Policy clause
"Derivatives only for hedging": how to write it, test it and evidence it
A hedging-only clause permits derivatives that reduce risk, not ones that add exposure. Purpose cannot be read from positions, so part of the clause is an attestation. Acclimetry can pair a measurable proxy, a hedge ratio capped at 100%, with an attested obligation in one composite rule.
Derivatives may be used only for hedging purposes.
Questions to settle before it can be tested
- Hedging what: currency only, or interest-rate and equity risk too? Each hedged risk needs its own measurable proxy.
- Over-hedging: a hedge larger than its exposure is a position in its own right. A 100% ceiling on the hedge ratio catches it.
- Efficient portfolio management: UK pension law allows derivatives that reduce risk or facilitate efficient portfolio management. A hedging-only policy is narrower and should say so.
- Purpose: why a contract was entered is not in the data, so the manager attests to it on a schedule.
As a testable rule
Composite rule, operator AND, over two operands. The first is a hedge ratio rule per currency, hedge class FX forwards, hard maximum 100%; the second follows a quarterly attestation of purpose. The composite holds when both are compliant or in warning, and is not evaluated, never compliant, if either is not evaluated.
A testable wording and where it stops
Derivatives may be used only to reduce currency risk on assets held. In each currency, the notional of forwards may not exceed the value of the assets. The manager will confirm each quarter that every derivative hedged an identified exposure.
No rule can see intent, so the composite pairs a measured test with a signed one. The example below runs the measured operand; see composite rule logic and attestations.
Worked example
Forwards selling 1.98m dollars against 1.8m of dollar assets hedge 110%: the extra 180,000 is a short dollar position.
Rule template:hedge_ratio currency: USDhedgeClassNames: FX forwards
Bounds: hard max 100%
| Holding | Class | Currency | Market value | Notional |
|---|---|---|---|---|
| US equity fund | Equities | USD | 1,200,000 | – |
| US Treasury 4% 2029 | Government bonds | USD | 600,000 | – |
| Forward: sell USD, buy GBP, December 2026 | FX forwards | USD | -6,000 | 1,980,000 |
| UK equities | Equities | GBP | 2,206,000 | – |
| Group | Status | Value | Bounds | Headroom to the hard bound | Code |
|---|---|---|---|---|---|
| USD hedge ratio | Breach | 110% | ≤ 100% | -10% | ABOVE_HARD_MAXIMUM |
ABOVE_HARD_MAXIMUM: The measured value exceeds the approved hard maximum, beyond any stated tolerance.
Largest contributors: USD hedge ratio → Forward: sell USD, buy GBP, December 2026 110%
Computed at build time by the Acclimetry rule engine (backend commit 8197063); the same code runs in the product.
What each monitoring run records
Each run stores both operand results and the composite's own result, which names any failing operand. The hedge ratio lists its forwards as contributors; the attestation keeps the answers, attachments, reviewer and timestamps. A failed or overdue attestation opens a case like a breached limit.
Sources
- Occupational Pension Schemes (Investment) Regulations 2005, reg 4 · OGL v3.0 · Read on12 October 2026