1. (1)

   12This chapter applies in relation to ICVCs and AUTs which are not within transitional provision 14 and which:

   1. (a)

      were UCITS schemes when their authorisation order was made; or

   2. (b)

      were UCITS schemes immediately after any alteration to the scheme approved under section 251 of the Act or regulation 21 of the OEIC Regulations became effective.

2. (2)

   This section (CIS 5.1) applies to authorised fund managers and depositaries of schemes within (1).

This section (CIS 5.2) applies to authorised fund managers, in respect of UCITS schemes, except:

1. (1)

   CIS 5.2.12 R (2)(c) (Eligible markets: requirements) which applies to depositaries of UCITS schemes only;

2. (2)

   CIS 5.2.24 R (Requirement to cover sales) which applies to ICVCs which are UCITS schemes and the managers and trustees of AUTs which are UCITS schemes only;

3. (3)

   CIS 5.2.25 R (3) (OTC transactions in derivatives) which also applies to depositaries of UCITS schemes;

4. (4)

   CIS 5.2.29 R (Significant influence for ICVCs), which applies to ICVCs which are UCITS schemes only;

5. (5)

   CIS 5.2.30 R (Significant influence for managers of AUTs), which applies to managers of AUTs which are UCITS schemes only; and

6. (6)

   CIS 5.2.31 R (Concentration), which also applies to ICVCs, only which are UCITS schemes.

An authorised fund manager must ensure that, taking account of the investment objectives and policy of the authorised fund as stated in the most recently published prospectus of the authorised fund, the scheme property of the authorised fund aims to provide a prudent spread of risk.

1. (1)

   In this chapter, the value of the scheme property of an authorised fund means the net value of the scheme property determined in accordance with CIS 4.8 (Valuation) (for ICVCs and single-priced AUTs) or CIS 15.8 (Valuation) (for dual-priced AUTs), after deducting any outstanding borrowings, whether immediately due to be repaid or not.

2. (2)

   When valuing the scheme property for this chapter:

   1. (a)

      the time as at which the valuation is being carried out ("the relevant time") is treated as if it were a valuation point, but the valuation and the relevant time do not count as a valuation or a valuation point for the purposes of CIS 4 (for ICVCs and single-priced AUTs) and CIS 15 (for dual-priced AUTs);

   2. (b)

      initial outlay is regarded as remaining part of the scheme property;

   3. (c)

      if the authorised fund manager, having taken reasonable care, determines that the authorised fund will become entitled to any unrealised profit which has been made on account of a transaction in derivatives, that prospective entitlement is regarded as part of the scheme property; and

   4. (d)

      for a dual-priced AUT, when applying CIS 15.8.4 R (Valuation):

      1. (i)

         the cancellation basis only is required; and

      2. (ii)

         paragraphs 1 to 8, 11 and 23 are not applicable.

1. (1)

   Where a rule in this chapter allows a transaction to be entered into or an investment to be retained only if possible obligations arising out of the investment transactions or out of the retention would not cause any breach of any limits in this chapter, it must be assumed that the maximum possible liability of the authorised fund under any other of those rules has also to be provided for.

2. (2)

   Where a rule in this chapter permits an investment transaction to be entered into or an investment to be retained only if that investment transaction, or the retention, or other similar transactions, are covered:

   1. (a)

      it must be assumed that in applying any of those rules, the authorised fund must also simultaneously satisfy any other obligation relating to cover; and

   2. (b)

      no element of cover must be used more than once.

1. (1)

   Subject to this rule (CIS 5.2.9 R), a transferable security is an investment falling within article 76 (Shares etc), article 77 (Instruments creating or acknowledging indebtedness), article 78 (Government and public securities), article 79 (Instruments giving entitlement to investments) and article 80 (Certificates representing certain securities) of the Regulated Activities Order.

2. (2)

   An investment is not a transferable security if the title to it cannot be transferred, or can be transferred only with the consent of a third party.

3. (3)

   In applying (2) to an investment which is issued by a body corporate, and which is an investment falling within articles 76 (Shares, etc) or 77 (Instruments creating or acknowledging indebtedness) of the Regulated Activities Order, the need for any consent on the part of the body corporate or any members or debenture holders of it may be ignored.

4. (4)

   An investment is not a transferable security unless the liability of the holder of it to contribute to the debts of the issuer is limited to any amount for the time being unpaid by the holder of it in respect of the investment.

