Corrections made relate to inconsistent ID numbers and spelling/grammar in labels. There has been no change in the structure of the report. i.e. there have been no additions, removals or changes to any data fields. The Working Group apologise for the inconvenience. Please refer to the document “Summary of Post Release Formatting Corrections to Aug 2016 Excel Template” attached at the top of this page for a complete list of the changes made, and please download the updated excel template for August 2016 from the Download page.
The Open Protocol is not designed to replace a manager’s current risk report, but to supplement it, so that investors not only get a good understanding of the individual fund but also their overall portfolio. The standard allows them to be able to aggregate consistent data across funds. We understand that the risk reports currently provided by managers to their investors show the risks of the fund as the manager sees them, so we fully expect managers to keep providing these reports if they would like to do so, alongside the Open Protocol reports. When designing the Protocol we looked at the information currently provided by managers in order to ensure that the Open Protocol is not asking for something which would be difficult for funds to report.
Investors are increasingly asking for bespoke information, and the proliferation of bespoke risk reports are very expensive for managers to produce. Many managers have taken a stance that they will not create any bespoke reports as these are expensive to produce, and lead to the preferential treatment of certain clients. The Open Protocol report is the perfect solution for this problem. It was constructed keeping in mind many various client requests, with the objective of creating one universal report covering most of the requests. Open Protocol can be thought of as a single solution for all client requests. Open Protocol reports can be distributed to all investors at the discretion of the manager, so that no single investor would benefit more than any other investor.
The Open Protocol was formally launched on 9th August 2011 in London and on 11th August 2011 in New York. An updated version of the template was launched on the 5th anniversary of the Open Protocol, 11th August 2016. The Working Group expects to convene on at least an annual basis to discuss any changes which may be required. However, the template is not expected to be updated frequently, due to the work required by all parties to update their reporting systems. If you have any suggestions for changes to the templates, please email us at firstname.lastname@example.org.
Form PF and AIFMD are required by regulators and do not have any direct connection with Open Protocol. However, Open Protocol is compatible with Form PF, and managers can fill in the majority of Form PF if they have Open Protocol already set up. The SEC has kept the methodology flexible for Form PF and therefore the methodology defined under Open Protocol can also be used for Form PF. Regulators are largely concerned about systemic risk while investors are concerned about a broader range of risks. Open Protocol is therefore a more robust solution for investors.
All managers would be required to fill sections 1, 8-11 and at least one of sections 2 to 7. If a manager trades more than one asset class (even if it is a hedge) then they should complete all the relevant asset class sections. For each of the sections, managers would be required to fill in at least Grade 1 information, but could choose different grades in each section. For sections 8, 9 and 10, which deal with portfolio level risk measures, managers could avoid filling in the template by stating that 0% of the long & short exposure is included in the calculation. For example, a manager trading distressed assets can avoid filling VaR (section 8) if they feel that VaR is not a meaningful measure of risk for their portfolio.
The template and schema are both fixed, and the fields should not be changed as it would hinder the investor’s ability to aggregate information, ultimately defeating the entire purpose of the exercise. The Manager could use the “Comment” section available at the bottom of each tab to give the reader more colour regarding the information provided or assumptions made.
The main body of the Manual contains methodology to calculate exposure information for various instruments, for example GP 15 to 17. The methodology in the main document should always take precedence over Appendix I. For example, GP 16 suggests that “All sovereign interest exposure (Section 3) should be reported as US 10 year swap equivalent basis” while Appendix I suggests that “Bond Future: N * NCS * market price of the CTD reference bond”. So, for Sovereign bonds, use the methodology prescribed in the main body, i.e. report exposure on US 10 year swap equivalent basis” and for non Sovereign bonds use the methodology in Appendix I.
On the exposure tabs, the classification of derivative instruments (by sector, region, maturity, market cap, credit rating, yield, etc) should be based on the underlying security. The only exceptions are the Instrument and Liquidity sections which should be based on the instrument (2.6, 2.8, 3.7, 4.7, 4.12, 5.6, 5.11, 6.6, 7.6, 7.10). Example 1: Equity options should be classified based on the underlying security in sections 2.4, 2.5 and 2.7, and based on the instrument type in sections 2.6 and 2.8. Example 2: Sovereign bond futures should be classified based on the underlying security in sections 3.4, 3.5 and 3.6. Note that this includes section 3.5 Instruments by Maturity; here the maturity should be the maturity of the underlying bond. Section 3.7 should be based on the instrument type.
