risk management manual - unjspf-investmentsimd.unjspf.org/documents/imd-riskmanual-v6.pdf ·...

UNITED NATIONS JOINT STAFF PENSION FUND

Risk Management Manual Investment Management Division

Friday, January 22, 2010

Investment Management Division Risk Management Manual

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Table of Contents I. Introduction .......................................................................................................................................... 9

II. Note by the Representative of the Secretary‐General ......................................................................... 9

III. Duties and Responsibilities of the Governing Bodies ..................................................................... 11

A. General Assembly ........................................................................................................................... 11

B. United Nations Joint Staff Pension Board ....................................................................................... 11

C. Secretary‐General ........................................................................................................................... 11

D. Representative of the Secretary‐General ....................................................................................... 12

E. Investments Committee ................................................................................................................. 12

F. Investment Management Division .................................................................................................. 14

IV. Guiding Principles ........................................................................................................................... 15

A. It is better to be approximately right than to be precisely wrong. ................................................. 15

B. All policies, procedures and manuals shall be approved, should be considered living documents and should be reviewed periodically. ..................................................................................................... 15

C. Separation of the front office, middle office and back office with independent risk oversight and internal audit oversight ........................................................................................................................... 15

D. Organization structure should be clearly defined with clear roles and responsibilities and risk principles should be consistently applied. .............................................................................................. 15

E. Test disaster recovery and business continuity plan on the regular basis with sound understanding of the residual risks. ....................................................................................................... 16

F. Manage model risks. All Risk Models have model risks. ................................................................. 16

G. Set proper risk appetite with the sound understanding of the asset liability structure ................ 16

H. Perform stress test and back tests .................................................................................................. 16

I. All external counterparties shall be subject to periodic due diligence. .......................................... 16

J. Independent review of the risk management controls by an external expert ............................... 17

K. Translate the lessons learnt into new risk controls ........................................................................ 17

L. Risk Objectives ................................................................................................................................ 17

1. Safety .......................................................................................................................................... 17

2. Profitability .................................................................................................................................. 17

3. Convertibility ............................................................................................................................... 17

4. Liquidity ....................................................................................................................................... 18


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5. Risk Tolerance ............................................................................................................................. 18

V. Governance ......................................................................................................................................... 19

VI. Risk Management Controls ............................................................................................................. 20

A. Credit Risk ....................................................................................................................................... 20

1. Issuer Ratings .............................................................................................................................. 20

2. Fitch Individual Bank Ratings ...................................................................................................... 21

3. Credit Risk Controls ..................................................................................................................... 22

1) Monitor Bond and Short Term Investment Limits: ............................................................. 22

2) Monitor Equity Debt Factor: ............................................................................................... 23

3) Broker Screening ................................................................................................................. 23

B. Counterparty Risk ........................................................................................................................... 24

1. Custodian / MRK ......................................................................................................................... 24

1) Acquisition of the services: ................................................................................................. 25

2) On‐going due diligence: ...................................................................................................... 25

3) Monitor Regulatory Capital and Economic Capital: ............................................................ 25

4) Monitor CDS spread: ........................................................................................................... 25

5) Monitor individual bank rating: .......................................................................................... 25

6) Monitor Assets under custody: ........................................................................................... 26

7) Monitor failed trades: ......................................................................................................... 26

8) Operational Losses or Fraud ............................................................................................... 26

9) Service Delivery: .................................................................................................................. 26

2. Brokers ........................................................................................................................................ 26

1) Brokerage Agreement Services ........................................................................................... 26

2) Failed Trades: ...................................................................................................................... 27

3) Monitor Commission ........................................................................................................... 28

4) Monitor Daily Trade Blotter: ............................................................................................... 28

3. External Advisors ......................................................................................................................... 28

1) Service Delivery ................................................................................................................... 28

4. External Managers (Small Cap, Alternative Investment) ............................................................ 28

1) Service Delivery ................................................................................................................... 28


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2) Due Diligence ...................................................................................................................... 28

3) Insurance Bond ................................................................................................................... 29

4) Compliance with the investment guidelines ....................................................................... 29

C. Market Risk ..................................................................................................................................... 29

1. Asset Allocation Controls ............................................................................................................ 29

1) Equity Strategic AA .............................................................................................................. 29

2) Equity Tactical AA ................................................................................................................ 29

3) Fixed Income Strategic AA .................................................................................................. 29

4) Fixed Income Tactical AA .................................................................................................... 30

5) Real Assets Strategic AA ...................................................................................................... 30

6) Real Assets Tactical AA ........................................................................................................ 30

7) Short Term Strategic AA ..................................................................................................... 30

8) Short Term Tactical AA ........................................................................................................ 30

9) Developing Country Investments ........................................................................................ 30

10) Developing Country Total Investments ........................................................................... 30

2. Socially Responsible Investments and Global Compact .............................................................. 31

1) Weapons: ............................................................................................................................ 31

2) Tobacco ............................................................................................................................... 31

3) Prohibited Investments (Internal & External Managers): ................................................... 31

4) Prohibited Shorts: ............................................................................................................... 31

5) Negative Cash Holdings: ...................................................................................................... 31

6) Countries (Internal & External Managers) w/Tax Exceptions: ............................................ 32

3. Global Equity Portfolio ................................................................................................................ 32

1) Single Equity < 5% of total Equity ....................................................................................... 32

2) 4.75% Limit Shares Outstanding ......................................................................................... 32

3) SC Europe 2% Limit Shares Outstanding ............................................................................. 32

4) Convertible bonds < 10% issue: ......................................................................................... 32

5) SC Europe Max Cap Euro 2B: .............................................................................................. 33

6) SC Asia Max Cap Yen 300B: ................................................................................................. 33

7) SC US (Jen & DFA) Max Cap USD 3B .................................................................................... 33


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8) SC Europe GIC Sector Concentration .................................................................................. 33

9) SC Asia GIC Sector Concentration: ...................................................................................... 34

10) SC US (Jen & DFA) GIC Sector Concentration .................................................................. 34

11) SC (Europe, Asia, US: Jen & DFA) Cash < 5% Account ..................................................... 34

4. Global Fixed Income Portfolio ..................................................................................................... 34

1) Credit Rating Minimum A .................................................................................................... 34

2) Issuer Limit 5% Corporate: .................................................................................................. 34

3) Total Debt Corporate < 10%: .............................................................................................. 35

4) Issuer Limit 15% Sovereign ................................................................................................. 35

5) Total Debt Sovereign < 20%: ............................................................................................... 35

5. Global Real Assets Portfolio ........................................................................................................ 35

1) Physical Buildings ................................................................................................................ 35

2) RE Investments < 25%: ........................................................................................................ 35

6. Global Short Term Portfolio ........................................................................................................ 36

1) Issuer Limit 5% Corporate: .................................................................................................. 36

2) Total Debt Corporate < 10%: .............................................................................................. 36

3) Maturity limit <365 days: .................................................................................................... 36

7. Miscellaneous ............................................................................................................................. 36

1) Risk Tolerance & Risk Oversight .......................................................................................... 36

2) Excessive Churning .............................................................................................................. 37

3) Realized losses >25%, unrealized losses > 25% 50%: .......................................................... 37

4) External Factors................................................................................................................... 37

5) Standing UN Rules & Regulations: ...................................................................................... 37

6) Departmental Cross Communication .................................................................................. 38

7) External and Internal Audit Effectiveness: .......................................................................... 38

8) Management Letter Response: ........................................................................................... 38

9) Actuarial Estimates: ............................................................................................................ 39

10) Investment Research: ..................................................................................................... 39

11) Advisor Performance ...................................................................................................... 39

12) Monitor Market Value Parameters: ................................................................................ 39


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D. Liquidity Risk ................................................................................................................................... 40

1) Duration Gap ....................................................................................................................... 40

2) Capital Commitment for Alternative Investments .............................................................. 40

3) Stress Test with the latest ALM study for Solvency: ........................................................... 40

4) Market Liquidity: ................................................................................................................. 40

E. Operational Risk .............................................................................................................................. 40

1) Test Business Continuity Plan: ............................................................................................ 41

2) Test Disaster Recovery Plan: ............................................................................................... 41

3) Lessons Learned: ................................................................................................................. 41

4) White Pages: ....................................................................................................................... 41

5) Remote Work Plan: ............................................................................................................. 41

6) Trade Errors Monitoring: .................................................................................................... 41

7) Ten Continuous Annual Leave Days: ................................................................................... 42

8) Cash Management: ............................................................................................................. 42

9) Accounting Standards Implementation: ............................................................................. 42

10) Internal and external Fraud, Conflict of Interest: ........................................................... 42

11) Effectiveness and efficiency of Trading, Operations and Investment Controls: ............. 43

12) Succession Planning: ....................................................................................................... 43

13) IT Outsourcing Vendor performance evaluation : .......................................................... 43

14) IT Change Management: ................................................................................................. 43

15) Password Management: ................................................................................................. 44

16) IMD Staff Travel: ............................................................................................................. 44

17) Maintaining distribution lists: ......................................................................................... 44

F. Currency Risk ................................................................................................................................... 44

G. Legal and Contract Risk ................................................................................................................... 44

1) Countries with Tax Exemptions: ......................................................................................... 44

2) Contract Renewal: ............................................................................................................... 45

3) Contract Review: ................................................................................................................. 45

4) Contract Issue Management: .............................................................................................. 45

5) Legal contracts review for foreign jurisdiction: .................................................................. 45


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6) Proxy Voting Review: .......................................................................................................... 45

7) Ensure Sufficiency and Quality of External Legal Counsel: ................................................. 46

H. Political and Sovereign Risk............................................................................................................. 46

1) Monitor Sovereign Rating: .................................................................................................. 46

2) IC Committee Advisor Reports ............................................................................................ 46

I. Reporting Risk ................................................................................................................................. 46

1) Investment Performance Monitoring: ................................................................................ 46

2) GIPS Compliance Monitoring: ............................................................................................. 46

3) Information Security, Privacy & Records retention: ........................................................... 47

4) Minutes for important investment meetings: .................................................................... 47

J. Reputational Risk ............................................................................................................................ 47

1) Monitor Compliance with all the risk controls:................................................................... 47

2) Information Dissemination and One Voice: ........................................................................ 47

3) Proactive co‐operation with all audit bodies: ..................................................................... 48

4) Late Payments: .................................................................................................................... 48

5) Compliance with PD rules: .................................................................................................. 48

6) Compliance with Personal trading and conflict of interest policy: ..................................... 48

7) Compliance with gift policy: ................................................................................................ 49

8) Understanding the conflict of interest, gift policy: ............................................................. 49

9) Trade distribution across brokers: ...................................................................................... 49

10) Complete all the mandatory trainings: ........................................................................... 49

11) Email surveillance: .......................................................................................................... 50

VII. Appendix ......................................................................................................................................... 51

A. Due Diligence Process for Hedge Fund Managers .......................................................................... 51

1. Investment Strategy review ........................................................................................................ 51

2. The Fund Structure Review ......................................................................................................... 51

3. Performance Review ................................................................................................................... 52

4. Risk assessment .......................................................................................................................... 52

5. Administrative Review ................................................................................................................ 52

6. Legal Review ................................................................................................................................ 53


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7. Reference Checks ........................................................................................................................ 53

B. Gift & Entertainment Policy ............................................................................................................ 54

1. Gifts ............................................................................................................................................. 54

2. Entertainment ............................................................................................................................. 54

3. Offers of Hospitality .................................................................................................................... 55

4. Questions .................................................................................................................................... 56


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I. Introduction

1) The Regulations of the United Nations Joint Staff Pension Fund provide that the investment of the assets of the Fund will be decided upon by the Secretary‐General. The Secretary‐General has delegated the responsibility for overseeing this task to a senior United Nations official, designated as the Representative of the Secretary‐General for the Investments of the United Nations Joint Staff Pension Fund (RSG). The Secretary‐General's representative is assisted by the Investment Management Division (IMD).