1. (1)

   The scheme property of a UCITS scheme must, except where otherwise provided in the rules in this chapter, only consist of any or all of:

   1. (a)

      transferable securities;

   2. (b)

      money market instruments permitted under CIS 5.2.20 R (Investment in money market instruments);

   3. (c)

      derivatives and forward transactions permitted under CIS 5.2.22 R (Permitted transactions (derivatives and forwards));

   4. (d)

      deposits permitted under CIS 5.2.28 R (Investment in deposits); and

   5. (e)

      units in collective investment schemes permitted under CIS 5.2.15 R (Investment in collective investment schemes).

2. (2)

   Transferable securities and money market instruments held within a scheme must (subject to (3) and (4)) be:

   1. (a)

      admitted to or dealt on an eligible market within CIS 5.2.12 R (1)(a) (Eligible markets: requirements); or

   2. (b)

      dealt on an eligible market within CIS 5.2.12 R (1)(b) ; or

   3. (c)

      dealt on an eligible market within CIS 5.2.12 R (2); or

   4. (d)

      in the case of a money-market instrument not within (a) to (c) above, within CIS 5.2.20 R (2) .1

3. (3)

   Not more than 10% in value of the scheme property of a UCITS scheme is to consist of transferable securities, which are not approved securities.

4. (4)

   Not more than 10% in value of the scheme property is to consist of money market instruments, which do not fall within CIS 5.2.20 R (Investment in money market instruments).

5. (5)

   CIS 5.2.13 R (Spread: general) and CIS 5.2.14 R (Spread: government and public securities) do not apply until the expiry of a period of six months after the date of effect of the authorisation order in respect of the authorised fund (or on which the initial offer commenced if later) provided that CIS 5.2.3 R (Prudent spread of risk) is complied with.

6. (6)

   The following sections also apply to UCITS schemes:

   1. (a)

      CIS 5.3 (Derivatives exposure)

   2. (b)

      CIS 5.4 (Stock lending); and

   3. (c)

      CIS 5.5 (Cash, borrowing, lending and other provisions).

1. (1)

   A market is eligible for the purposes of the rules in this sourcebook if it is:

   1. (a)

      a regulated market; or

   2. (b)

      a market in an EEA State which is regulated, operates regularly and is open to the public.

2. (2)

   A market not falling within (1) is eligible for the purposes of the rules in this sourcebook if:

   1. (a)

      the authorised fund manager, after consultation and notification with the depositary (and in the case of an ICVC, any other directors), decides that market is appropriate for investment of, or dealing in, the scheme property;

   2. (b)

      the market is included in a list in the prospectus; and

   3. (c)

      the depositary has taken reasonable care to determine that:

      1. (i)

         adequate custody arrangements can be provided for the investment dealt in on that market; and

      2. (ii)

         all reasonable steps have been taken by the authorised fund manager in deciding whether that market is eligible.

3. (3)

   In (2), a market must not be considered appropriate unless it:

   1. (a)

      is regulated;

   2. (b)

      operates regularly;

   3. (c)

      is recognised;

   4. (d)

      is open to the public;

   5. (e)

      is adequately liquid; and

   6. (f)

      has adequate arrangements for unimpeded transmission of income and capital to or to the order of investors.

1. (1)

   This rule (CIS 5.2.13 R) does not apply to government and public securities.

2. (2)

   For the purposes of this ruleCIS 5.2.13 R) companies included in the same group for the purposes of consolidated accounts as defined in accordance with Directive 83/349/EEC or in the same group in accordance with international accounting standards are regarded as a single body.

3. (3)

   Not more than 20% in value of the scheme property is to consist of deposits with a single body.

4. (4)

   Not more than 5% in value of the scheme property is to consist of transferable securities or money market instruments issued by any single body.

5. (5)

   The limit of 5% in (4) is raised to 10% in respect of up to 40% in value of the scheme property.

6. (6)

   In applying (4) and (5) certificates representing certain securities are treated as equivalent to the underlying security.

7. (7)

   The exposure to any one counterparty in an OTC derivative transaction must not exceed 5% in value of the scheme property. This limit is raised to 10% where the counterparty is an approved bank.2

8. (8)

   Not more than 20% in value of the scheme is to consist of transferable securities and money market instruments issued by the same group (as referred to in (2)).2

9. (9)

   Not more than 20% in value of the scheme is to consist of the units of any one collective investment scheme.

10. (10)

    In applying the limits in (3),(4),(5), (6) and (7), not more than 20% in value of the scheme property is to consist of any combination of two or more of the following:

    1. (a)

       transferable securities or money market instruments issued by; or

    2. (b)

       deposits made with; or

    3. (c)

       exposures from OTC derivatives transactions made with;

    a single body.

