Dimensional Funds

Enhanced due diligence for the quarter ended 30 September 2022

Enhanced due diligence trigger

An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail.

In the third quarter of 2022, the below Dimensional trusts (the trusts) were flagged for enhanced due diligence (EDD)

▪ Dimensional Global Core Equity Trust NZD Hedged Class

▪ Dimensional Global Sustainability Trust NZD Hedged Class

▪ Dimensional Five-Year Diversified Fixed Int. Trust NZD Class

▪ Dimensional Global Bond Sustainability Trust NZD Class

▪ Dimensional Global Bond Trust NZD Class

▪ Dimensional Two-Year Sustainability Fixed Int. Trust NZD Class

Nature of the EDD flag

The EDD flag was due to receiving notification from Dimensional via their quarterly checklist that they have engaged with BNP Paribas as an FX Hedge Counterparty.

Review

BNP Paribas is a French international banking group, founded in 2000 from the merger between Banque Nationale de Paris and Paribas, formerly known as the Banque de Paris et des Pays-Bas. The full name of the group's parent entity is BNP Paribas S.A. They have 190,000 employees worldwide and manage 2.6 trillion Euros as of 2021. BNP Paribas is also the ninth largest banking group in the world.

We have previously made contact with Dimensional Fund Advisers (DFA) via our scheduled monthly calls to discuss how they undertake due diligence on counterparties before introducing them to their funds. DFA confirmed by email as follows:

• The addition of new FX counterparties requires approval by the Investment Committee. All FX counterparties are reviewed and approved at least annually by the Investment Committee.

• We require that all approved 3rd party FX counterparties have an active IFEMA or ISDA contract signed on the account. These contracts provide legal protection for counterparties in the case there is a default.

• A daily process is run to identify if the net currency exposure with any counterparty is greater than 1% of Assets on an account-by-account basis. This exposure represents the total unrealized gain on any outstanding FX trade. When an account’s exposure is over 1%, we will stop entering into new FX trades with this counterparty until the number goes back under 1%. If we have a net exposure to a counterparty that begins to show signs of significant financial issues, we will look to close out our existing exposure to the counterparty.

• From a counterparty monitoring standpoint, two daily credit checks are performed:

• We have an internal tool created to aggregate market data, a report is generated to check the market implied credit quality of each counterparty. This report is continuously updated with market pricing which is then charted to look for potential signs of credit issues represented by widening credit spreads. An internal credit rating is then estimated based on this data for each individual pricing source. Any significant changes in credit quality are immediately passed along and used to discontinue/suspend trading relationships (This process has caused us to stop trading with multiple banks in the past and was later used to reinstate those same banks). All FX/derivative counterparties currently used by Dimensional are represented on this list.

• For accounts with a true minimum ratings requirement, a daily check is run in order to look for changes in the stated ratings (not the implied ratings) to determine eligible counterparties

Overall, Dimensional have a thorough process in place to manage a change in key party and we believe that this process mitigates any risk as a key party is introduced to Dimensional funds.

Conclusion

Dimensional’s approach to undertaking due diligence on counter parties is thorough. This is not limited to the initial DD, and due diligence on counterparties is an ongoing process. Overall exposure to any single counterparty is capped, significantly limiting single counterparty risk.

We remain satisfied that DFA are taking thorough measures to ensure that the funds will be managed appropriately, minimising risks for all parties.

Given all the above, the CIC assesses that the funds have passed this enhanced due diligence flag in relation to the engagement of BNP Paribas as an FX Hedge Counterparty

December 2022

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