2) The original procedures were published in January 1990 and amended periodically. In 2002‐2003, a major review was undertaken to reflect the changes in the procedures that have taken place over the years. The procedures were updated in January 2006 to further update the 2005 version.

3) The Current Investment manual is updated in December 2009 for the purposes of clarity, organization and to accommodate various recommendations from the OIOS.

II. Note by the Representative of the SecretaryGeneral 1) At the 54th session of the Pension Board, the Investment Management Division (IMD) was

requested to develop a comprehensive investment policy and present it to the Investment Committee for their comments following the results of the asset‐liability management (ALM) study undertaken last year and presented to the Pension Board during the same session.

2) The proposed investment policy was presented at the 196th Investments Committee on 5 May 2008. IMD has incorporated all the recommendations made by the Committee.

3) The proposed investment policy reflects the Fund’s strategic purpose of funding liabilities and details the primary investment goal, asset classes, performance objective, benchmarks, portfolio strategy, investment style, risk management and strategic asset allocation target.

4) The strategic asset allocation, the most critical element of the investment policy decision that will impact the long‐term risk adjusted performance of the Fund, is 60 per cent equities, 31 percent fixed income, 6 per cent real assets and 3 per cent short‐term investments as decided by the Representative of the Secretary‐General for the investments of the Fund at the 54th session.

5) Risk tolerance thresholds that set an acknowledged and acceptable level of risk, the amount of loss that is tolerable in the pursuit of gain, will be implemented in the investment policy when the proper risk analytic tools to effectively evaluate and monitor the global portfolio are sourced. IMD is currently conducting a search for a portfolio risk analysis and performance attribution system. A risk model with a multi‐factor framework will identify the factors and securities to which risk is most sensitive and provide critical insights into the composition of the Fund portfolio risk and returns.


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6) Risk budgeting is crucial to the investment process and will be detailed in the investment policy when the proper financial tools are available for implementation. The objective of risk budgeting is to create a systematic plan for the expenditure of risk and allocating what is the total risk that we are willing to incur to generate returns (risk tolerance), and measuring the risk allocated to each investment decision. The overall investment process can be improved by enforcing discipline, eliminating unintended or disproportionate bets, and balancing the risk and return of each investment decision.

7) The use of futures was discussed in the 195th Investments Committee meeting and procedures, as requested during that meeting, were proposed in the 196th Investments Committee meeting. The members of the Committee were of the opinion that such tools are basic and commonly used by pension funds to reduce the risk of adverse market moves. These tools will be implemented in accordance with best practices.

8) The existing proxy voting policies will be revised as part of the process of implementation of Responsible Investment.

9) Following an alternative investments study conducted by Mercer Investment Consulting Inc. in its report dated 30th April 2008 and presented at the 196th Investment Committee on 5th May 2008, the report recommended material strategic asset allocation changes to lower the Fund’s exposure to systematic risk and increase diversification. Amendments will be made to the strategic asset allocation once approval is granted from the Representative of the Secretary‐General and shall be then reflected in the investment policy.

10) The Pension Board may wish to take note of the Investment Policy provided in the annex to this note.


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III. Duties and Responsibilities of the Governing Bodies

A. General Assembly 1) The General Assembly at its first session in 1946 adopted a resolution whereby the fiduciary

responsibility for the investment of the assets of the Fund was entrusted to the Secretary‐General of the United Nations. This fiduciary responsibility was further confirmed in 1948 when the General Assembly approved and adopted the Rules and Regulations of the United Nations Joint Staff Pension Fund.

2) The General Assembly may from time to time adopt resolutions on general investment policy as long as these resolutions are not conflicting with the fiduciary responsibility of the Secretary‐General. These resolutions for example have established that the investments of the Fund should abide with criteria of safety, profitability, liquidity and convertibility. All past General Assembly resolutions have confirmed the Secretary‐General’s fiduciary responsibility which requires that all investment decisions taken must be in the best interests of the Fund.

3) In summary: a. The investment policies to be pursued by the Secretary‐General with respect to the

investments of the Fund are established by the General Assembly of the United Nations.

b. The texts of applicable General Assembly resolutions embodying UNJSPF investment policies shall be filed and updated by the Investment Management Division of the UNJSPF.

c. The UNJSPF Pension Board and the Investments Committee shall assist the Secretary‐

General in the formulation and implementation of the Fund’s total plan risk and determine the Fund’s tolerance for risk, taking into account future benefit obligations and contributions requirements.

B. United Nations Joint Staff Pension Board 1) Article 4 of the Rules and Regulations of the Fund state that the Fund is administered by the

United Nations Joint Staff Pension Board (UNJSPB), a staff pension committee for each member organization, and a secretariat to the Board and to each committee.

2) The United Nations Joint Staff Pension Board and the General Assembly may from time to time make observations and recommendations on broad investment policy.

3) The Pension Board shall review the investments of the Fund at its regular sessions with a view to rendering advice to the Secretary‐General on investment policies as to their adequacy and consistency with the Fund’s goals and objectives.

C. SecretaryGeneral 1) Article 19 of the Rules and Regulations of the Fund state that


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a. The investment of the assets of the Fund shall be decided upon by the Secretary‐General after consultation with an Investments Committee and in light of observations and suggestions made from time to time by the Board on the investments policy.

b. The Secretary‐General shall arrange for the maintenance of detailed accounts of all investments and other transactions relating to the Fund, which shall be open to examination by the Board.

2) In exercising his/her fiduciary responsibility, the Secretary‐General must ensure that all investment decisions are made in conformity with the Rules and Regulations of the Fund and in the best interest of the Fund.

D. Representative of the SecretaryGeneral 1) The Secretary‐General has delegated the fiduciary responsibility for the investment of the Fund

to a senior United Nations official who acts as the Representative of the Secretary‐General for the investments of the UNJSPF (RSG).

2) The RSG has the over all responsibility for the management of the investments of the assets of

the Fund. On behalf of the Secretary‐General, the RSG is responsible for the approval of the investment policy, the strategic and tactical asset allocation and the appropriate investment strategy after consultation with the Investments Committee. The RSG oversees the implementation of investments decisions and ensures that the approved investment policy and assets allocation are followed. He/she is responsible for the reporting to the Pension Board, the ACABQ and the General Assembly on the performance of the Fund’s investments.

E. Investments Committee 1) In accordance with the relevant General Assembly Resolution and the Rules and Regulations of

the Fund, the Secretary‐General in exercising his fiduciary duties consults with the United Nations Investments Committee (IC). The Committee advises the Secretary‐General and the RSG on long‐term investment policy, strategic and tactical asset allocation and investment strategy and on any matter related to the investments of the assets of the Fund that the members consider should be brought to the attention of the Secretary‐General or the RSG for appropriate action. The Committee meets on a quarterly basis to review the performance of the investments of the Fund, to discuss economic and market developments and to recommend long‐term and short‐term asset allocation.

2) The Investments Committee consists of nine members appointed by the Secretary‐General after consultation with the Pension Board and the Advisory Committee on Administrative and Budgetary Questions, subject to confirmation by the General Assembly. In addition to regular members, the Secretary‐General may appoint ad hoc members to serve in the Committee.


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3) Pursuant to Article 19 (a) of the Regulations of the UNJSPF, the Investments Committee shall

advise the Secretary‐General on long‐term investments. It shall also advise the Secretary‐General on overall investment guidelines and strategy.

4) In keeping with its terms of reference, the Investments Committee may also advise the

Secretary‐General on any matter related to the investments of the assets of the Fund which the Committee is of the view should be brought to the attention of the Secretary‐General for appropriate action.

5) The Investments Committee normally meets four to five times a year, including one meeting

annually held in conjunction with the session of the Pension Board and biennially with the Committee of Actuaries. The Investments Committee advises the Secretary‐General on the following matters:

• investment policy; • asset allocation and strategy; while the long‐term guidelines provide the strategic asset

allocation which is expected to generate investment returns with a risk level appropriate for the Fund’s pension liability characteristics, the short‐term tactics reflect the direction in which each portfolio section should move under certain expectations;

• diversification by type of investment, currencies and economic sector;

• and other matters, which in the view of the Committee, should be brought to the attention of the Secretary‐General or on which the latter may deem the advice of the Committee desirable.

6) The Investments Committee reviews investment returns, small capitalization manager performance, diversification, and transactions of the Fund every quarter, as provided by IMD in its Bluebook and by the Institutional Investment Advisors.

7) The Committee’s report shall be composed of the minutes of each meeting as prepared by the Secretary, reviewed by the Representative of the Secretary‐General, the Director and the participants. The report shall be reviewed and approved by the Committee at its next meeting.

8) The Secretary of the Investments Committee is appointed by the Director of IMD. The Secretary makes appropriate arrangements for the functioning of the meetings in consultation with the Director of IMD. The Secretary shall also oversee the travel arrangements for the members of the Committee attending scheduled meetings. The Secretary shall moreover ensure that only such reports as have been approved by the Investments Committee are released for distribution.


