Investment in derivatives must contribute to a reduction of investment risks or facilitate efficient portfolio management and such investments must be valued on a prudent basis, taking into account the underlying assets, and included in the valuation of the Company's assets. Investments in derivatives should be restricted to hedging purposes only. The Company must avoid excessive risk exposure to a single counterparty and to other derivative operations.
Prior to undertaking any derivative transactions, the Board of Directors of the Company is expected to ensure that:
It understands the scope and nature of derivative activities to be undertaken;
The derivative transactions are consistent with the investment and risk management policies of the Company;
Approved policies, systems and procedures that are commensurate with the level and nature of derivative activities to be undertaken by the Company are in place and have been clearly communicated to all levels of staff concerned; and
The Company has appropriate resources (e.g., competent, capable and qualified personnel), capacity and adequate infrastructure to effectively manage and monitor derivative positions.
The Company shall ensure that controls over derivatives and other investment instruments have been implemented and are adequate to ensure that risks are properly assessed, regularly reviewed in the light of changing market conditions and experience, and consistent with the overall investment strategy decided upon and approved by the Company.
The senior management of the Company shall put in place a written risk management policy, approved by the Board of Directors. In respect of derivative activities, the risk management policy shall cover the following primary components of risk management practices:
The purpose for which derivatives may be used;
The scope and types of permitted derivatives, including the risk tolerance level in respect of its derivative activities;
Procedures for the proper authorization of any change in significant risk management policies or procedures;
Procedures on authorization of new derivative products for use by the Company;
Restrictions on counterparties with whom derivative transactions may be executed;
Details on persons authorized to enter into derivative transactions and limits of authority;
Clear lines of responsibility for the monitoring and management of the Company's derivative positions;
Procedures for regular reporting to senior management and the Board of Directors on derivative activities; and
A provision for periodic review by the Board of Directors and senior management of the Company's risk management policy to gauge its effectiveness in managing risk exposures and to ensure that the policy remains consistent with the Company's corporate strategies and financial and management capabilities, particularly in the light of changing circumstances.