14.6 Enter into a Derivatives Agreement to Manage Risk

Policy Statement

Derivatives are financial instruments to hedge risk. They protect the value of an asset or limit a financial obligation by the University of Illinois System.

Only the Office of Investments may speculate in financial derivatives.

According to the Board of Trustees' policy, certain units may use derivatives to manage the risk of increased financial cost. Some examples include:

• Manage price risk more efficiently
• Take advantage of market opportunities to reduce debt service cost
• Reduce cost and price risk of energy commodities
• Improve response/reaction time to market fluctuations
• Reduce agricultural commodity price risk

Units may not enter into contracts for derivatives without consulting the Office of University of Accounting and Financial Reporting and obtaining the subsequent approval of the Chief Financial Officer.

Reason for the Policy

This policy establishes a restriction on units entering contracts for derivatives without first consulting the Office of University Accounting and Financial Reporting and obtaining the subsequent approval of the Chief Financial Officer.

Applicability of the Policy

This policy applies to units seeking to enter into derivative agreements.

Procedure

To enter into a derivatives agreement to manage risk, units must:

1. Conduct a risk evaluation to demonstrate a need for a derivative. Document that the unit has appropriate internal controls to manage the instrument according to the Board of Trustees' Derivatives Use Policy. If units need assistance in creating these two documents, they must consult with the Office of University Accounting and Financial Reporting.
2. Consult the Office of University Accounting and Financial Reporting who will help units find the appropriate way to meet their needs.