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F. Investment Management Division 1) The staff of the Investment Management Division (IMD) assists the Secretary‐General and the

RSG in the management of the investments of the assets of the UNJSPF. The staff of IMD is responsible for the day to day management of the Fund’s assets. They implement the approved investment strategy and ensure that the portfolio conforms to the approved asset allocation. On a daily basis, the staff analyzes the financial markets, makes sales and purchase recommendations of securities and evaluates the returns achieved. IMD formulates investment strategies for a long‐term investment horizon and makes certain that the investments of the Fund conform to the approved policies and the Rules and Regulations of the Fund. The IMD ensure that performance and portfolio risk analyses reports are accurate and up‐to‐date and arranges for the maintenance of appropriate and accurate accounts on the Fund’s investments.


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IV. Guiding Principles

A. It is better to be approximately right than to be precisely wrong.

Risk management is highly quantitative in nature. All quantitative analysis should be firmly rooted in sound economic understanding. Commonsense should prevail and IMD shall question all quantitative conclusions if they seem counter intuitive and not seem be based on sound economic principles.

B. All policies, procedures and manuals shall be approved, should be considered living documents and should be reviewed periodically.

All policies and procedures should reflect the risk management objectives. The investment environment is fluid and that fluidity should reflect in periodic review of the procedures and policies. In addition, risk management policy and the investment policy should be reviewed every quarter to ensure IMD policies and processes take into account the latest market conditions. Changes in the policies should be internally debated, reviewed, and presented to the Investment Committee to see their guidance. All material changes shall be approved and be operational.

C. Separation of the front office, middle office and back office with independent risk oversight and internal audit oversight

The Risk and Compliance function should perform the independent oversight of all the processes of the front office, middle office and back office. Industry best practice of the separation of front office and back office should be followed to manage the operational risk.

D. Organization structure should be clearly defined with clear roles and responsibilities and risk principles should be consistently applied.

Risk controls should be consistently applied to all internal personnel and external counterparties. Exceptions should be noted, probed and root cause analysis should be performed. Reporting lines should be clearly defined with risk and compliance function to have direct access to the Representative of the Secretary‐General. Any changes in the roles and responsibilities shall be documented and communicated to the all affected parties.


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E. Test disaster recovery and business continuity plan on the regular basis with sound understanding of the residual risks.

Business continuity and disaster events are low frequency high impact incidences, the impact of which can be significant on the IMD. IMD should evaluate the disaster recovery and business continuity plans on the regular basis to ensure all material identified risks are identified and proper controls are placed. IMD should have a good understanding of the residual risks. IMD policies should ensure that all personnel understand their role in the event of disaster and have the equipment to function independently at an alternate location.

F. Manage model risks. All Risk Models have model risks.

All quantitative models are based on certain assumptions (normality of distribution etc). IMD should have good understanding of the limitations of the models and be conservative in terms of applying quantitative insights.

G. Set proper risk appetite with the sound understanding of the asset liability structure

Risk appetite cannot be properly set without the good understanding of the liability structure. IMD should be intimately involved in all Asset Liabilities studies, should have a sound understanding of the liability structure, currency exposure and set the risk appetite based on it.

H. Perform stress test and back tests

IMD should stress test and back test all the models. Stress test scenarios should be revisited a at least quarterly. IMD should also back test all the models. For example, if IMD is producing statistics based in 99 percent confidence intervals, it should back test to see that approximately one percent of the events are falling out of its confidence interval. Based on back testing, IMD may need to fine tune its models.

I. All external counterparties shall be subject to periodic due diligence.

IMD should exercise proper oversight to all the external counterparties (external fund managers, custodians, brokers etc) to ensure that counterparties have adequate risk controls and compliance functions are in place and their actions are not subjecting the IMD to undue risks.


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J. Independent review of the risk management controls by an external expert

IMD should evaluate the efficacy of its risk management function periodically by getting the risk management process and controls reviewed by an external expert. Feedback from the expert shall be reviewed and incorporated into the risk management function to strengthen the risk management process.

K. Translate the lessons learnt into new risk controls

The IMD should organize the lessons learnt sessions on a regular basis to understand what worked and what did not work. Processes should be improved based on the insights gained by the actual incidents and lessons should be translated into risk management controls.

L. Risk Objectives The investment objectives of the Fund, which take into account observations and requests made by the General Assembly and the Pension Board, as reviewed and considered by the Investments Committee are:

1. Safety Safety is achieved by ensuring adequate asset class, geographic, currency, sector and industry diversification, by carefully researching and documenting investment recommendations and constantly reviewing the portfolio in order to take advantage of the unsynchronized economic cycles, market and currency movements. Asset classes are all subject to market risk; security is a relative term.

2. Profitability Profitability requires that each investment at the time of purchase be expected to earn a positive total return, taking into account potential risk, particularly market risk which is common to all securities of the same general class and commonly can be mitigated but not eliminated by diversification.

3. Convertibility Convertibility is the ability to readily convert investments into liquid currencies. Convertibility facilitates payments in local currencies. The Fiduciary responsibility to the Fund’s participants mandates that due to the U.S. dollar‐based market valuation of the Fund, and the U.S. dollar based appraisal of its actuarial soundness, all investments should be readily and fully convertible into U.S. dollars.


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4. Liquidity Liquidity is the ready marketability of the assets in recognized sound, stable and competitive exchanges or markets. Liquidity is required to ensure that the portfolio can be restructured in the shortest possible time in order to enhance total return and/or to minimize potential losses.

In establishing liquidity requirements, the Investment Management Division (“IMD”) will take the following factors into consideration:

(a) the need for liquidity to meet payroll requirements in an array of currencies (b) the need for funds to take advantage of investment opportunities as they arise (c) the need for funds required for projected cash flows

The emphasis on liquidity shall be an investment consideration based on the expected changes in the funding of short‐term liabilities. Managing liquidity to meet the Fund’s requirements will be met by structuring the investment portfolio to maintain a sufficient allocation of funds in highly liquid securities. IMD will consider an acceptable range of illiquidity to generate a higher return from the approved asset classes.

It is noted that there may be attractive investment opportunities which require long‐term commitments from the Fund. The Fund may invest in longer‐term asset classes, such as alternative investments1, with the concurrence of the RSG.

5. Risk Tolerance Under Development: Risk tolerance will be established using input from the most recent ALM study, historical and projected performance and holdings based risk attribution data collected for a year from the risk system. The Risk tolerance will be multi dimensional in nature. It address the downside risk using tolerance based on Value at Risk (VaR) and active management tolerance based on Tracking Error. The Risk Tolerance will be the primary input in setting up the risk budget for various investment managers.

1 Real assets and alternative investments have limited liquidity


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20

VI. Risk Management Controls

A. Credit Risk

1. Issuer Ratings

Short‐ and long‐term Issuer Default Ratings (IDRs) may be assigned to entities for certain sectors, including Corporate, Financial Institution and Sovereign entities, which reflect the ability of an entity to meet financial commitments on a timely basis. Similar to other ratings, these are drawn from the International Long‐term and Short‐term ratings scales and are identified as IDRs.

A short‐term Issuer Default Rating (SIDR) is based on the liquidity profile of the rated entity and relates to the ongoing capacity to meet financial obligations with a relatively short time horizon (less than 13 months, except for public finance where short‐term ratings may be assigned up to a three year horizon, in line with industry standards).

The long‐term IDR is assigned to issuers and counterparties, reflecting their ability to meet all of their most senior financial obligations on a timely basis over the term of the obligation. The long‐term IDR, therefore, is effectively a benchmark probability of default rating.

Credit Risk Moody's* Standard & Poor's** Fitch**

INVESTMENT GRADE

Highest quality Aaa AAA AAA

High quality (very strong) Aa AA AA

Upper medium grade (strong) A A A

Medium grade Baa BBB BBB

NON‐INVESTMENT GRADE

Lower medium grade (somewhat speculative) Ba BB BB

Low grade (speculative) B B B

Poor quality (may default) Caa CCC CCC

Most speculative Ca CC CC

No interest being paid or bankruptcy petition filed C C C

In default C D D Source: The Bond Market Association * The ratings from Aa to Ca by Moody’s may be modified by the addition of a 1,2 or 3 to show relative standing within the category.


21

** The ratings from AA to CC by Standard and Poor’s and Fitch may be modified by the addition of a plus or minus sign to show relative standing within the category.

2. Fitch Individual Bank Ratings

Individual Ratings are assigned only to banks. These ratings, which are internationally comparable, attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. These ratings are designed to assess a bank's exposure to, appetite for, and management of risk, and thus represent our view on the likelihood that it would run into significant difficulties such that it would require support.

The principal factors used to analyze and evaluate the bank and determine these ratings include: profitability and balance sheet integrity (including capitalization), franchise, management, operating environment, and prospects. Finally, consistency is an important consideration, as is a bank's size (in terms of equity capital) and diversification (in terms of involvement in a variety of activities in different economic and geographical sectors).

A denotes: A very strong bank. Characteristics may include outstanding profitability and balance sheet integrity, franchise, management, operating environment or prospects. B denotes: A strong bank. There are no major concerns regarding the bank. Characteristics may include strong profitability and balance sheet integrity, franchise, management, operating environment or prospects. C denotes: An adequate bank, which, however, possesses one or more troublesome aspects. There may be some concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects.

D denotes: A bank, which has weaknesses of internal and/or external origin. There are concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. Banks in emerging markets are necessarily faced with a greater number of potential deficiencies of external origin. E denotes: A bank with very serious problems, which either requires or is likely to require external support. F denotes: A bank that has either defaulted or, in Fitch’s opinion, would have defaulted if it had not received external support. Examples of such support include state or local government support, (deposit) insurance funds; acquisition by some other corporate entity or an injection of new funds from its shareholders or equivalent. Notes: Gradations may be used among the five ratings: i.e. A/B, B/C, C/D, and D/E.


22

1) The Credit Policy was introduced in May 2008 to ensure the proper mechanisms are implemented to assess the creditworthiness of counterparties and to manage risk through quality management by creating credit limits for investments.

2) The Credit Policy was first approved by the Investments Committee during the 196th meeting on 5th May 2008.

3) Credit risk is defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms resulting in a loss. The risk of a trading partner not fulfilling its obligations to another in a timely manner is a risk that all obligors face. Ensuring adequate control over credit risk and effective credit risk management is critical to the long term success of investment managers.