11. (11)

    [deleted]2

12. (12)

    For the purpose of calculating the limits in (7) and (10), the exposure in respect of an OTC derivative may be reduced to the extent that collateral is held in respect of it if the collateral meets each of the conditions specified in (13).3

13. (13)

    The conditions referred to in (12) are that the collateral:3

    1. (a)

       is marked-to-market on a daily basis and exceeds the value of the amount at risk;3

    2. (b)

       is exposed only to negligible risks (e.g. government bonds of first credit rating or cash) and is liquid;3

    3. (c)

       is held by a third party custodian not related to the provider or is legally secured from the consequences of a failure of a related party; and3

    4. (d)

       can be fully enforced by the UCITS scheme at any time.3

14. (14)

    For the purpose of calculating the limits in CIS 5.2.13 R (7) and CIS 5.2.13 R (10), OTC derivative positions with the same counterparty may be netted provided that the netting procedures:

    1. (a)

       comply with the conditions set out in Section 3 (Contractual netting (Contracts for novation and other netting agreements)) of Annex III to the Banking Consolidation Directive; and

    2. (b)

       are based on legally binding agreements.

15. (15)

    In applying this rule, all derivatives transactions are deemed to be free of counterparty risk if they are performed on an exchange where the clearing house meets each of the following conditions:

    1. (a)

       it is backed by an appropriate performance guarantee; and

    2. (b)

       it is characterised by a daily mark-to-market valuation of the derivative positions and an at least daily margining.

1. (1)

   This rule (CIS 5.2.14 R) applies to government and public securities ("such securities").2

2. (2)

   Where no more than 35% in value of the scheme property is invested in such securities issued by any one body, there is no limit on the amount which may be invested in such securities or in any one issue.

3. (3)

   An authorised fund may invest more than 35% in value of the scheme property in such securities issued by any one body provided that:

   1. (a)

      the authorised fund manager has before any such investment is made consulted with the depositary and as a result considers that the issuer of such securities is one which is appropriate in accordance with the investment objectives of the authorised fund;

   2. (b)

      no more than 30% in value of the scheme property consists of such securities of any one issue;

   3. (c)

      the scheme property includes such securities issued by that or another issuer, of at least six different issues; and

   4. (d)

      the disclosures in (4) have been made.

4. (4)

   Where it is intended that (3) may apply, the instrument constituting the scheme, and the most recently published prospectus, must clearly state:

   1. (a)

      the fact that more than 35% of the scheme property is or may be invested in such securities issued by one issuer;

   2. (b)

      the names of the States, the local authorities or public international bodies issuing such securities in which the authorised fund may invest over 35% of its assets.

5. (5)

   In this ruleCIS 5.2.14 R) in relation to such securities:

   1. (a)

      issue, issued and issuer include guarantee, guaranteed and guarantor; and

   2. (b)

      an issue differs from another if there is a difference as to repayment date, rate of interest, guarantor or other material terms of the issue.

A scheme may invest in units in a collective investment scheme provided that no more than 30% of the value of that investing scheme is in collective investment schemes which are not schemes which comply with the conditions necessary in order to enjoy the rights conferred by the UCITS Directive and only if the second scheme is permitted under (1) - (4):1

1. (1)

   it is a scheme which:

   1. (a)

      Complies with the conditions necessary for it to enjoy the rights conferred by the UCITS Directive; or

   2. (b)

      is recognised under the provisions of section 270 of the Act (Schemes authorised in designated countries or territories); or

   3. (c)

      is authorised as a non-UCITS retail scheme (provided the requirements of article 19(1)(e) of the UCITS Directive are met); or

   4. (d)

      is authorised in another EEA State (provided the requirements of article 19(1)(e) of the UCITS Directive are met);

2. (2)

   the second scheme must comply where relevant with CIS 5.2.18 R (Investment in other group schemes);

3. (3)

   the second scheme must have terms which prohibit more than 10% in value of the scheme property consisting of units in collective investment schemes; and

4. (4)

   for the purposes of this rule (CIS 5.2.15 R) and CIS 5.2.13 R (Spread: general) each sub-fund of an umbrella scheme is to be treated as if it were a separate scheme but no sub-fund of an umbrella scheme may invest in another sub-fund of that umbrella scheme.2

Units in a collective investment scheme do not fall within CIS 5.2.15 R (Investment in collective investment schemes) if that collective investment scheme is managed or operated by (or, if it is an ICVC, has as its ACD) the authorised fund manager of the investing authorised fund or an associate of that authorised fund manager, unless:

1. (1)

   the prospectus of the investing authorised fund clearly states that the property of that investing fund may include such units; and

2. (2)

   CIS 5.2.18 R (Investment in other group schemes) is complied with.

