CIS 5.4 Stock lending

This section (CIS 5.4) applies to depositaries of authorised funds which are UCITS schemes, except:

1. (1)

   CIS 5.4.3 R (Stock lending: general), which applies to ICVCs which are UCITS schemes, or to managers of AUTs which are UCITS schemes; and

2. (2)

   in the case of ICVCs, CIS 5.4.4 R (Permitted stock lending) which applies to ICVCs which are UCITS schemes if the ICVC enters into the stock lending agreement.

The stock lending permitted by this section (CIS 5.4) may be exercised by an authorised fund when it reasonably appears to the ICVC or to the manager to be appropriate to do so with a view to generating additional income for the authorised fund with an acceptable degree of risk.

1. (1)

   An ICVC, or the depositary at the request of the ICVC, or a the trustee at the request of the manager, may enter into a stock lending arrangement of the kind described in section 263B of the Taxation of Chargeable Gains Act 1992 (without extension by section 263C), but only if:

   1. (a)

      all the terms of the agreement under which securities are to be reacquired by the depositary for the account of the ICVC or by the trustee, are in a form which is acceptable to the depositary or to the trustee and are in accordance with good market practice;

   2. (b)

      the counterparty is an authorised person or a person authorised by a Home State regulator; and

   3. (c)

      collateral is obtained to secure the obligation of the counterparty under the terms referred to in (a) and the collateral is:

      1. (i)

         acceptable to the depositary;

      2. (ii)

         adequate within CIS 5.4.6 R(1); and

      3. (iii)

         sufficiently immediate within CIS 5.4.6 R(2).

2. (2)

   The counterparty for the purpose of (1) is the person who is obliged under the agreement referred to in (1)(a) to transfer to the depositary the securities transferred by the depositary under the stock lending arrangement or securities of the same kind.2

1. (1)

   Collateral is adequate for the purposes of this section (CIS 5.4) only if it:

   1. (a)

      is transferred to the depositary or its agent;

   2. (b)

      is at least equal in value, at the time of the transfer to the depositary, to the value of the securities transferred by the depositary; and

   3. (c)

      is in the form of one or more of:

      1. (i)

         cash; or

      2. (ii)

         government and public securities; or

      3. (iii)

         a certificate of deposit; or

      4. (iv)

         a letter of credit; or

      5. (v)

         securities transferred in CREST.

2. (2)

   Collateral is sufficiently immediate for the purposes of this section (CIS 5.4) if:

   1. (a)

      it is transferred before or at the time of the transfer of the securities by the depositary; or

   2. (b)

      the depositary takes reasonable care to determine at that time that it will be transferred at the latest by the close of business on the day of the transfer.

3. (3)

   The depositary must ensure that the value of the collateral at all times is at least equal to the value of the securities transferred by the depositary

4. (4)

   The duty in (3) may be regarded as satisfied in respect of collateral the validity of which is about to expire or has expired where the depositary takes reasonable care to determine that sufficient collateral will again be transferred at the latest by the close of business on the day of expiry.1

5. (5)

   Any agreement for transfer at a future date of securities or of collateral (or of the equivalent of either) under this section (CIS 5.4) may be regarded, for the purposes of valuation under CIS 4 (Single-pricing and dealing), CIS 15 (Dual-pricing and dealing) or this chapter, as an unconditional agreement for the sale or transfer of property, whether or not the property is part of the property of the authorised fund.

6. (6)

   Collateral transferred to the depositary is part of the scheme property for the purposes of the rules in this sourcebook, except in the following respects:

   1. (a)

      it does not fall to be included in any valuation for the purposes of CIS 4 (Single-pricing and dealing), or CIS 15 (Dual-pricing and dealing) or this chapter, because it is offset under (5) by an obligation to transfer; and

   2. (b)

      it does not count as scheme property for any purpose of this chapter other than this section (CIS 5.4).

7. (7)

   Paragraph (5) and (6)(a) do not apply to any valuation of collateral itself for the purposes of this section (CIS 5.4).

There is no limit on the value of the scheme property which may be the subject of stock lending transactions within this section (CIS 5.4).