4) Credit risk management should address the following important areas: a. Approving and maintaining appropriate credit exposure measurement standards; b. Establishing limits for amounts and concentrations of credit risk, monitoring and

implementing a review process for credit exposure and; c. Ensuring adequate controls over credit risk.

To manage the credit risk at Investment Management Division of UNJSPF, the following internal controls have been implemented to ensure the safety of the Fund’s assets and to minimize exposure to counterparties.

3. Credit Risk Controls 1) Monitor Bond and Short Term Investment Limits: Bond holdings must comply with fixed

income investment guidelines outlined in Investment Policies and Procedures. Exception report shall be generated for the holdings which do not meet the guidelines. All outstanding breaches are reported to the IMD Director and the Investment team. • Implementation: Compliance Analyst for Post Trade compliance and Charles River for Pre

Trade Compliance. • Evidence: Breach report and memo to the investment team • Frequency: Quarterly • Action:

a. Memo to the Investment team and the Director. b. Investments in bonds that violate the limits stated are monitored by the Investment

Officer to determine the best opportunity for exiting the position at the best available price for long‐term ratings that are downgraded to Standard and Poor’s BBB, Moody’s Baa2 and Fitch IBCA BBB or below.

c. Investments in bonds that violate the issue and total bond portion of the fund limits stated are monitored by the Investment Officer to determine the best opportunity for reducing the position at the best available price to bring the position back to acceptable limits.

d. Investments in short‐term investments that violate the limits stated are monitored by the Investment Officer to determine the best opportunity for exiting the position


23

at the best available price for ratings that are downgraded to Standard and Poor’s BBB, Moody’s Baa2 and Fitch IBCA BBB or below.

2) Monitor Equity Debt Factor: The following ratios are utilized to assess the long‐term solvency

of equity securities and signal weakness in financial strength regarding the cost of debts and its impact on the company’s potential increase in default risk.

(a) Debt to Capital Ratio = Total Debt (LT + ST) / Total Debt + Shareholders’ Equity (b) Debt to Equity Ratio = Total Debt (LT + ST) / Total Equity

No formal limits, however, Investment Officers will monitor the capital structure with such indicators as they deem appropriate. Northern Trust Compliance reports and Thompson Portfolio Analytics generate security equity debt factors and these figures are reviewed on a periodic basis. • Implementation: Compliance Analyst & Thompson Portfolio Analytics • Evidence: Equity Debt Report • Frequency: Quarterly • Action: Report to the Investment team and the Director.

3) Broker Screening:

a. The selection of brokers used for sales and purchases for the UNJSPF (“Investment Manager”) is evaluated based on the Fitch Individual bank credit ratings; a leading global rating agency committed to providing the world’s credit markets with valued and insightful independent credit research.

b. Individual ratings are assigned only to banks and attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. The ratings are designed to assess a bank’s exposure to, appetite for, and management of risk, and thus represent the rating agency’s view on the likelihood that it would run into significant difficulties.

c. Principal factors used to evaluate banks include profitability and balance sheet integrity (including capitalization), franchise, management, operating environment, consistency, size and diversification.

d. The minimum individual bank credit rating of “B/C” and minimum of US $5 billion in assets is preferred by UNJSPF for banks utilized for bond and equity trades. “B” rating denotes a strong bank with no major concerns and a “C” rating represents an adequate bank.

e. The minimum individual bank credit rating of “B” is preferred by UNJSPF for banks utilized for short‐term investments.

f. A review of the Fitch individual bank ratings is performed periodically (Quarterly). Proper consideration and proactive measures are made based on the following rating actions:


24

i. New ratings: A new rating has been assigned. ii. Upgrades: The rating has been raised in the scale. iii. Downgrades: The rating has been lowered in the scale. iv. Rating Watch On: The issue or issuer has been placed on active rating watch status. v. Change: The rating has been changed or modified due to a revision in methodology. vi. Revision Rating: The rating has been modified, usually as a result of the introduction

of a new scale. vii. Withdrawn: The rating has been removed and is no longer maintained by Fitch. viii. Affirmed: The rating has been reviewed and no change has been deemed necessary.

• Implementation: Manual • Evidence:

a. The Statement of Financial Condition, Independent Auditors Report and Consolidated Financial Statement are reviewed in lieu of the Fitch IBCA ratings when available.

b. The above reports are prepared in accordance with accounting principles generally accepted in the United States or International Financial Reporting Standards (IFRS) which are published by the International Accounting Standards Board (IASB) and International Public Sector Accounting Standards (IPSAS).

c. The standards and accounting principles sometimes require the company to make estimates and assumptions regarding the valuations of certain financial instruments, the outcome of litigation, tax and other matters.

• Frequency: Quarterly • Action: Broker Exception Process. Possible elimination from the preferred list.

B. Counterparty Risk IMD engages various counterparties for investment related services. IMD counterparty exposure is non‐trivial and must be managed effectively. IMD has exposure to following types of counterparties.

a. Custodian / MRK Service Providers b. External Small cap Managers c. External Investment Advisors d. Brokers e. Alternative Asset Management Firms f. BC/DR service provider g. Risk Analytics, Portfolio Accounting Service Providers h. Various contractors

1. Custodian / MRK


25

1) Acquisition of the services: All services must be acquired through the procurement mandated RFP process. RFP process should be two phased approach with on site due diligence visit by Risk Group. • Implementation: Manual. • Evidence: Memo of scores for technical evaluation, due diligence scores. • Frequency: Need basis • Action: Risk team provides a short listed candidate to the PD which meets the investment

and risk requirement.

2) On‐going due diligence: Risk team should perform on site visit for custodian at least once a year. Scope of the visit is to see the operations, evaluate BC/DR process, infrastructure, face to face meeting with various managers. Risk & Compliance Team should also visit at least one sub custodian in different region once a year to evaluate the custodian‐sub custodian relationship, and sub custodian quality. • Implementation: Manual • Evidence: Due Diligence evaluation report. • Frequency: At least once a year • Action: If risk team discovers sub optimal process then, advice the IMD and PD to open

discussion with the custodian for the explanation and remediation plan. If risk team discovers sub optimal process with the sub custodian, then it should engage custodian to remediate IMD concerns with the sub custodian.

3) Monitor Regulatory Capital and Economic Capital: Risk team should maintain rolling RCAP and

ECAP ratio for last five years and create a base line capital ratio. If the capital ratio goes down 25% of the base line, then it must initiate the discussion with the custodian about its financial health. If RCAP ratio goes down below 10%, IMD need to initiate the emergency discussion with the custodian possibly transferring the assets to another custodian. • Implementation: Manual • Evidence: Rolling five year RCAP and ECAP ratio • Frequency: Quarterly • Action: Possible transfer of assets

4) Monitor CDS spread: Maintain five year rolling CDS spread. If CDS spread moves up by 2

standard deviation, IMD should engage in immediate discussion with the custodian management probing the financial health of the firm. If the CDS spread event is in conjunction of credit rating downgrade and falling RCAP ratio below 10%, IMD should initiate the transfer of assets to alternate custodian. • Implementation: Manual • Evidence: Rolling five year CDS spread. • Frequency: Monthly • Action: Possible transfer of assets.

5) Monitor individual bank rating: if the Individual Bank Rating drops, initiate discussion with the

custodian management. If the Individual Bank Rating drops below C, then prepare to transfer the assets to alternate custodian.


26

• Implementation: Manual • Evidence: five year history of individual bank rating • Frequency: Monthly • Action: Possible transfer of assets.

6) Monitor Assets under custody: Keep history of rolling five year assets under custody. If the assets under custody drops more than 25%, initiate discussion with the custodian management. If the drop in assets under custody is accompanied with widening CDS spread or drop in individual bank rating or declining capital ratio, then prepare to transfer assets to alternate custodian. • Implementation: Manual • Evidence: Rolling five year history of assets under custody • Frequency: Quarterly • Action: Possible transfer of assets.

7) Monitor failed trades: Review the list of failed trades every quarter. If a particular region is

experiencing uptrend in failed trades, then initiate discussion with custodian and possibly conduct an on‐site due diligence for custodian or sub custodian in the region where there is upward trend in failed trades. • Implementation: Manual • Evidence: Quarterly list of failed trades • Frequency: Quarterly • Action: Possible on site due diligence visit

8) Operational Losses or Fraud: Review the insurance contract which the custodian carries at

least twice a year. If the insurance is dropped or reduced, immediate discussion needs to be started. If the custodian fails to produce the insurance contract within 30 days, initiate the process to transfer assets to alternate custodian. • Implementation: Manual • Evidence: Copy of insurance contract. • Frequency: Semi Annually • Action: Possible transfer of assets.

9) Service Delivery: Review all the issues from the custodians and MRK and prepare the

evaluation form evaluating their compliance with the SLAs. • Implementation: Manual • Evidence: Evaluation Form. • Frequency: Semi Annually • Action: Discussion with the management to remediate the identified issues.

2. Brokers 1) Brokerage Agreement Services:


27

a. A Brokerage Agreement is a legally binding exchange of agreement and an effective communication tool for creating a common understanding between the UNJSPF and brokers regarding services, expectations, responsibilities, liabilities and priorities.

b. Objectives of a Brokerage Agreement:

i. To open the lines of communication between the parties and identify the terms and conditions of the agreement;

ii. To help avoid or alleviate disputes by providing a shared understanding of needs and priorities.

iii. To serve as a living document that both parties can review. If, during its term, the parties hereto should mutually agree to modify, amend or alter the provisions of the Agreement, in any respect, any such changes shall be effective only if in writing and executed by the authorized representatives of the parties.

c. The brokerage agreement will further set forth the following:

i. Responsibilities of both parties such as, but not limited to, compensation (i.e. commission), services provided (i.e. research), and indemnification.

ii. It will also specify recourse if either party fails to honour one or more provisions of the contract by referring to the Settlement of Dispute clause which will stipulate how service‐related disagreements will be resolved.

d. The liability for potential overdraft charges and delivery failure of assets is easily assigned based on the outlined responsibilities of both parties in the brokerage agreement. The brokerage agreement will serve to limit the liabilities of the UNJSPF.

Evaluate the broker performance based on the SLA terms • Implementation: Manual • Evidence: Evaluation Form. • Frequency: Semi Annually Action: Discussion with the management to remediate the identified issues. The broker list is updated periodically. Exceptions for brokers who do not meet the minimum criteria are made on a case‐by‐case basis by the Director of Investment Management Division.