An authorised fund must not invest in or dispose of units in another collective investment scheme (the second scheme), which is managed or operated by (or in the case of an ICVC, whose ACD is), the authorised fund manager of such authorised fund, or an associate of that authorised fund manager, unless;

1. (1)

   the authorised fund manager of the authorised fund is under a duty to pay to the authorised fund by the close of business on the fourth business day next after the agreement to buy or to sell the amount referred to in (3) and (4);

2. (2)

   there is no charge in respect of the investment in or the disposal of units in the second scheme;

3. (3)

   on investment, either:

   1. (a)

      any amount by which the consideration paid by the authorised fund for the units in the second scheme exceeds the price that would have been paid for the benefit of the second scheme had the units been newly issued or sold by it; or

   2. (b)

      if such price cannot be ascertained by the authorised fund manager of the authorised fund, the maximum amount of any charge permitted to be made by the seller of units in the second scheme;

4. (4)

   on disposal, the amount of any charge made for the account of the authorised fund manager or operator of the second scheme or an associate of any of them in respect of the disposal; and

5. (5)

   In (1), (2), (3) and (4):

   1. (a)

      any addition to or deduction from the consideration paid on the acquisition or disposal of units in the second scheme, which is applied for the benefit of the second scheme and is, or is like, a dilution levy made in accordance with CIS 4.6.3 R (for ICVCs and single-priced AUTs) or SDRT provision made in accordance with CIS 4.6.3 R (for ICVCs and single-priced AUTs) or CIS 15.6.3 R (for dual-priced AUTs) is to be treated as part of the price of the units and not as part of any charge; and

   2. (b)

      any charge made in respect of an exchange of units in one sub-fund or separate part of the second scheme for units in another sub-fund or separate part of that scheme is to be included as part of the consideration paid for the units.

1. (1)

   Where a UCITS scheme invests in a warrant, the exposure created by the exercise of the right conferred by the warrant must not exceed the limits in CIS 5.2.13 R (Spread: general) and CIS 5.2.14 R (Spread: government and public securities).2

2. (2)

   A transferable security on which any sum is unpaid falls within a power of investment only if it is reasonably foreseeable that the amount of any existing and potential call for any sum unpaid could be paid by the authorised fund, at the time when payment is required, without contravening the rules in this chapter.

3. (3)

   [deleted]2

A UCITS scheme may invest in money market instruments which are dealt in on the money market, are liquid and whose value can be accurately determined at any time, provided:2

1. (1)

   the money market instrument is within CIS 5.2.10 R (2)(a) -(c); or1

2. (2)

   the money market instrument is:

   1. (a)

      issued or guaranteed by a central, regional or local authority, a central bank of an EEA State, the European Central Bank, the European Union or the European Investment Bank, a non-EEA State or, in the case of a Federal State, by one of the members making up the federation, or by a public international body to which one or more EEA States belong; or

   2. (b)

      issued by a body, any securities of which are dealt in on an eligible market; or

   3. (c)

      issued or guaranteed by an establishment subject to prudential supervision in accordance with criteria defined by Community law or by an establishment which is subject to and complies with prudential rules considered by the FSA to be at least as stringent as those laid down by Community law.

1. (1)

   A transaction in derivatives or a forward transaction must not be effected for a scheme unless:

   1. (a)

      the transaction is of a kind specified in CIS 5.2.22 R (Permitted transactions (derivatives and forwards)); and

   2. (b)

      the transaction is covered, as required by CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions).

2. (2)

   Where a scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in CIS 5.2.13 R (Spread: general) and CIS 5.2.14 R (Spread: government and public securities) save as provided in (4).

3. (3)

   Where a transferable security or money market instrument embeds a derivative, this must be taken into account for the purposes of complying with this section (CIS 5.2).

4. (4)

   Where a scheme invests in an index based derivative, provided the relevant index falls within CIS 5.2.34 R (Relevant indices) the underlying constituents of the index do not have to be taken into account for the purposes of CIS 5.2.13 R (Spread: general) and CIS 5.2.14 R (Spread: government and public securities).

5. (5)

   The relaxation in (4) is subject to the authorised fund manager taking account of CIS 5.2.3 R (Prudent spread of risk).

