Securities-issuing institutions must devote more attention to the work of calculation agents

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Banks and other securities-issuing institutions should devote more attention to the manner in which the activities of calculation agents are structured. This is apparent from an exploratory investigation performed by the Netherlands Authority for the Financial Markets (AFM).

Bank employees who perform important calculations for implementing structured products, so-called 'calculation agents', have a great deal of personal discretionary power and may be confronted with conflicts of interest when performing their duties.

A calculation agent calculates what amounts in interest and/or repayment an investor in securities receives on the basis of the development of the underlying securities. Calculation agents are usually employees or departments of the institutions that issue the aforementioned securities. In other cases, the calculation agent’s duties are outsourced on a contract basis to another party.


The investigation presented three findings:

  • Institutions do not devote sufficient attention to the position of calculation agents within their organisation and possible conflicts of interest. This should be considered in relation to the various duties and responsibilities that calculation agents often have and their dependence on other departments within the organisation in the performance of their work as calculation agents.

  • As regards complex products whereby payment cannot be determined in an unambiguous manner, there is a latent risk that the calculation agent arrives at a wrong conclusion without the possibility of verification. The impression exists that fewer products with very complex and/or unclear calculations are being issued than before, but the risk remains.

  • When outsourcing the activities of the calculation agent to an external party, too little attention is devoted to the ethical and verifiable performance of the activities by this party. This external party can also be confronted with conflicts of interest if it also performs other roles with respect to the same securities, such as market maker and/or hedge counter party.

Based on these findings, today the AFM publishes a series of recommendations for securities-issuing institutions (See Annex). For example, the institution guarantees that the calculation agent does not harm the interests of investors. This is particularly important if the calculation agent also performs other activities. Furthermore it is important that the standard calculations to be made are rendered as 'objectifiable' as possible. Also, duties that are outsourced and the fact that these duties are performed in an expert and ethical manner are laid down in an agreement.

Reason and purpose of the investigation

The investigation concerning the role of the calculation originated from the AFM's prospectus supervision. In the assessed prospectuses of structured products, the comprehensive role of calculation agents is described. The prospectuses include calculation models of varying degrees of detail and complexity that must be applied by calculation agents. It was noted in that connection that the calculation agent sometimes has a far-reaching degree of discretionary power.

As part of securities-issuing institutions, calculation agents are also confronted with conflicts of interest. The providers of the relevant securities warn of these conflicts of interest in combination with with the agents’ discretionary powers, in the risk paragraphs of prospectuses. It was decided to perform an exploratory investigation in order to obtain greater insight into the activities of calculation agents, and the manner in which the position of calculation agent is embedded in the organisation of the securities-issuing institutions.

Scope and structure of the investigation

The investigation focuses on the activities of calculation agents concerning structured products offered in the Netherlands. Following several initial meetings with market parties, several investigations were conducted at several large providers on the basis of detailed questionnaires, including case reviews of products that were actually issued. Other institutions also received the questionnaires and answered in writing.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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