2) Failed Trades: Get list of failed trades from the custodian and review if there are too many

failed trades in a particular market or with a particular broker. Investigate the reason for failed trades. • Implementation: Manual • Evidence: Failed trades spreadsheet. • Frequency: Quarterly • Action: Ranking of the broker, revoking the exception process if in place, discussion with the

custodian management to probe the reasons behind increasing failed trades. Possible elimination from the preferred list.


28

3) Monitor Commission:

a. A review of the total commission dollars per asset class and region is performed monthly.

b. A detailed review of the total broker dollars allocated and percentage of total commissions is performed on a quarterly basis. Broker commissions are aggregated across asset classes to assess the top allocations to brokers in percentage and dollar terms.

• Implementation: Manual • Evidence: commission spreadsheet. • Frequency: Monthly, Quarterly • Action: Possible elimination from the preferred list.

4) Monitor Daily Trade Blotter: Daily trade blotter contains relevant information about all the

trades executed the previous day. It has Trade date, the security traded, shares traded, trade price, executing broker and total commission. The compliance team will monitor the trade blotter to ensure all the trades meet the investment policy and that trades are distributed among brokers and trade commission. • Implementation: Manual • Evidence: Trade Blotter spreadsheet. • Frequency: Daily • Action: Discussion with the portfolio manager if compliance officer notices irregular pattern.

3. External Advisors 1) Service Delivery: Evaluate the advisor performance based on the SLA terms

• Implementation: Manual • Evidence: Evaluation Form. • Frequency: Semi Annually • Action: Discussion with the management to remediate the identified issues.

4. External Managers (Small Cap, Alternative Investment) 1) Service Delivery: Evaluate the advisor performance based on the SLA terms

• Implementation: Manual • Evidence: Evaluation Form. • Frequency: Semi Annually • Action: Discussion with the management to remediate the identified issues.

2) Due Diligence: All external managers have to undergo due diligence meeting at least twice a

year. At least one of the meetings has to be on site visit by the risk team. • Implementation: Manual • Evidence: Due Diligence Report • Frequency: Semi Annually


29

• Action: Discussion with the management to remediate the identified issues. Possible termination of the contract.

3) Insurance Bond: All external managers must produce the insurance bond during the due diligence meeting, which should be equal to the what was in the contract with the IMD • Implementation: Manual • Evidence: Due Diligence Report • Frequency: Semi Annually • Action: Discussion with the management to remediate the identified issues. Possible

termination of the contract.

4) Compliance with the investment guidelines: All external managers must comply with the investment guidelines in their respective asset class. Breaches will be noted and will need to be explained. • Implementation: Manual, Compliance Analyst • Evidence: Breach report • Frequency: Quarterly • Action: Discussion with the management to remediate the identified issues. Possible

termination of the contract.

C. Market Risk

1. Asset Allocation Controls 1) Equity Strategic AA Upper Bound = 67%, Lower Bound = 53%

• Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

2) Equity Tactical AA : Input Investment Committee results for tactical Equity AA. Set range at 100

bps equal to +‐50 bps upper and lower bound of range. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

3) Fixed Income Strategic AA : Upper Bound =38%, Lower Bound = 24%



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4) Fixed Income Tactical AA : Input Investment Committee results for tactical Fixed Income AA. Set range at 100 bps equal to +‐50 bps upper and lower bound of range. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

5) Real Assets Strategic AA Upper Bound = 9%, Lower Bound = 3% • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

6) Real Assets Tactical AA : Input Investment Committee results for tactical Fixed Income AA. Set range at 100 bps equal to +‐50 bps upper and lower bound of range. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

7) Short Term Strategic AA Upper Bound = 6%, Lower Bound = 0%


8) Short Term Tactical AA : Input Investment Committee results for tactical Fixed Income AA. Set

range at 100 bps equal to +‐50 bps upper and lower bound of range. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

9) Developing Country Investments: Every effort is to be made to find suitable investment

opportunities in developing countries. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

10) Developing Country Total Investments: Every effort is to be made to find suitable investment

opportunities in developing countries. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report


31

• Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

2. Socially Responsible Investments and Global Compact 1) Weapons: Investments in companies that derive any revenue from the production of military

weapons, weapons systems or weapons of mass destruction or derive more than 10 per cent of revenue from production of customized components for purpose of weapons are prohibited. Restrictions are as per listed in the Investment Policy. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

2) Tobacco: Investments in companies that derive any revenue from the production of tobacco and that primarily deal with manufacturing and distribution of tobacco and tobacco related products are prohibited. Restrictions are as per listed in the Investment Policy. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

3) Prohibited Investments (Internal & External Managers): Unless specifically approved by the

Representative of the Secretary‐General, securities specifically prohibited from purchase include, but are not limited to:

a. Stock in non‐public corporations b. Letter or restricted stock; c. Short sales of any type d. Partnership or limited partnership, except in Real Assets e. Socially responsible investing restrictions: weapons, tobacco


4) Prohibited Shorts: Unless specifically approved by the RSG, short sales of any type are

prohibited. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

5) Negative Cash Holdings: Unless specifically approved by the RSG, short sales of any type are

prohibited. • Implementation: Compliance Analyst


32

• Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

6) Countries (Internal & External Managers) w/Tax Exceptions: The Fund should only initiate

investments in countries where the fund has been granted tax exemptions. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

3. Global Equity Portfolio 1) Single Equity < 5% of total Equity: The holdings of a single equity security or preferred stock

should not exceed 5% of the total equity portion of the Fund. This includes investments in Investment Trusts. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues. PM must

bring down the concentration limit in line in 180 days after the exception has been identified.

2) 4.75% Limit Shares Outstanding: The holding of a single equity security or preferred stock should not exceed 4.75% of the market capitalization of a type of security of the issuer • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues. PM must

comply with this limit immediately.

3) SC Europe 2% Limit Shares Outstanding: The holding of a European single equity security or preferred stock should not exceed 2% of the market capitalization of a type of security of the issuer (restricted to Italy and Germany) • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues. PM must


4) Convertible bonds < 10% issue: The holdings of a single security cannot be more than 10% of the outstanding amount of the issue of the convertible unless specifically authorized by the RSG, upon a recommendation by the director of the IMD. • Implementation: Compliance Analyst


33

• Evidence: Compliance Analyst Report, Exception recommendation from the Director, and the exception recommendation approval by the RSG.

• Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues. PM must


5) SC Europe Max Cap Euro 2B: The maximum capitalization of the companies shall be EUR2B. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and

the exception recommendation approval by the RSG. • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues. PM must


6) SC Asia Max Cap Yen 300B: The maximum capitalization of the companies shall be JPY300B. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and



7) SC US (Jen & DFA) Max Cap USD 3B: The maximum capitalization of the companies shall be

USD3B. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and



8) SC Europe GIC Sector Concentration: Each fund should be diversified along prudent lines,

avoiding heavy concentration in any one industry. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and




34

9) SC Asia GIC Sector Concentration: Each fund should be diversified along prudent lines, avoiding heavy concentration in any one industry. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and



10) SC US (Jen & DFA) GIC Sector Concentration: Each fund should be diversified along prudent lines, avoiding heavy concentration in any one industry. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and



11) SC (Europe, Asia, US: Jen & DFA) Cash < 5% Account: Cash may be maintained up to 5% of the market value of the account and invested in short term vehicles of the highest quality. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and

the exception recommendation approval by the RSG. • Frequency: Quarterly • Action: Discussion with the portfolio managers to remediate the identified issues.

4. Global Fixed Income Portfolio 1) Credit Rating Minimum A: Only Bonds with the credit of A and above by a recognized rating

service should be bought. If the rating downgrade happens after the purchase then an exception need to be approved by the Director and the RSG. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


2) Issuer Limit 5% Corporate: A holding in a fixed income security of a single corporate issuer

should not exceed 5% of the total bond portion of the Fund. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and



35

3) Total Debt Corporate < 10%: A holding in a fixed income security of a single corporate issuer

should not exceed 10% of the total amount of the issue. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


4) Issuer Limit 15% Sovereign: the maximum holding of single supranational (international and

regional financial institutions) and of sovereign state or guaranteed by sovereign states should not exceed 15% of the total bond portion of the fund. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


5) Total Debt Sovereign < 20%: the maximum holding of single supranational (international and

regional financial institutions) and of sovereign state or guaranteed by sovereign states should not exceed 20% of the issue. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


5. Global Real Assets Portfolio 1) Physical Buildings: Direct investments in physical buildings are not allowed.

• Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


2) RE Investments < 25%: The Fund should not hold more than

a. 20% of a particular real estate fund at the time of initial purchase but the size of holdings could be more than 20% due to withdrawals by other investors. Under these circumstances the limit will be determined on a case by case basis by the Director of the IMD would seek approval from the RSG when appropriate.

b. No more than 25% of the investment vehicle in any circumstances. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and

the exception recommendation approval by the RSG. • Frequency: Quarterly


36

• Action: Discussion with the portfolio managers to remediate the identified issues.

6. Global Short Term Portfolio

1) Issuer Limit 5% Corporate: A holding on a single issuer should not exceed 5% of the total short‐term investment portfolio of the Fund except for Government Bills and Notes where there is no limit. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


2) Total Debt Corporate < 10%: No short‐term investment should exceed 10% of the total

amount of the issue. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


3) Maturity limit <365 days: No short‐term investment should exceed 365 days maturity. • Implementation: Compliance Analyst • Evidence: Compliance Analyst Report, Exception recommendation from the Director, and


7. Miscellaneous This section controls for risks identified by various audit recommendations as well as risk which spans across various categories.

1) Risk Tolerance & Risk Oversight: IMD, in consultation with the ALM and Investment Committee sets the risk tolerance level. Based on the risk tolerance, IMD implements, and monitors risk budget and other risk controls to manage the best risk adjusted performance. IMD risk group also functions as risk oversight group.

• Implementation: Risk Analytics • Evidence: Bluebook and other regular risk reports • Frequency: Quarterly • Action: Discussion with the portfolio managers, RSG, IC and senior management about the

identified risks.


37

2) Excessive Churning: All trades must be supported by proper due diligence and sound basis. Churning is defined as Less of (Buys, Sales) / 12 Month Avg. Market Value. There may be good reason for more than normal trading (Asset reallocation based in IC meeting, Market Events etc). IMD risk group closely monitors trading turn over and portfolio turnover ratio over 30% will trigger examination of trading basis, due diligence documentation and advisor recommendations.

