MLC Investments
Derivative
Risk Statement
Fund Reference
Derivative Risk
Statement (Part A)
MLC Limited
ABN 90 000 000 402
105–153 Miller Street
North Sydney, NSW 2060
Australia
MLC Limited
(‘the Company’)
Fund Reference Derivative
Risk Statement (Part A)
1. Name of Collective
Investment
2. Objective of this
Statement
The Company is a member of the MLC
Group (‘MLC’).
The objective of this Statement
is to summarise the Company’s
approach to the use of derivatives.
Higher level monitoring controls
performed by MLC entities are
described in this Statement.
For the purposes of this Statement,
derivative means, ‘a financial contract
whose value depends on, or is derived
from, assets, liabilities or indices
(‘the underlying asset’). Derivative
transactions include a wide range
of instruments including forwards,
futures, options, swaps, share ratios,
warrants and other composites.
Investment Managers/Advisors
The Company has prepared this Fund
Reference Derivative Risk Statement
in its capacity as a life insurance
company, which offers investmentlinked policies and earning rate based
products (Products).
Under the investment-linked policies, the
benefit amount is directly related to the
market value of the investments held in
specific investment-linked products
maintained by the Company. While the
underlying assets are registered in the
name of the Company and the
investment-linked policy owner has no
direct access to the specific assets, the
contractual arrangements are such that
the investment-linked policy owner bears
the risks and rewards of the applicable
statutory fund’s investment performance.
The Company derives fee income from
the administration of its investmentlinked statutory funds.
Under the earning rate based products,
the policy owner’s benefit amount may
not be directly related to the market
value of the investments held within
specific products maintained by the
Company. Rather, the Company invests
in suitable assets, sometimes backed by
reserves (as required), which generate
earnings/bonuses that may be
distributed to policy holders.
A summary of each Product available to
investors is provided as an Appendix to
this Statement.
Page 01 Derivative Risk Statement
MLC adopts a manager-of-managers
approach. This involves the appointment
of specialist investment management/
advisory companies to manage
assets within each asset class. MLC
Limited does not directly manage
any of the investment assets.
MLC Limited may also invest into
certain asset classes via internal
pooling trusts. The trustee of these
trusts has also appointed specialist
investment managers/advisors. The
same selection process applies.
Each investment manager/advisor
is subject to a rigorous selection
process followed by ongoing monitoring
and review. MLC allows these
investment managers/advisors to
use derivatives to utilise opportunities
to increase return, to reduce risk
and to reduce transaction costs.
All derivative investments are made
under appropriate controls.
In the case of investment managers’/
advisors’ utilisation of derivatives,
detailed controls are listed in each
investment manager’s/advisor’s
detailed Derivative Risk Statement
Part B (DRS Part B) or equivalent,
which is provided to MLC.
Each investment management/
advisory organisation appointed by
the company or by the trustee of
the internal pooling trusts is bound
by an investment agreement (the
Agreement) entered into with the
particular company. The Agreement
is consistent with the underlying
investment strategy of the relevant
Product. The Agreement specifies:
• the part of the underlying investment
strategy that the investment manager/
advisor is to implement, and
• the policies to be applied when
derivatives are used by the investment
manager/advisor in implementing
the specific part of the underlying
investment strategy. These policies are
consistent with the Australian Prudential
Regulation Authority (APRA) guidelines
for Derivative Risk Statements.
The Company’s Board also
receives investment advice from
a Principal Investment Advisor.
The Principal Investment Advisor and
each investment manager/advisor
appointed by the Company’s Board for
each Product are listed in the Appendix.
The Company or the trustee of the internal
pooling trusts obtains a DRS Part B from
the relevant investment manager/advisor.
In the case of overseas investment
managers/advisors, an Internal Control
Document or similar is received.
4. Strategy Delegated
to Investment
Managers/Advisors
External Fund Managers
The Company allows investors to link
their life insurance policies to a selection
of approved investment products
offered by external fund managers.
The Company is fully responsible
to policy holders for the prudent
management and implementation of
the investment strategy (including the
use of derivatives) for each Product
managed by the Company.
A specially constituted committee
of the Company (‘the Committee’)
considers and grants approval of the
products offered by external fund
managers taking into consideration
robust approval criteria.
The Company retains a Principal
Investment Advisor, currently
National Corporate Investment
Services Limited (‘NCIS’).
Any external fund manager approved
under this criteria is bound by
the information that they submit
to MLC via a ‘Fund Manager
Questionnaire’ and by a ‘Fund
Manager Service Level Agreement’.
• recommendations to enable the
Company to determine overall
investment strategy in relation to
investment objectives and asset
allocation for each product; and
In relation to investment products
offered by external fund managers,
the company relies on the
representations or undertakings made
by the external fund managers.