1. (1)

   A transaction in a derivative must

   1. (a)

      (a) be in an approved derivative; or

   2. (b)

      be one which complies with CIS 5.2.25 R (OTC transactions in derivatives).

2. (2)

   A transaction in a derivative must have the underlying consisting of any or all of the following to which the scheme is dedicated:

   1. (a)

      transferable securities;

   2. (b)

      money market instruments permitted under CIS 5.2.20 R (Investment in money market instruments);

   3. (c)

      deposits permitted under CIS 5.2.28 R (Investment in deposits);

   4. (d)

      derivatives permitted under this rule (CIS 5.2.22 R);

   5. (e)

      collective investment scheme units permitted under CIS 5.2.15 R (Investment in collective investment schemes);

   6. (f)

      financial indices;

   7. (g)

      interest rates

   8. (h)

      foreign exchange rates; and

   9. (i)

      currencies.

3. (3)

   A transaction in an approved derivative must be effected on or under the rules of an eligible derivatives market.

4. (4)

   A transaction in a derivative must not cause a scheme to diverge from its investment objectives as stated in the instrument constituting the scheme and the most recently published prospectus.

5. (5)

   A transaction in a derivative must not be entered into if the intended effect is to create the potential for an uncovered sale of one or more, transferable securities, money market instruments, units in collective investment schemes, or derivativesprovided that a sale is not to be considered as uncovered if the conditions in CIS 5.2.24 R (3) (Requirement to cover sales) are satisfied.3

6. (6)

   Any forward transaction must be with an approved counterparty under CIS 5.2.25 R (2) (OTC transactions in derivatives).2

A derivative or forward transaction (which is a permitted transaction under CIS 5.2.22 R (Permitted transactions (derivatives and forwards)) which will or could lead to the delivery of property for the account of the ICVC or to the trustee for the account of the AUT may be entered into only if:

1. (1)

   that property can be held for the account of the ICVC or can be held by the AUT; and

2. (2)

   the authorised fund manager having taken reasonable care determines that delivery of the property under the transaction will not occur or will not lead to a breach of the rules in this sourcebook

1. (1)

   No agreement by or on behalf of an ICVC or on behalf of an AUT to dispose of property or rights may be made:

   1. (a)

      unless the obligation to make the disposal and any other similar obligation could immediately be honoured by the authorised fund by delivery of property or the assignment (or, in Scotland, assignation) of rights; and

   2. (b)

      the property and rights at (a) are owned by the authorised fund at the time of the agreement.

2. (2)

   Paragraph (1) does not apply to a deposit.

3. (3)

   Paragraph (1) does not apply where:3

   1. (a)

      the risks of the underlying financial instrument of a derivative can be appropriately represented by another financial instrument and the underlying financial instrument is highly liquid; or3

   2. (b)

      the authorised fund manager or the depositary has the right to settle the derivative in cash, and cover exists within the scheme property which falls within one of the following asset classes:3

      1. (i)

         cash;3

      2. (ii)

         liquid debt instruments (e.g. government bonds of first credit rating) with appropriate safeguards (in particular, haircuts); or3

      3. (iii)

         other highly liquid assets having regard to their correlation with the underlying of the financial derivative instruments, subject to appropriate safeguards (e.g. haircuts where relevant).3

4. (4)

   In the asset classes referred to in (3), an asset may be considered as liquid where the instrument can be converted into cash in no more than seven business days at a price closely corresponding to the current valuation of the financial instrument on its own market.3

Any transaction in an OTC derivative under CIS 5.2.22 R (1)(b) must be:

1. (1)

   in a future or an option or a contract for differences;

2. (2)

   with an approved counterparty; a counterparty to a transaction in derivatives is approved only if the counterparty is:

   1. (a)

      an eligible institution or an approved bank; or

   2. (b)

      a person whose permission (including any requirements or limitations), as published in the FSA Register or whose Home State authorisation, permits it to enter into the transaction as principal off-exchange;

3. (3)

   on approved terms; the terms of the transaction in derivatives are approved only if, before the transaction is entered into, the depositary is satisfied that the counterparty has agreed with the ICVC or the manager:

   1. (a)

      to provide a reliable and verifiable valuation in respect of that transaction (which, for dual-priced AUTs should be on a buying and selling basis) at least daily and at any other time at the request of the ICVC or manager; and

   2. (b)

      that it will, at the request of the ICVC or manager, enter into a further transaction to close out that transaction at any time, at a fair value arrived at under the pricing model or other reliable basis agreed under (4); and

4. (4)

   capable of valuation; a transaction in derivatives is capable of valuation only if the authorised fund manager having taken reasonable care determines that, throughout the life of the derivative (if the transaction is entered into), it will be able to value the investment concerned with reasonable accuracy:

   1. (a)

      on the basis of the pricing model which has been agreed between the authorised fund manager and the depositary; or

   2. (b)

      on some other reliable basis reflecting an up-to-date market value which has been so agreed.

