6.15.1. Systems and controls requirements for Fund Managers of Credit Funds

(a) The Fund Manager of a Credit Fund must maintain systems and controls that include suitable, documented policies and procedures designed to ensure:

(i)     a Fund risk appetite statement is developed and incorporated into its investment process;

(ii)    that provision of Credit to a Borrower is only made based upon a sound assessment and pricing methodology;

(iii)  the ongoing monitoring of granted Credit, including policies for renewals and refinancing;

(iv)  that adequate risk management is undertaken, including in relation to credit risk and concentration risk;

(v)   the application of stress testing methodologies as set out in Section 6.15.2(e);

(vi)  the management of collateral;

(vii) that bad debt and impairments are identified and managed; and

(viii)                 the timely, appropriate and accurate valuation of Fund Property.

6.15.2. Eligible investments and diversification requirements

(a) The Fund Manager of a Credit Fund must not allow for Credit to be provided to, or for the benefit of:

(i)     a natural person;

(ii)    a Related Party;

(iii)  a Collective Investment Scheme;

(iv)  a Person intending to utilise such financing for the purpose of speculative investment; or

(v)   a Bank or lender.

(b) A Fund Manager must ensure that the investment strategy of a Credit Fund is designed to achieve a portfolio that meets the Fund’s specified diversification and concentration requirements within a stated period from the date of the Fund establishment.

(c) The investment strategy of a Credit Fund must limit the maximum exposure to a single borrower (or group of connected borrowers) to 25% of the NAV of the Fund unless otherwise approved by the AFSA.

(d) The Fund Manager must ensure that borrowing by a Credit Fund must not exceed 100% of the NAV of the Fund unless otherwise approved by the AFSA.

(e) The Fund Manager of a Credit Fund must have a comprehensive stress testing and scenario analysis programme that:

(i)       identifies possible events or future changes in economic conditions that could have unfavourable effects on the Credit Fund’s credit exposures and assess the Credit Fund’s ability to withstand such changes;

(ii)      requires the outcomes of applying stresses to be compared against internal risk limits established by the Fund Manager in respect of the Credit Fund;

(iii)     considers the evolution of both specific transactions and aggregate exposures, reflecting all forms of counterparty credit risk at the level of specific counterparties, across an appropriate time horizon that represents meaningful stress testing;

(iv)    provides at least semi-annual exposure stress testing of principal market risk factors such as interest rates, FX and credit spreads for all counterparties of the Credit Fund in order to identify and enable the Fund Manager to reduce significant concentrations, relative to the internal risk limits, and specific risks when necessary;

(v)     requires scenario analysis exercises to be undertaken at least annually and incorporates material risks including yield curve exposure and basis risks; and

(vi)     must be undertaken by qualified personnel not involved in the investment management process of the Credit Fund.

(f) The AFSA may direct the Fund Manager of a Credit Fund to conduct more frequent stress testing and scenario analysis.

(g) The results of stress testing and scenario analysis performed in accordance with Rules 6.15.2 (e)(i) and 6.15.2(e)(ii) must be reported without undue delay to the Governing Body of the Fund Manager. 

Guidance

The periodic stress testing and scenario analysis required by Rule 6.15.2(e) should be viewed as a minimum standard. The Fund Manager of a Credit Fund should consider the fund’s complexity, liquidity and risk profile when considering the frequency of stress testing and scenario analysis or, should a material risk be identified, whether ad hoc stress testing and scenario analysis should be undertaken.

Scenario analysis may reflect historical or hypothetical scenarios and should, at a minimum, address scenarios where:

(a)   severe economic or market events have occurred;

(b)   broad market liquidity has decreased significantly;

(c)   a large financial intermediary is liquidating positions and

(d)   the Credit Fund is required to liquidate assets during a period of extreme market stress.

The AFSA considers that the "stated period" referred to in Rule 6.15.2 (b) is to be one year.