Open Protocol required various types of values to be entered and the following is a rough guide: a.) All % values: should be reported with a percentage sign or as a decimal (max 3). For example, 9.355% holding should be reported as 9.4% or 0.094 but not 9.4. b) Numerical cells: text should not be entered in a numerical cell, i.e. do not put dashes or ‘n/a’ in any cells. If a cell is not applicable just leave it blank. c) All AUM numbers: should be reported to the nearest integer. Report the actual amount and do not use any text like “m” or “million” in these fields. d) In sections 2 to 7, “Total Exposure to ….”: Total long and short dollar exposure for each relevant asset class should be reported at the top of the template in sections 2.1, 3.1, 4.1, 5.1, 6.1 and 7.1. e) Section 4.8 Price Yield and Spread
f) Section 4.10.1, Portfolio Average Maturity: Should be reported as number of years, for example 5.1. Do not add “years” or other text at the end. g) Section 5.7, Derivative specific information
h) In sections 8 to 11, for “% Long/Short exposure included in calculation”: Values should be reported as a percentage of total AUM and not as a percentage of total long / short exposure.
Side pockets should be included under the following sections only:
Please do not include Side Pocket information for the following sections
QTD performance is the cumulative performance to date since the latest quarter end NOT rolling 3month return. Similarly, YTD performance is the cumulative performance since the latest 31st December. ITD performance must be annualised unless the fund is less than 12 months old.
Please report this section in the same manner as you would Form PF, Question 50 (http://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml). Please report this section assuming that 100% of the investor base has requested liquidity. For each reporting date, this section should be filled in taking into account all relevant lock-ups, upcoming notice and redemptions dates, gates, etc. “Without Penalty” column should be completed cumulatively such that “More than 36 Months” + “Side Pockets” equals 100%. “With Penalty” column should only show what additional amount can be redeemed with Penalty in each cumulative period. Therefore, the sum of the two numbers across each row should not exceed 100%. The split between “with penalty” and “without penalty” should be proportional to the split between the investor base off lockup (“without penalty”) and investor base under soft lockup (“with penalty”). For example, assume the following:
The 20% gate should be split as follows:
Generally, funds can report Unencumbered Cash as defined for Form PF: “The fund’s plus the value of overnight repos used for liquidity management where the assets purchased are U.S. treasury securities or agency securities minus the sum of the following (without duplication): (i) cash and cash equivalents transferred to a collateral taker pursuant to a title transfer arrangement; and (ii) cash and cash equivalents subject to a security interest, lien or other encumbrance (this could include cash and cash equivalents in an account subject to a control agreement).” In general we expect Unencumbered Cash to include only cash, risk free government bonds and money market funds that are in the same currency as the fund. Any cash or cash equivalents that are not in the base currency of the fund must be reported in section 3, sovereign and interest rate exposure, and section 6, currency.
Any investment in funds where the manager has “no control” over the investment decisions should be treated as external. If you are reporting for a fund which invests in other funds within the same company and the manager has control over the investments, then they should not be treated as external investments and the exposure information of these funds should be filled in the relevant templates. Investments in money market funds should be reported under 1.10.1 and 1.9 and investments in any other funds should be reported under 1.10.2.
Baskets should be broken down into individual stocks in order to accurately reflect the sector and region exposures in the portfolio. This may appear to inflate your total number of positions in sections 2.4 and 2.5 however in the Instrument and Market Cap tables you can report each basket as one position under “Indices and Baskets” It would also be acceptable to report baskets in the “Equity (Single Stock)” line in section 2.6 to distinguish them from listed indices, but in 2.7 they should be bundled under “Indices and Baskets”.
