a criterion, metric, or threshold provided for in the fund's risk guidelines established under paragraph 1.ii. of these conditions or by the stress testing described in paragraph 1.iii. of these conditions.
vi. Periodic review of the program. The derivatives risk manager must review the program at least annually to evaluate the program's effectiveness and to reflect changes in risk over time. The periodic review must include a review of the VaR calculation model used by the fund under condition 2 below (including the backtesting required by paragraph 1.iv. of these conditions) and any designated reference portfolio to evaluate whether it remains appropriate.
2. Limit on fund leverage risk.
i. The fund must comply with the relative VaR test unless the derivatives risk manager reasonably determines that a designated reference portfolio would not provide an appropriate reference portfolio for purposes of the relative VaR test, taking into account the fund's investments, investment objectives, and strategy. A fund that does not apply the relative VaR test must comply with the absolute VaR test.
ii. The fund must determine its compliance with the applicable VaR test at least once each business day. If the fund determines that it is not in compliance with the applicable VaR test, the fund must come back into compliance promptly after such determination, in a manner that is in the best interests of the fund and its securityholders.
iii. If the fund is not in compliance with the applicable VaR test within five business days,
A. The derivatives risk manager must provide a written report to the board and explain how and by when (i.e., number of business days) the derivatives risk manager reasonably expects that the fund will come back into compliance;
B. The derivatives risk manager must analyze the circumstances that caused the fund to be out of compliance for more than five business days and update any program elements as appropriate to address those circumstances; and
C. The derivatives risk manager must provide a written report within thirty calendar days of the exceedance to the board explaining how the fund came back into compliance and the results of the analysis and updates required under paragraph 2.iii.B. of these conditions. If the fund remains out of compliance with the applicable VaR test at that time, the derivatives risk manager's written report must update the report previously provided under paragraph 2.iii.A. of these conditions and the derivatives risk manager must update the board on the fund's progress in coming back into compliance at regularly scheduled intervals at a frequency determined by the board.
3. Board oversight and reporting --
i. Approval of the derivatives risk manager. The board, including a majority of independent directors of the fund manager, if any, must approve the designation of the derivatives risk manager.
ii. Reporting on program implementation and effectiveness. On or before the implementation of the program, and at least annually thereafter, the derivatives risk manager must provide to the board a written report providing a representation that the program is reasonably designed to manage the fund's derivatives risks and to incorporate the elements provided in paragraphs 1.i. through vi. of these conditions. The representation may be based on the derivatives risk manager's reasonable belief after due inquiry. The written report must include the basis for the representation along with such information as may be reasonably necessary to evaluate the adequacy of the fund's program and, for reports following the program's initial implementation, the effectiveness of its implementation. The written report also must include, as applicable, the derivatives risk manager's basis for the approval of any designated reference portfolio or any change in the designated reference portfolio during the period covered by the report; or an explanation of the basis for the derivatives risk manager's determination that a designated reference portfolio would not provide an appropriate reference portfolio for purposes of the relative VaR test.
iii. Regular board reporting. The derivatives risk manager must provide to the board, annually or at such other frequency determined by the board, a written report regarding the derivatives risk manager's analysis of exceedances described in paragraph 1.ii. of these conditions, the results of the stress testing conducted under paragraph 1.iii of these conditions, and the results of the backtesting conducted under paragraph 1.iv of these conditions since the last report to the board. Each report under this paragraph must include such information as may be reasonably necessary for the board to evaluate the fund's response to exceedances and the results of the fund's stress testing.
4. [Not applicable]
5. [Not applicable]
6. Recordkeeping --
i. Records to be maintained. A fund must maintain a written record documenting the following, as applicable:
A. The fund's written policies and procedures required by paragraph c.1. of these conditions, along with
1. The results of the fund's stress tests under paragraph 1.iii. of these conditions;
2. The results of the backtesting conducted under paragraph 1.iv. of these conditions;
3. Records documenting any internal reporting or escalation of material risks under paragraph 1.v.B. of these conditions; and
4. Records documenting the reviews conducted under paragraph 1.vi of these conditions.
B. Copies of any materials provided to the board in connection with its approval of the designation of the derivatives risk manager, any written reports provided to the board relating to the program, and any written reports provided to the board under paragraphs 2.iii.A. and C. of these conditions.
C. Any determination and/or action the fund made under paragraphs 2.i. and ii. of these conditions, including a fund's determination of: The VaR of its portfolio; the VaR of the fund's designated reference portfolio, as applicable; the fund's VaR ratio (the value of the VaR of the fund's portfolio divided by the VaR of the designated reference portfolio), as applicable; and any updates to any VaR calculation models used by the fund and the basis for any material changes thereto.
ii. Retention periods.
A. A fund must maintain a copy of the written policies and procedures that the fund adopted under condition 1. that are in effect, or at any time within the past seven years were in effect, in an easily accessible place.
B. A fund must maintain all records and materials that paragraphs 6.i.A.1. through 4. and 6.i.B. and C. of these conditions describe for a period of not less than seven years (the first two years in an easily accessible place) following each determination, action, or review that these paragraphs describe.