• Implementation: Risk Analytics, Custodian/MRK reports • Evidence: Turnover reports • Frequency: Quarterly • Action: Discussion with the portfolio manager, Chief Investment Officer and the Director

3) Realized losses >25%, unrealized losses > 25% 50%: All trades must be supported by proper due diligence and sound basis. IMD monitors realized and unrealized losses on each position. The event when realized losses exceed 25% and unrealized losses exceed 25%, will trigger examination of due diligence process and continued basis of still holding the investment (in case of unrealized losses)

• Implementation: Risk Analytics, Custodian/MRK reports • Evidence: Realized / Unrealized losses • Frequency: Monthly Quarterly • Action: Discussion with the portfolio manager, Chief Investment Officer and the Director

4) External Factors: External factors like political conditions, economic factors, capital markets, social conditions, technological advances, legal and regulatory factors, fraud, and environmental conditions may result in specific risks to the Fund. The Fund has various advisors specializing in specific geographies, produce reports highlighting various kinds of external risks the fund may face.

• Implementation: Investment Committee Meetings, External Advisors • Evidence: Bluebook • Frequency: Quarterly • Action: Discussion with the RSG and senior management about the identified risks.

5) Standing UN Rules & Regulations: Some of the standing UN rules and regulations are risk to the fund. Due to complexities and the nature of the UN rules and regulations applicable to the Pension Fund (e.g. procurement, recruitment, mobility, etc.), the Pension Fund may face inefficiencies while:

‐ working towards achieving program goals ‐ addressing new issues


38

‐ taking advantage of emerging opportunities (e.g. new investment products)

Which has a high impact on its operations. IMD should proactively participate in various working groups to expedite processes and gain exception from the processes which are not suitable for IMD.

• Implementation: Manual • Evidence: Meeting Minutes from various working group, report from IMD assessing the

potential and actual impact due to inflexible rules. • Frequency: Quarterly or semi‐annually • Action: Discussion with the RSG and senior management about the identified risks.

6) Departmental Cross Communication: without effective cross‐communication the Pension Fund may fail to effectively address cross‐departmental issues or objectives and duplicate administrative efforts. IMD should actively participate in various inter and intra department working groups, identify and debate various operational issues

• Implementation: Manual • Evidence: Working Group agenda, Meeting minutes • Frequency: Semi‐Annually • Action: Discussion with the RSG and senior management about the identified risks.

7) External and Internal Audit Effectiveness: The Board of Auditors and the Office of Internal Oversight Service are partners and plays an important role as an additional risk oversight mechanism. IMD will proactively work with external and internal audit to address the identified recommendations.

• Implementation: Manual • Evidence: BOA reports, OIOS reports, IMD Master Project Plan, IMD presentation to Audit

Committee • Frequency: Semi‐Annually • Action: Discussion with all stakeholders who are involved in implementing the identified

recommendations and the senior management.

8) Management Letter Response: The Management Letter’s can be issued by auditors. Generally, an explicit response is not requested. However, IMD must ensure that all the information in the management letter is accurate and issue its own response to the management letter, even if no explicit response is requested. IMD Risk group should coordinate the response of all management letters within three weeks of receiving it.

• Implementation: Manual • Evidence: Management Letter response • Frequency: whenever a management letter is received.


39

• Action: Discussion with all stakeholders who are involved in crafting the response to the management letter.

9) Actuarial Estimates: IMD should proactively participate in all ALM studies and conduct in‐depth review of ALM results, assumptions and forecasts.

• Implementation: Manual • Evidence: ALM Report, IMD Review Report, Trend Analysis • Frequency: Whenever ALM studies are performed • Action: Presentation to IC, Discussion with the senior management.

10) Investment Research: Review tear sheets for each investment decision, buy/sell criteria, review sell discipline, Advisors reports. Highlight any trades which do not seem to have quality due diligence performed.

• Implementation: Manual, Charles River Trade Order System • Evidence: Tear Sheets, Advisors recommendations, List of trades which do not seem to have

quality due diligence performed. • Frequency: Quarterly • Action: Discussion with Investment Officers

11) Advisor Performance: Review the advisor performance done by the investment group based

on their presentations, economic analysis, activity and level of contact with the advisors, quality of idea generation, timeliness, research quality etc.

• Implementation: Manual • Evidence: Advisor Performance Evaluation Reports • Frequency: Annually • Action: Discussion with Investment Officers

12) Monitor Market Value Parameters: Due to market conditions, values of individual positions

can change significantly. Sometimes, these changes can indicate specific risks, other times; the changes in value can be attributed to general market conditions. Risk group will monitor on a regular basis, some key statistics for investment positions, and if it detects significant changes in those parameters, it would trigger the review of investment rational of those investments. Some of the parameters which would be monitored on a regular basis are, CDS jumps, ratings downgrades, inversion of 1 years v/s 5 years CDS, change in volatility etc.

• Implementation: RiskMetrics, Bloomberg, Manual • Evidence: RiskMetrics reports • Frequency: Monthly, Quarterly


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• Action: Discussion with Investment Officers

D. Liquidity Risk

1) Duration Gap: Duration differential for various parts of the duration spectrum of assets and liabilities should be published by the Risk Group. To implement this control Risk Analytics software need to model assets and liabilities using the most current ALM study. • Implementation: Manual, Risk Analytics • Evidence: Duration gap report • Frequency: Quarterly • Action: Discussion with the management to remediate the identified issues.

2) Capital Commitment for Alternative Investments: For alternative investments, IMD, as part of

the investment agreement agrees to capital infusion. Establish capital commitment calendar and match it against investable cash. • Implementation: Manual, Risk Analytics • Evidence: Capital Commitment Calendar • Frequency: Quarterly • Action: Discussion with the management to remediate the identified shortfall.

3) Stress Test with the latest ALM study for Solvency: Model the liabilities using the latest ALM

data and stress test liabilities against assets. • Implementation: Risk Analytics • Evidence: Results from the stress test • Frequency: Annually • Action: Discussion with the management to remediate the identified shortfall.

4) Market Liquidity: Liquidating large positions can have market impact and unfavorable trade execution. IMD should employ external services to monitor broker and trade execution cost employing various methodologies like VWAP, Implementation shortfall etc. IMD should also review various assets in portfolio for which prices are difficult to find. IMD should monitor trading volume and if trading volume decreases 2 standard deviations from mean trading volume, those securities should be highlighted. IMD should also monitor bid/ask spread widening to forecast liquidity problems. • Implementation: Risk Analytics, Bloomberg, Trade Cost analytics service • Evidence: Trade cost analytics report, top 10 least liquid positions in each portfolio • Frequency: Semi‐Annually • Action: Discussion with the stakeholders.

E. Operational Risk


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1) Test Business Continuity Plan: Review report of the IMSS test of the business continuity test • Implementation: Manual • Evidence: Report of the testing • Frequency: Annually • Action: Discussion with the management to remediate the identified issues.

2) Test Disaster Recovery Plan: Review report of the IMSS test of the Disaster Recovery test. All

mission critical applications should be failed over and be operated from the DR site for two days per month to test the adequacy of the DR infrastructure. Moreover, DR site personnel should not be informed about the pending failover testing to ensure their readiness in unexpected failover. • Implementation: Manual • Evidence: Report of the testing • Frequency: Annually • Action: Discussion with the management to remediate the identified issues.

3) Lessons Learned: All BC/DC scenarios shall be tested as indicated by the BC/DR policy and the

risk manual. Lessons learned session should evaluate what worked and what did not work and where the improvements can be made. In addition all other incidences (failed trades, compliance issues etc) shall also be reviewed as part of the lessons learned session. • Implementation: Manual • Evidence: Report of the testing and Lessons learned report • Frequency: semi‐annually • Action: Discussion with the management to improve the existing process and remediate the

identified problems.

4) White Pages: Review the accuracy of White Pages contact information for key personnel. Test the contact information by making calls and emails. • Implementation: Manual • Evidence: Test Report • Frequency: Annually • Action: Discussion with the management to remediate the identified issues.

5) Remote Work Plan: all Key personnel should work from home one day a month to test the

remote connectivity. Whole IMD should work from home/remote work site one day a year to test remote connectivity. • Implementation: Manual • Evidence: Test Report • Frequency: Annually • Action: Discussion with the management to remediate the identified issues.

6) Trade Errors Monitoring: IMD has a policy to mitigate the probability of trade errors.

Automated trade order system has a workflow which employs four‐eye principle to protect


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against erroneous trade orders. Risk group uses daily trade blotter to also look for trade order errors. • Implementation: Semi‐Automated • Evidence: Trade Blotter • Frequency: Daily • Action: Discussion with the management to remediate the identified issues.

7) Ten Continuous Annual Leave Days: All key personnel must take ten continuous annual leave days. • Implementation: Manual • Evidence: Leave Reports • Frequency: Annually • Action: Discussion with the management to remediate the identified issues.

8) Cash Management: Cash Management for various trading activities is an important function. IMD produces cash forecast and cash position in various currencies.

• Implementation: Manual, Custodian and MRK reports, Charles River Trade Order System • Evidence: Cash Management and Currency Forecast reports • Frequency: Monthly • Action: In case of overdraft situations, discussion with the relevant parties.

9) Accounting Standards Implementation: Compliance with IPSAS, UNAS, IFRS and GAAP is a

requirement and IMD should ensure all statements have right accounting treatment. IMD should also get annual certification from the portfolio accounting system for the compliance with the relevant accounting standards.

• Implementation: Manual, Portfolio Accounting and Reconciliation System, Independent Audit

• Evidence: Independent Auditor Report • Frequency: Annually • Action: Discussion with the senior management.

10) Internal and external Fraud, Conflict of Interest: IMD should review trading processes, trace

sample trades through whole life‐cycle, require personal trading clearance from the compliance group, reconcile account balances with trades and require financial disclosures. Other Fraud detection methodologies shall be employed if required. IMD should also look for signs of fraud with external counterparties (front running etc) by performing due diligences on them on a periodic basis.


43

• Implementation: Manual, Portfolio Accounting and Reconciliation System, Independent Audit, Due Diligence Visits

• Evidence: Reconciliation Reports, IMD reports on sample trades. • Frequency: Annually • Action: Discussion with the senior management.

