GERMANY – Financial regulator BaFIN is set to introduce a set of guidelines covering the use of derivatives in investment funds.

The Bundesanstalt fuer Finanzdienstleistungsaufsicht is set this week to unveil new guidelines covering the use of derivatives, according to a lawyer who helped with the wording of the guidelines.

Till Entzian, a Frankfurt-based lawyer specialising in investment funds, said the move was necessary because there was no detailed regulations about derivatives in the recently passed investment fund law.

Entzian said BaFIN would present two approaches, ‘simple’ and ‘qualified’.

The simpler approach would build on a paper published by the European Commission’s DG Markt and would roughly follow the approach taken since 1998. This would enable derivatives exposure up to 200%.

The second approach, Entzian said, would propose a value-at-risk, or VAR, measure along with a ‘virtual fund’ for comparison. Derivative exposure would be able to be used according to a fund’s investment policy, he added. “Then you measure VAR in both the real and virtual fund.” This would then provide the exposure level.

He said it was unclear yet which was the better system, though people were now saying the qualified approach was easier.

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