1. (1)

   An authorised fund manager must use a risk management process enabling it to monitor and measure as frequently as appropriate the risk of a scheme's derivatives and forwards positions and their contribution to the overall risk profile of the scheme.

2. (2)

   The following details of the risk management process must be notified by the authorised fund manager to the FSA in advance of the use of the process as required by (1) along with advance notification of any material alteration to such details:

   1. (a)

      the methods for estimating risks in derivative and forward transactions; and

   2. (b)

      the types of derivatives and forwards to be used within the scheme together with their underlying risks and any relevant quantitative limits.2

A UCITS scheme may invest in deposits only with an approved bank and which are repayable on demand or have the right to be withdrawn, and maturing in no more than 12 months.

1. (1)

   An ICVC must not acquire transferable securities issued by a body corporate and carrying rights to vote (whether or not on substantially all matters) at a general meeting of that body corporate if:

   1. (a)

      immediately before the acquisition, the aggregate of any such securities held by the ICVC gives the ICVC power significantly to influence the conduct of business of that body corporate; or

   2. (b)

      the acquisition gives the ICVC that power.

2. (2)

   For the purpose of (1), an ICVC is to be taken to have power significantly to influence the conduct of business of a body corporate if it can, because of the transferable securities held by it, exercise or control the exercise of 20% or more of the voting rights in that body corporate (disregarding for this purpose any temporary suspension of voting rights in respect of the transferable securities of that body corporate).

1. (1)

   A manager must not acquire, or cause to be acquired for an AUT of which it is the manager, transferable securities issued by a body corporate and carrying rights to vote (whether or not on substantially all matters) at a general meeting of the body corporate if:

   1. (a)

      immediately before the acquisition, the aggregate of any such securities held for that AUT, taken together with any such securities already held for other AUTs of which it is also the manager, gives the manager power significantly to influence the conduct of business of that body corporate; or

   2. (b)

      the acquisition gives the manager that power.

2. (2)

   In (1), a manager is to be taken to have power significantly to influence the conduct of business of a body corporate if it can, because of the transferable securities held for all the AUTs of which it is the manager, exercise or control the exercise of 20% or more of the voting rights in that body corporate (disregarding for this purpose any temporary suspension of voting rights in respect of the transferable securities of that body corporate).

A UCITS scheme:

1. (1)

   must not acquire transferable securities (other than debt securities) which:

   1. (a)

      do not carry a right to vote on any matter at a general meeting of the body corporate that issued them; and

   2. (b)

      represent more than 10% of those securities issued by that body corporate;

2. (2)

   must not acquire more than 10% of the debt securities issued by any single body;

3. (3)

   must not acquire more than 25% of the units in a collective investment scheme;

4. (4)

   must not acquire more than 10% of the money market instruments issued by any single body; and

5. (5)

   need not comply with the limits in (2), (3) and (4) if, at the time of acquisition, the net amount in issue of the relevant investment cannot be calculated.

1. (1)

   A UCITS scheme may invest up to 20% in value of the scheme property in shares and debentures which are issued by the same body where the investment policy of that scheme as stated in the most recently published prospectus is to replicate the composition of a relevant index as defined in CIS 5.2.34 R (Relevant indices).

2. (2)

   The limit in (1) can be raised for a particular UCITS scheme up to 35% in value of the scheme property, but only in respect of one body and where justified by exceptional market conditions.

The indices referred to in CIS 5.2.32 R (Schemes replicating an index) are those which satisfy the following criteria:

1. (1)

   the composition is sufficiently diversified;

2. (2)

   the index is a representative benchmark for the market to which it refers; and

3. (3)

   the index is published in an appropriate manner.

This section (CIS 5.3) applies to authorised fund managers of UCITS schemes except CIS 5.3.4 R, which applies to:

1. (1)

   ICVCs which are UCITS schemes; and

2. (2)

   to trustees of AUTs in respect of UCITS schemes.

1. (1)

   A transaction in derivatives or forward transaction is to be entered into only if the maximum exposure, in terms of the principal or notional principal created by the transaction to which the scheme is or may be committed by another person is covered globally under (2).