11) Effectiveness and efficiency of Trading, Operations and Investment Controls: Review all

controls; automated and manual. Take sample trades and follow the whole lifecycle including tear sheets, trade approval, settlement, accounting etc. Highlight the controls which can be automated or can be made more efficient. Highlight the controls which are weak.

• Implementation: Manual • Evidence: Operations Report • Frequency: Annually • Action: Discussion with Senior Management

12) Succession Planning: Ensure that all the important functions have secondary and tertiary back

personnel and systems. Review business continuity process. Monitor vacations schedule and back up personnel memos.

• Implementation: Manual • Evidence: Memo, Business Continuity Guidelines • Frequency: Quarterly • Action: Discussion with Senior Management

13) IT Outsourcing Vendor performance evaluation : All IT services which involve external counterparties, shall be evaluated to ensure all the SLAs are met and detect any trend in terms of service deterioration.

• Implementation: Manual • Evidence: Performance Evaluation Report • Frequency: Annually • Action: Discussion with Senior Management, Vendor, OLA and PD.

14) IT Change Management: Change management process is critical for mission critical

applications as it can disrupt the trading activities of the IMD. IMD shall evaluate the effectiveness of the change management process to ensure it is keeping up with the business requirements.

• Implementation: Manual • Evidence: Change Management evaluation report. • Frequency: Annually


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• Action: Discussion with Senior Management, Vendor, OLA and PD.

15) Password Management: Password sharing for mission critical applications like Online Trade Order Management System, SWIFT etc is strictly forbidden. The Risk group, along with the Information Technology group, must regularly interview the IMD staff and arrange education sessions to refresh the information security guidelines. All breaches are considered high impact breaches and disciplinary action may be initiated.

• Implementation: Manual • Evidence: Information Security Guidelines & Training Schedule • Frequency: Annually • Action: Discussion with Senior Management

16) IMD Staff Travel: The Director and two Deputy Directors do not travel on the same plane to

ensure adequate coverage in case of unfortunate plane crash.

• Implementation: Manual • Evidence: Memo, • Frequency: Whenever travel needs arise • Action: Authorization from RSG

17) Maintaining distribution lists: Various IMD reports from IMD and counterparties are

distributed to various stakeholders. Most of the time these stake holders distribution is maintained by distribution lists. When IMD staff moves (retires, quit, move to another part of the organization), the distribution lists should be updated. Compliance group should review all the distribution lists to ensure it has right members.

• Implementation: Manual • Evidence: Distribution Lists • Frequency: Quarterly • Action: update the list

F. Currency Risk TBD. Pending RiskMetrics Implementation

G. Legal and Contract Risk 1) Countries with Tax Exemptions: The Fund should only initiate investments in countries where

the fund has been granted tax exemptions. Legal section must have a letter on file indicating the UN tax exemption status from every country where it invests. • Implementation: Manual • Evidence: Tax Exemption Letter • Frequency: Annually


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• Action: Discussion with the portfolio managers and the mission, memos to the mission and quantification of actual taxes withheld. Halt in investment in the country where tax exemption issue is persistent and cannot be resolved. Seek external counsel to recover already withheld taxes.

2) Contract Renewal: The Fund shall maintain the contract renewal calendar and start the process of renewal well before the actual expiry of the contract to secure the funding and ensure time for legal review. • Implementation: Manual, outlook calendar • Evidence: Contract Expiry calendar for two years • Frequency: Annually • Action: Alert to legal and relevant department for the expiry of the contract.

3) Contract Review: Review all legal contracts with all counterparties at the time of renewal and

on‐demand basis. • Implementation: Manual, outlook calendar • Evidence: Review Report • Frequency: on demand • Action: as advised by the legal officer

4) Contract Issue Management: A brief from the legal officer about the high legal risks in

contracts. • Implementation: Manual • Evidence: Review Report • Frequency: Semi‐Annually • Action: Contact Officer Of Legal Affairs, Procurement Division or any relevant counterparty.

5) Legal contracts review for foreign jurisdiction: All legal contracts in which IMD is counterparty in a foreign jurisdiction, based on the IMD legal office opinion, and must be reviewed by external independent legal resource. • Implementation: Manual • Evidence: Review Report, memo from IMD legal office about the need of external review. • Frequency: Semi‐Annually • Action: Discussion with IMD legal officer

6) Proxy Voting Review: Proxy voting is an important instrument by which IMD can exert an

effective voice in corporate governance. IMD shall review its record of proxy voting. It should evaluate how many proxy votes were applied by default and for how many IMD made a conscious decision for proxy voting. If IMD is employing the services of external consulting firms for proxy voting, then evaluate the performance of the firm. • Implementation: Manual • Evidence: Proxy Voting Record • Frequency: Semi‐Annually


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• Action: Discussion with IMD legal officer

7) Ensure Sufficiency and Quality of External Legal Counsel: IMD operates in many internal jurisdictions and faces legal challenges which can span across multiple jurisdictions. IMD legal team should evaluate the sufficiency and quality of external legal counsel. • Implementation: Manual • Evidence: Memo • Frequency: Semi‐Annually • Action: Discussion with IMD legal officer, Senior Management

H. Political and Sovereign Risk 1) Monitor Sovereign Rating: Fitch Ratings issues sovereign rating once a year. Rating indicate

political and economic outlook of a country. IMD shall maintain this rating and if a particular country is downgraded of which IMD holds the sovereign debt, risk group will issue an alert to all portfolio managers. • Implementation: Manual • Evidence: Fitch Sovereign Rating • Frequency: Semi‐Annually • Action: Discussion with the portfolio Manager

2) IC Committee Advisor Reports: Various advisors come to IC committee and issue an economic

outlook report about various geographies. Risk group study these report and initiate discussion with portfolio managers if it feels undue risk. • Implementation: Manual • Evidence: IC committee Advisor Reports • Frequency: Semi‐Annually • Action: Discussion with the portfolio Manager

I. Reporting Risk 1) Investment Performance Monitoring: Ensure that all the Investment performance reports

listed in the investment policies are produced in timely fashion

• Implementation: Manual, MRK, and Risk Analytics • Evidence: Performance Reports, Performance and Risk attribution reports • Frequency: Monthly • Action: Discussion with the reporting team.

2) GIPS Compliance Monitoring: Ensure all service providers which provide investment reports

are GIPS compliant. Maintain GIPS compliance certification for each service provider.

• Implementation: Manual, MRK • Evidence: Self Certification letter from all vendors


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• Frequency: Annually • Action: Discussion with PD, OLA, Legal Officers and Vendors.

3) Information Security, Privacy & Records retention: Review Information security and privacy

plan. Information security plan should address secure dissemination of information, internal access control and protection of IMD data from unauthorized access. Privacy aspects should address how IMD maintains the access to personal information to ensure privacy and confidentiality of information. The policy should also address record retention, scanning policy and more importantly, records destruction policy. At a minimum, all material trading records should be maintained for 7 years.

• Implementation: Manual • Evidence: Information security plan • Frequency: Annually • Action: Discussion with Senior Management

4) Minutes for important investment meetings: Minutes for the following meetings shall be kept

for the record. a. Weekly Investment Meeting b. Quarterly Asset Allocation meeting c. Investment Committee meeting d. Pension Board meeting

• Implementation: Manual • Evidence: Minutes Documents • Frequency: Annually • Action: Discussion with the management to remediate the identified issues.

J. Reputational Risk Reputational risk pertains to events or news which can cast IMD staff and process in negative lights.

1) Monitor Compliance with all the risk controls: Ensure that all risk controls are implemented and reported on timely basis.

• Implementation: Manual • Evidence: Reports as mentioned in various risk controls • Frequency: Quarterly • Action: Discussion with Senior Management

2) Information Dissemination and One Voice: All the reports which are sent outside of IMD

(Secretariat, Pension Board, Various Committees etc) are reviewed by the Director and if needed by the RSG. All reports are distributed in secured PDF format. Dissemination of reports in any format other than secured PDF format can only be done at the discretion of the RSG. Reports


48

must have proper disclaimers if the data provided is not fully audited. Request for external reports must be routed through the Director. Disclaimer should also clearly indicate that reproduction of reports provided by IMD in any form is prohibited unless pre cleared by the RSG. No one is permitted to talk to external news organization and press without proper clearance from the Director and the RSG.

• Implementation: Manual • Evidence: Reports which meet dissemination policy, distribution list for all IMD reports • Frequency: Quarterly • Action: Discussion with Senior Management

3) Proactive co‐operation with all audit bodies: Ensure that all audit requests for information are

satisfied in a timely manner and all audit recommendations are addressed in a timely manner.

• Implementation: Manual • Evidence: Master Project Plan, Audit schedule, memos • Frequency: Annually • Action: Discussion with Senior Management

4) Late Payments: All late payment incidences should be fully documented and root cause analysis

should be performed.

• Implementation: Manual • Evidence: Late Payment Reports • Frequency: Quarterly • Action: Discussion with Senior Management

5) Compliance with PD rules: All stakeholders must take procurement training to understand what is needed to comply with procurement rules.

• Implementation: Manual • Evidence: Certificate of training • Frequency: Annually • Action: Discussion with Senior Management

6) Compliance with Personal trading and conflict of interest policy: All covered employees are

subject to financial disclosure and personal trading restrictions. All personal trades on a security over $5000 over the period of 60 days need to be approved by the compliance officer. In addition, all personal broker account statements need to be provided to the compliance group every quarter.

• Implementation: Manual


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• Evidence: Broker Statements, Personal trading permission forms • Frequency: on‐going • Action: Discussion with covered employees, senior management •

7) Compliance with gift policy: All gifts received by the covered employees above the threshold amount indicated in the gift policy shall be reported to the compliance group. In addition, every year every covered employee must certified that s/he has not received any gifts value of which is above limit indicated in the gift policy.

• Implementation: Manual • Evidence: Self Certification • Frequency: Annually • Action: Discussion with covered employees, senior management

8) Understanding the conflict of interest, gift policy: Annually all covered employees shall self

certify that they understand the conflict of interest and gift policy. Self certification is in the form a quiz which will be provided by the compliance group.

• Implementation: Manual • Evidence: Self Certification • Frequency: Annually • Action: Discussion with covered employees, senior management

9) Trade distribution across brokers: IMD monitors trade distribution across brokers determines

pattern about trade execution with brokers. IMD should seek to distribute trades across various brokers and not routing all trades to one particular broker even if other brokers in that market are available.

