CIU Correlation Test

When applying the correlation test outlined in Article 350(2b) to a given CIU position in order to determine the appropriate capital treatment for position risk, may an institution adjust the historical prices of the CIU to reflect solely those price movements which relate to the position risk of that CIU?

Where a CIU is denominated in the same currency as the currency of its underlying constituents, the only risk factor affecting the price of the CIU is the position risk factor. However the same CIU is often listed for trading on several different venues in several different currencies. It is industry convention that the majority of these CIUs are not currency hedged. In such cases, the price of the CIU will be dependent on both the position risk factor and the foreign exchange risk factor. For example, an ETF tracking the DAX index which is listed in Euro has a mandate to track the DAX index and we expect that it will comfortably pass the correlation test if it is being managed in line with its mandate. However, that same ETF may also be cross-listed in CHF. In terms of position risk, the benchmark tracking error reported by the ETF provider for the ETF denominated in CHF will be exactly the same as that of the ETF listed in Euro but the CIU may fail the correlation test as its listed price in CHF will also be affected by movements in the CHF/EUR FX rate. Given that Article 350 deals only with position risk and that the foreign exchange risk of CIU positions is dealt with effectively in Article 353 of the CRR, is it acceptable to adjust the price of the CIU to reflect only position risk before carrying out the correlation test in Article 350? Assuming the actual underlying positions will result in the true economic risk being correctly reflected for both position risk and foreign exchange risk. Failure to pass the correlation test results in institutions being forced to apply the punitive capital treatment outlined in Article 348 despite the fact that the CIUs are being managed in accordance with UCITS rules and their own prospectus documents. This renders it uneconomical to trade and market-make these positions.