2. (2)

   Exposure is covered globally if adequate cover from within the scheme property is available to meet the scheme's total exposure, taking into account the value of the underlying assets, any reasonably foreseeable market movement, counterparty risk, and the time available to liquidate any positions.

3. (3)

   Cash not yet received into the scheme property but due to be received within one month is available as cover for the purposes of (2).

4. (4)

   Property the subject of a transaction under CIS 5.4 (Stock lending) is only available for cover if the authorised fund manager has taken reasonable care to determine that it is obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.

5. (5)

   The total3global3 exposure relating to derivatives held in a UCITS scheme may not exceed the net value of the scheme property2(Article 2(1) of the Commission Recommendation 2004/383/EC)3.

1. (1)

   Cash obtained from borrowing, and borrowing which the authorised fund manager reasonably regards as an eligible institution or an approved bank to be committed to provide, are not available for cover under CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions), save in compliance with (2).

2. (2)

   Where, for the purposes of this section (CIS 5.3), the ICVC or the trustee for the account of the AUT on the instructions of the manager:

   1. (a)

      borrows an amount of currency from an eligible institution or an approved bank; and

   2. (b)

      keeps an amount in another currency, at least equal to the borrowing for the time being in (a), on deposit with the lender (or his agent or nominee);

   this section applies as if the borrowed currency, and not the deposited currency, were part of the scheme property.1

An authorised fund manager must (as frequently as necessary), re-calculate the amount of cover required in respect of derivatives and forward positions already in existence under this section (CIS 5.3). Derivatives and rights under forward transactions under this section may be retained in the scheme property only so long as they remain covered globally under CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions).

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).

1. (1)

   CIS 5.5.2 R (1) and (2) (Cash and near cash) apply to authorised fund managers.

2. (2)

   CIS 5.5.3 R (General power to borrow) applies to ICVCs and trustees of AUTs, except CIS 5.5.3 R (3) and (4), which apply to authorised fund managers.

3. (3)

   CIS 5.5.4 R (Borrowing limits) applies to authorised fund managers.

4. (4)

   CIS 5.5.5 R (Restrictions on lending of money) applies to ICVCs or to managers and trustees, except for CIS 5.5.5 R (3), which applies to ICVCs.

5. (5)

   CIS 5.5.6 R (Restrictions on lending of property other than money) applies to ICVCs or managers and trustees, except for CIS 5.5.6 R (4)which applies to ICVCs or to depositaries of ICVCs.

6. (6)

   CIS 5.5.7 R (General power to accept or underwrite placings) applies to ICVCs or to managers.

7. (7)

   CIS 5.5.8 R (Guarantees and indemnities) applies to ICVCs or depositaries

1. (1)

   Cash and near cash must not be retained in the scheme property except to the extent that, where this may reasonably be regarded as necessary in order to enable:

   1. (a)

      the pursuit of the scheme's investment objectives; or

   2. (b)

      redemption of units; or

   3. (c)

      efficient management of the authorised fund in accordance with its investment objectives; or

   4. (d)

      other purposes which may reasonably be regarded as ancillary to the investment objectives of the authorised fund.

2. (2)

   During the period of the initial offer the scheme property may consist of cash and near cash without limitation.

1. (1)

   The ICVC or trustee (on the instructions of the manager) may, in accordance with this rule (CIS 5.5.3 R) and CIS 5.5.4 R, borrow money for the use of the authorised fund on terms that the borrowing is to be repayable out of the scheme property. This power to borrow is subject to the obligation of the authorised fund to comply with any restriction in the instrument constituting the scheme.

2. (2)

   The ICVC or trustee may borrow under (1) only from an eligible institution or an approved bank.

3. (3)

   The authorised fund manager must ensure that any borrowing is on a temporary basis and that borrowings are not persistent, and for this purpose the authorised fund manager must have regard in particular to:

   1. (a)

      the duration of any period of borrowing; and

   2. (b)

      the number of occasions on which resort is had to borrowing in any period.

4. (4)

   In addition to complying with (3), the authorised fund manager must ensure that no period of borrowing exceeds three months, whether in respect of any specific sum or at all, without the prior consent of the depositary; the depositary's consent may be given only on such conditions as appear to the depositary appropriate to ensure that the borrowing does not cease to be on a temporary basis only.

5. (5)

   This rule (CIS 5.5.3 R) does not apply to "back to back" borrowing under CIS 5.3.4 R (2) (Borrowing).

