10.1 Personal hedging

Where an appropriate remuneration policy is aligned with risks, it should be sufficiently effective and able to result in practice in a downward adjustment to the amount of variable remuneration awarded to staff and the application of malus and clawback arrangements.

Investment firms should ensure to the extent possible that identified staff members are not able to transfer the downside risks of variable remuneration to another party through hedging or certain types of insurance, e.g. by implementing policies for dealing in financial instruments and disclosure requirements.

Identified staff should be considered to have hedged the risk of a downward adjustment in remuneration if the identified staff member enters into a contract with a third party or the investment firm and either of the following conditions is met:

• a. the contract requires the third party or the investment firm to make payments directly or indirectly to the identified staff member that are linked to or commensurate with the amounts by which the staff member’s variable remuneration has been reduced;
• b. the identified staff member purchases or holds derivatives that are intended to hedge losses associated with financial instruments received as part of the variable remuneration.

Identified staff should be considered to have insured the risk of a downward adjustment where staff takes out an insurance contract with a stipulation to compensate them in the event of a downward adjustment in remuneration. This should in general not prevent taking out insurance to cover personal payments such as healthcare and mortgage instalments.

The requirement to not use personal hedging strategies or insurance to undermine the risk alignment effects embedded in their remuneration arrangements should apply to deferred and retained variable remuneration.

Investment firms should maintain effective arrangements to ensure that the identified staff member complies with the provisions of this section. At least a declaration of self-commitment by the identified staff member that he or she will refrain from concluding personal hedging strategies or insurances for the purpose of undermining the risk alignment effects is necessary. Where applicable, investment firms’ human resources or internal control functions should perform at least spot-check inspections of the compliance with this declaration with regard to the internal custodianship accounts. Such random checks should at least include the internal custodianship accounts of identified staff. Notification to the investment firm of any custodial accounts outside the investment firm should also be made mandatory.