Q & A Database
The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.
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ArchivedEffective: 1 November, 2012 - 31 December, 2019Categories: Cash FlowSource: GIPS Handbook, 3rd Edition
We are in the process of establishing our significant cash flow and large cash flow levels for each composite. We understand that establishing a significant cash flow policy is optional whereas for periods beginning on or after 1 January 2010, firms must define the level of large cash flow for each composite to determine when portfolios in a composite must be valued. Can the level used to define large cash flows and significant cash flows be the same? If not, does the level established for significant cash flows need to be greater than the level used for large cash flows?
The GIPS standards define a large cash flow as the level at which the firm determines that an external cash flow may distort performance if the portfolio is not valued. Firms must define large cash flow levels for each composite to determine when portfolios in that composite must be valued. Portfolios that experience a large cash flow remain in the composite (unless it is also a significant cash flow, as defined). The determination of the large cash flow level may be influenced by a variety of factors such as the nature of the strategy, historical and expected volatility of the strategy, and the targeted cash level of the strategy.
The GIPS standards define a significant cash flow as the level at which the firm determines that a client-directed external cash flow may temporarily prevent the firm from implementing the composite strategy, thereby causing the portfolio to no longer be representative of the composite strategy. Firms that choose to adopt a significant cash flow policy for certain composites must define the significant cash flow level on a composite-specific basis. Portfolios that subsequently experience a significant cash flow are then temporarily removed from the composite. The determination of the significant cash flow level may be influenced by a variety of factors such as market liquidity and the trading capabilities of the investment manager.
It is not expected that the level used to define large cash flows and significant cash flows will be the same. It is expected that the level used to define large cash flows will be less than the level established for significant cash flows because the cash flow amount that would cause a portfolio to be distorted and thus need to be valued typically does not rise to the level that disrupts the implementation of the investment strategy.
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