FOA updates end-user derivatives guidelines

The guidelines were produced considering the changed trading environment and the collapse of companies such as Enron and Worldcom, said the FOA. It last published derivatives guidelines in 1995, but the association said the impact of globalisation, the increasing use of sophisticated technology, the effects of industry consolidation and the growing interface between products and services, have generated new and different kinds of risks that are difficult to quantify and manage.

“Competence in risk management alongside proper corporate governance are today investment criteria that should be satisfied before a portfolio manager will invest in a business,” said Roy Leighton, chairman of the FOA, adding that the new guidelines will help companies implement the necessary checks and balances.

The updated guidelines, which were published in association with PricewaterhouseCoopers and the Clifford Chance law firm, comprise six ‘core principles’ for managing derivatives risk. Four of these focus on the identification and management of market risk, credit risk, operational risk and legal risk. The other two focus on how senior management should set up and organise effective internal oversight of derivatives.

Gay Huey Evans, director of markets and exchanges at the UK Financial Services Authority (FSA), said the guidelines will make a timely and topical contribution to the supervision and management of derivatives risk. “Derivatives play a key role in managing risk, but also generate their own risk,” said Evans. “The responsibility for managing risk lies not with the regulators but with the organisations themselves.”