The Company’s approach to
managing the use of derivatives in
relation to the appointed investment
managers/advisors, as outlined in
this Statement, does not apply to
these investment products offered
by the external fund managers.
3. Overall Investment
Strategy
The overall investment strategy of each
Product is detailed in information
memoranda or public offer documents
for that Product.
NCIS’s services include:
• investigation, evaluation, monitoring
and appointment/termination of
investment managers/advisors.
The services provided by investment
managers/advisors to the company
are outlined in the Agreements and
include provisions relating to:
• prudential standards of conduct;
• investment objectives;
• assets (including derivatives)
which can be held; and
• in the case of derivatives:
—— the purpose for which
derivatives may be used;
—— the type of derivatives which
may be used; and
—— the limits of derivatives’ use,
individually and in aggregate,
according to the objectives.
The Appendix lists for each Product
the area of the investment strategy
that has been delegated to an
investment manager/advisor.
The Company, together with NCIS,
conducts a regular ongoing review of
the performance of each investment
manager/advisor under their Agreement.
MLC conducts, or arranges to be
conducted on its behalf, monitoring
controls at entity level, including:
• Mandate monitoring - monitors the
compliance of each investment
manager/advisor with their
respective investment guidelines.
• Stress testing – shows the impact
on market values for each portfolio
holding options and details
effective exposure achieved
through derivatives, both before
and after the application of market
‘shocks’. If ‘stress tested’ effective
derivative exposure is greater
than cash or cash equivalents a
notional exception is raised.
• Counterparty exposure - monitors
the aggregate exposure to each
counterparty with respect to ‘over
the counter’ derivative transactions
entered into by the investment
manager/advisor. High levels
of concentration, or the use of
non-approved counterparties
is flagged.
• Effective derivative exposure –
values and monitors the actual
derivative exposure to ensure
sufficient cash is available to
meet transactional obligations.
In relation to the ongoing review and
monitoring of the products offered
by external fund managers, the
company utilises the investment
research resources of MLC.
Derivative Risk Statement Page 02
MLC Limited
(‘the Company’)
Fund Reference Derivative
Risk Statement (Part A)
5. Identification of
Manager Derivative
Risk Statement Part B
The majority of investment managers/
advisors appointed by the Company or
the trustee of the internal pooling trusts
have prepared a DRS Part B. Overseas
investment managers/advisors not
resident in Australia are not bound by the
APRA requirements to prepare a DRS
Part B. The Company accepts
substitutes from overseas investment
managers/advisors such as Internal
Control Documents.
Each investment manager/advisor has
confirmed that its DRS Part B or Internal
Control Document is subject to
external audit.
For each investment manager/advisor,
the specific DRS Part B or Internal Control
Document is obtained and reviewed.
Wherever the investment manager/
advisor updates their DRS Part B or
Internal Control Document, these are also
obtained and reviewed.
The effective date of the latest available
DRS Part B or Internal Control document
for each investment manager/advisor is
listed in the Appendix.
xternal ‘Fund Manager Service
E
Level Agreement’.
Each approved external fund manager is
required to sign a ‘Fund Manager
Service Level Agreement’. This
agreement sets out the requirement that
the external fund manager will manage
the use of derivatives in accordance with
their own DRS Part B.
6. Authorisation of
Use of Derivatives
The operations of the Company are
governed by the Life Insurance Act
1995. Section 43 permits life insurance
companies to invest in a manner that
is likely to further the business of their
statutory funds and investment products.
The Company is satisfied that:
• the use of derivatives is permitted by
the governing rules (which include
where relevant the information
memoranda, offer documents or
internal guidelines) of each Product.
• the use of derivatives is consistent
with the overall investment
strategy of each Product.
Where APRA’s requirements
are more restrictive, then those
requirements will be adhered to.
As outlined in Section 4, there
are rigid guidelines regarding the
use of derivatives in place.
7. Date of Authorisation
by the Company
The Company approved this
Fund Reference Derivative Risk
Statement on 25 November 2009.
MLC funds can invest in derivatives to:
• reduce risk;
• reduce transaction costs;
• take advantage of opportunities
to increase returns.
Whilst MLC allows the use of
derivatives, it is MLC’s policy that,
unless indicated otherwise:
• Derivatives will not be used to
increase the level of market risk
beyond that required to meet the
investment portfolio’s objective.
• Derivatives will not be used to create
economic leverage. Economic
leverage is where the portfolio’s
exposure to the return on a
market is greater than that which
could be achieved by investing
in that market without using
derivatives or borrowed funds.
• Derivatives will not be used to create
an uncovered short exposure
to an asset or market, ie a short
exposure without an offsetting long
exposure considered a reasonable
hedge for that asset or market.
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