Article 132(4) of Solvency II Directive states that the use of derivatives shall be possible insofar as they contribute to a reduction of risks or facilitate efficient portfolio management. Consequently, efficient portfolio management would refer to cases where the purpose of using derivatives is not to cover risks but to create exposures in a more efficient way, including cost reduction, anticipate re-investments or income enhancement.  

In any case, the use of derivatives should be consistent with the objectives, strategy and procedures provided in the undertaking's risk management policy. In particular with respect to efficient portfolio management, Guideline 34 of EIOPA's Guidelines on system of governance provides that where derivatives are used to that aim, the undertaking should demonstrate how the quality, security, liquidity or profitability of the portfolio is improved without significant impairment of any of these features.

The use of derivatives to facilitate an efficient portfolio management should not result in a substantial change in the undertaking's risk profile or any material additional risks (e.g. unlimited or excessive losses) by considerably increasing the leverage of the portfolio. It would not be considered as efficient portfolio management if as a result of the use of derivative the investment portfolio is exposed to different risk exposures (i.e. in amount and/or type of risks) than the ones foreseen in the investment policy (except for the market and counterparty credit risk, different from the underlying exposure, created by the derivative itself). Speculative activities, such as naked short sales, excessive leverage or arbitrage strategy-driven products with high frequency of transactions, which may endanger the quality, security, profitability and liquidity of the overall portfolio would not be considered as facilitating effective portfolio management.