Since the Open Protocol template does not treat volatility as a separate asset class, VIX positions should be captured in the Equity Exposure tab. For consistency, they should be expressed as a combination of options on the SP500 which would be captured under the Equity Indices – Options exposure row. For example, a long VIX future position can be expressed as long calls and long puts and then the delta adjusted exposure of the latter would be reported in OP. Alternatively, if the above treatment is not possible, the position could be captured as long or short index future exposure, depending on whether it is a bearish or bullish view on the SP500. For example, long VIX is a hedge against falling equities hence it would be captured as short exposure in OP.
The basic idea here is to calculate the interest rate exposure in terms of 10 year swaps by using DV01 as the relationship.
Every CDS on a single entity has an underlying representative/deliverable bond, which should be used for valuing the CDS. If the identifying the underlying bond is difficult (i.e. for an index) then as per GP 17 you can use notional value. Open Protocol always looks at the underlying asset. If an increase in value of the underlying asset leads to a positive return then the manager is long, if it leads to a negative return then the manager is short. Therefore a long CDS position is effectively a short bond exposure.
At Grade 1, Structured Credit (MBS, ABS) would fall under “Financials”. At Grade 2, it should be classified as follows:
In the Average Portfolio Delta computation, delta is defined as a ratio (known as the hedge ratio) between the change in convertible bond price and the change in the underlying equity price, (Change in CB price due to small change in equity price)/(small change in equity price) To arrive at the average, the hedge ratio needs to be computed for each bond and then weighted using the bond market value. Average Portfolio Delta would typically lie in the region of 35% to 80%. This gives as an estimate of how much the portfolio would change in value due to a small shift in equity prices, ∆, by computing: (Average Portfolio Delta) x ∆ In the sensitivities tab, Convertible delta is defined as a percentage impact on portfolio value: (Change in value of all convertible bonds held by the fund due to a 1% equity increase)/AUM Note that this number would of course be affected by the exposure in convertibles. Now, to try and connect the two different deltas, suppose we only have one bond with delta (hedge ratio) 0.8. So for a small shift in the equity, ∆, price the bond will move by: 0.8 x ∆
Hopefully the examples below will help clarify the process: In the examples below, it is assumed the base currency is not Euro. Example 1
The rationale for asking for information in this manner is that if the manager has active currency risk, it would be picked up by the long Euro in Example 1, however if the manager then hedges the currency risk, as seen Example 2, then it will show a net zero exposure to Euro and the base currency. An alternative approach which would lead to a similar output would be to calculate the base currency delta for all the positions (not just the currency positions) in the portfolio with respect to all the currencies. The output could be used to complete section 6.4.
Row 11 captures the opposite leg of all non-base currency exposures whether these are direct (i.e. through FX instruments) or indirect (i.e. through non base currency denominated securities/derivatives). It should not however include base currency cash/securities/derivatives. To illustrate this with an example, suppose you hold the following and your base currency is USD:
c and d would not count towards the Base Currency row.
Then the totals in rows 7 and 3 should not include the Base Currency row as this does not pose currency risk (it is the base currency).
There are two alternative methods:
Clarification: cell B4 should read “9.8 Asset Classes” and not “10.8 Asset Classes”. All values should be entered as a percentage of AUM. For purpose of calculating Delta underlying asset value should be increased on a relative basis by 1%. So if the underlying is 50 then the increase value would be 50.5 and not 51.
Clarification: cell B4 should read “9.8 Asset Classes” and not “10.8 Asset Classes”. All values should be entered as a percentage of AUM. Gamma should be calculated with respect to the Delta and the calculation methodology should be consistent. Therefore for 3. Sovereign & Int Rate Exp, convexity should be on Interest rate while for 4 it should be on credit spread.
The portfolio inception does not really matter as you would be stressing the current positions. Hence the impact could be reported for all scenarios. For all historical stress tests report the performance of the current exposures over the period of the test. For positions on securities that existed during the period of the test, then use their actual historical prices to calculate the impact. For positions on securities that did not exist at the time, use a predictive methodology.
Available Liquidity would be the amount of assets available via counterparties, which aren’t being used by the manager. Required Margin would be margin for all instruments which require margin, so includes futures, but other derivatives would be included as well.