• Implementation: Manual, Charles River Trading, Custodian/MRK • Evidence: Trade Reports • Frequency: Quarterly • Action: Discussion with the traders, portfolio manager, chief investment officer and the

director

10) Complete all the mandatory trainings: All UN mandatory trainings must be completed by all qualified employees

• Implementation: Manual • Evidence: Certificate of trainings • Frequency: Annually • Action: Discussion with Senior Management


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11) Email surveillance: Risk and Compliance group will monitor all incoming and outgoing emails for inappropriate activities. A surveillance program will scan the emails for key words and in case of positive hit, full email would be reviewed to understand the nature of the email. Staff will be made aware of the surveillance program, however, the keywords which the surveillance program is scanning will not be shared with the staff.

• Implementation: Automated scanning by the surveillance program, manual review after the positive hit by the surveillance program

• Evidence: Surveillance program report, Compliance office report • Frequency: Quarterly • Action: Discussion with Senior Management


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VII. Appendix

A. Due Diligence Process for Hedge Fund Managers IMD shall implement a thorough due diligence process for hedge fund managers. The process should focus on

a. The Fund structure review b. Investment Strategy review c. Performance review d. Risk assessment e. Administrative review f. Legal review g. Reference checks

1. Investment Strategy review 1) IMD need to probe the investment objectives of the hedge fund, the investment process of the

fund manager, source of competitive advantage of the manager, the investment universe of the manager, general investment strategy of the fund and if the manager has a benchmark, characteristics of the benchmark. Does the manager uses the black box (algorithmic) proprietary investment process resulting in increased transparency risk?

2) Probe how the manager gains the information advantage? 3) IMD should obtain the documentation regard the type and style of the hedge fund strategy,

approach used within the strategy and the implementation process for the strategy. in addition the documentation should include the hedge fund investment markets and investment universe. Understand in detail the idea generation process.

2. The Fund Structure Review 1) How the hedge fund is organized as a business entity and what is the set up of the fund

manager’s operations. Review any registration the fund have with regulatory bodies, review the fund manager ownership including the key personnel in the firm and review the outside service providers to the managers. For the outside service providers, IMD should pay particular close attention to the reputation of external auditors, quality of audit, qualified opinions, and independence of the auditors, prime broker and legal counsel.

2) IMD should review where the fund manager is located, organization structure of the key personnel, education background and prior experience of the key personnel. Does the CFO have strong accounting background and experience to back up the complexity of the financial statements reporting? What is the hedge fund retention policy to keep key personnel and probe employee turnover.

3) Is the fund manager registered with SEC? if yes, than review the form ADV to get better understanding of the manager’s finances and operations. Is the fund registered with NFA


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(National Futures Association) or CFTC (Commodity Futures Trading Commission)? If yes, then IMD should review various filings made by the hedge fund managers. Confirm the date of original registration with the regulatory bodies and review the circumstances of there are outstanding civil, criminal or administrative actions pending against the hedge fund manager or against the key personnel.

4) IMD should obtain the current and last few years of annual audited financial statements and review any unqualified opinion from the auditors. If possible, IMD should also interview the prime broker and review the history of margin calls.

3. Performance Review 1) Though the hedge fund benchmarks have their own limitations, if the fund strategy uses

benchmarks, IMD should review the benchmarks and be comfortable with the limitations of the benchmark. Review the performance against the hurdle rate if the fund manager has a hurdle rate. IMD should obtain the current portfolio snapshot to assess long versus short exposure of the fund, cash the fund manager is keeping in the fund, portfolio concentration, and portfolio positioning relative to the current market conditions. If possible compare it with the past portfolio snapshots to detect any style or strategy drifts.

2) IMD should review how long the fund manager has been actively managing the fund, are the performance results are persistent? What is the process for withdrawals and are there gating mechanisms in place? When did the gating process put in place? Did the hedge fund change the asset allocation due to large withdrawals?

4. Risk assessment 1) What is the risk appetite of the hedge fund strategy? what risks are managed by the fund

manager? How does the fund manager measure the risk, what software tools it is using to measure the risk? Is the fund manager using the risk budgeting framework? Does the manager have good understanding of the model risk? What is the risk mitigation process and how the residual risk is quantified and managed. What is the disaster recovery and business continuity policy and how those plans are tested. What is the managers credit risk, and counterparty risk management methodology? What is the role of leverage in the fund strategy and the pattern of leverage over past few years. What is the VaR, Tracking error and other risk parameters for the fund?

5. Administrative Review 1) Review the operational issues that may affect the manager’s performance and relationship with

the clients. Review any civil, criminal or regulatory actions that may have been filed against the fund manager or key personnel. Review the pattern of employee turnover. Obtain the disaster recovery and business continuity plans.

2) Review in detail the operational risk assessment methodology of the fund. Does the fund categorize operational events in HFLI (High Frequency Low Impact) and LFHI (Low Frequency High impact) categories? What is the operational loss distribution? Gain insight into the


53

manager’s character. High employee turnover can be distraction to the fund. Interview some of the employees to gain insight into employee morale and retention policy. Obtain the list that includes the roles of current and departing employees and the departed employees in last three to five years.

3) Does the fund assign the account representative? If yes, then interview current and past clients to review the performance of the account representative.

6. Legal Review 1) If necessary, IMD should acquire the external legal counsel to review the partnership structure,

and the legal contracts which it may be subjected to. Review the fee structure and high watermark. Did the fund manager negotiated in past to lower the high watermark? Understand detailed insight of the fee structure and review all the filings the fund manager has made to various regulatory bodies. Are there any claw back provisions for the fees? Understand clearly any lockout periods and the process of withdrawals and notice period. Does the manager has maximum subscription amount?

2) Review the tax reclaims process.

7. Reference Checks 1) Interview outside auditors, current and past prime broker, and legal counsel. Interview current

and past clients. Are the financial reports are produced in timely manner? Is the hedge fund manager is responsive to questions and concerns? Has the fund manager maintains the investment process in a consistent manner? Do the existing clients have any concerns about the fund’s performance?

2) Perform the background checks and review and legal proceedings (past and current) against the key personnel of the fund.


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B. Gift & Entertainment Policy

1) When an IMD employee accepts a gift (including entertainment) from anyone who has, or is seeking to have, a business relationship with the Fund, it can create a situation in which the personal interests of the IMD staff member may conflict, or appear to conflict, with the interests of the Fund. Therefore, IMD staff members must use great caution in their interaction with suppliers or other third parties that have, or are seeking to have, a business relationship with the Fund.

1. Gifts 1) Because of this potential conflict of interest and the reputational risk to the UNJSPF the IMD has

adopted a Zero Tolerance for the receipt of gifts from suppliers, or other third parties that have, or are seeking to have, a business relationship with the Company. In no case may an IMD staff member accept a gift of any value.

2) In principle, UN staff members shall not accept any gift, honor, decoration or remuneration from any source without first obtaining the approval of the Secretary‐General2. Although Staff Rule3 permits the staff member to occasionally accept gifts of “essentially nominal value” as an exception, however in view of appearance of conflict of interest, IMD staff members are prohibited from accepting a gift of any value.

3) If the IMD staff member was to solicit a gift (including entertainment) from a third party as a condition to that third party receiving a benefit from the Fund, it would be wrong and would violate the requirement that IMD employees not use their positions at the Fund for personal gain. The IMD employees may not solicit, encourage or receive a payment, contribution, gift or favor that may influence a business decision.

2. Entertainment 1) The IMD Gift and Entertainment Policy does allow for reasonable, ordinary business

entertainment, but prohibits any events that may be perceived as extravagant or that involve lavish expenditures. The definition of business entertainment is any event in which the IMD staff person is accompanied by a host representative, and where the function relates to investments or other business activity. Most often these events are for the purposes of meeting company management or sell side analysts.

2) While there are no limits for either the dollar amount or the frequency of attendance for customary business breakfasts, lunches and dinners, at which both the IMD staff member and the company representative are present, common sense and good business practices should dictate responsible behavior. A reasonable dollar amount for a meal is acceptable. It should not be extravagant and should be consistent with sensible and common business practices.

2 Regulation 1.2 (j) through (l) of ST/SGB/2009/7, 16 June 2009 3 Staff Rule 101.2(j) and 101.2(k)


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Other entertainment events, such as sporting events, theater, movies, concerts, or other forms of entertainment conducted for business purposes are permitted, only under the following conditions:

a. The host must be present for the event unless there is an exigent circumstance. b. Acceptance is considered to be for a legitimate business purpose and is not for mere business

entertainment. There must be an opportunity to discuss matters related to the UNJSPF. c. Spouses or other family members of the employee may not attend the entertainment event or

any meals before or after the event. d. It is understood that attendance at any entertainment event that would reflect poorly on the UNJSPF of

the highest fiduciary and ethical standards should be avoided. For example, events involving adult entertainment or gambling must be avoided.

3. Offers of Hospitality

1) It is appreciated that in the discharge of a staff member duties associated with investment research and decision‐making, visits to a particular company, facility or asset mayor will be necessary. As a business courtesy it is common practice for hospitality to be offered. This can range from working lunches to dinners, to offers of tickets for sporting or cultural events or even holidays. When deciding whether or not to accept an offer made by an individual or entity, the following is to be adhered to:

a. Hospitality that includes overnight accommodation paid for by an individual or entity should not be accepted. Exceptionally, it may sometimes be appropriate to accept overnight hospitality, where there is no convenient alternative to the offeror’s accommodation and where the offer arises in connection with an official working visit. In those cases, the offeror should be compensated for the use of the accommodation, such compensation being based upon the normal and reasonable commercial rate applicable for that location.

b. Transport from the point of arrival (i.e. airport, train station etc.) to the place of accommodation should not be accepted, as terminal expenses, and travel and subsistence allowances are expected to cover such expenditure. Nevertheless local transportation, which is considered necessary in order to facilitate a timely and thorough assessment of the investment under consideration, may be accepted provided it is considered reasonable in the circumstances, forms part of the official visit and is approved by the Chief Compliance Officer, the Deputy Director for Risk Management or the Director of the IMD.


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2) Invitations offered by governments to attend luncheons, dinners, diplomatic receptions and other functions organized by the governments may be accepted as part of the staff member’s official functions in accordance with Staff Rule4.

4. Questions

1) All questions regarding interpretation of the IMD Gifts and Entertainment Policy should be referred to the IMD Chief Compliance Officer (CCO), who shall be responsible for resolving interpretations under Policy and communicating such matters to IMD employees as necessary.

4 Staff Rule 101.2(j) and 101.2(k)