6. (6)

   An ICVC must not issue any debenture unless it acknowledges or creates a borrowing that complies with (1) to (4).

1. (1)

   The authorised fund manager must ensure that the authorised fund's borrowing does not, on any business day, exceed 10% of the value of the scheme property.

2. (2)

   This rule (CIS 5.5.4 R) does not apply to "back to back" borrowing under CIS 5.3.4 R (2).

3. (3)

   In this rule (CIS 5.5.4 R), "borrowing" includes, as well as borrowing in a conventional manner, any other arrangement (including a combination of derivatives) designed to achieve a temporary injection of money into the scheme property in the expectation that the sum will be repaid.

4. (4)

   [deleted]1For an ICVC, borrowing does not include any arrangement for the ICVC to pay to a third party (including the ACD) any costs which the ICVC is entitled to amortise under CIS 8.3.4 R(Set up costs) and which were paid on behalf of the ICVC by the third party.1

1. (1)

   None of the money in the scheme property of an authorised fund may be lent and, for the purposes of this prohibition, money is lent by an authorised fund if it is paid to a person ("the payee") on the basis that it should be repaid, whether or not by the payee.

2. (2)

   Acquiring a debenture is not lending for the purposes of (1); nor is the placing of money on deposit or in a current account.

3. (3)

   Paragraph (1) does not prevent an ICVC from providing an officer of the ICVC with funds to meet expenditure to be incurred by him for the purposes of the ICVC (or for the purposes of enabling him properly to perform his duties as an officer of the ICVC) or from doing anything to enable an officer to avoid incurring such expenditure.

1. (1)

   The scheme property of an authorised fund other than money must not be lent by way of deposit or otherwise.

2. (2)

   Transactions permitted by CIS 5.4 (Stock lending) are not lending for the purposes of (1).

3. (3)

   The scheme property of a UCITS scheme must not be mortgaged.

4. (4)

   Nothing in this rule (CIS 5.5.6 R) prevents the ICVC or the depositary at the request of the ICVC, or the trustee at the request of the manager, from lending, depositing, pledging or charging scheme property for margin requirements where transactions in derivatives or forward transactions are used for the account of the authorised fund in accordance with any other of the rules in this chapter.

1. (1)

   Any power in this chapter to invest in transferable securities may be used for the purpose of entering into transactions to which this rule (CIS 5.5.7 R) applies, subject to compliance with any restriction in the instrument constituting the scheme.

2. (2)

   This rule (CIS 5.5.7 R) applies, subject to (3), to any agreement or understanding:

   1. (a)

      which is an underwriting or sub-underwriting agreement; or

   2. (b)

      which contemplates that securities will or may be issued or subscribed for or acquired for the account of the authorised fund.

3. (3)

   Paragraph (2) does not apply to:

   1. (a)

      an option; or

   2. (b)

      a purchase of a transferable security which confers a right:

      1. (i)

         to subscribe for or acquire a transferable security; or

      2. (ii)

         to convert one transferable security into another.

4. (4)

   The exposure of an authorised fund to agreements and understandings within (2) must, on any business day:

   1. (a)

      be covered under CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions); and

   2. (b)

      be such that, if all possible obligations arising under them had immediately to be met in full, there would be no breach of any limit in this chapter.

1. (1)

   An ICVC or a depositary for the account of an authorised fund must not provide any guarantee or indemnity in respect of the obligation of any person.

2. (2)

   None of the scheme property of an authorised fund may be used to discharge any obligation arising under a guarantee or indemnity with respect to the obligation of any person.

3. (3)

   Paragraphs (1) and (2) do not apply to:

   1. (a)

      any indemnity or guarantee given for margin requirements where the derivatives or forward transactions are being used in accordance with the rules in this chapter;

   2. (b)

      for an ICVC:

      1. (i)

         an indemnity falling within the provisions of regulation 62(3) (Exemptions from liability to be void) of the OEIC Regulations;

      2. (ii)

         an indemnity (other than any provision in it which is void under regulation 62 of the OEIC regulations) given to the depositary against any liability incurred by it as a consequence of the safekeeping of any of the scheme property by it or by anyone retained by it to assist it to perform its function of the safekeeping of the scheme property; and

      3. (iii)

         an indemnity given to a person winding up a scheme if the indemnity is given for the purposes of arrangements by which the whole or part of the property of that scheme becomes the first property of the ICVC and the holders of units in that scheme become the first shareholders in the ICVC; and

   3. (c)

      for an AUT, an indemnity given to a person winding up a body corporate or other scheme in circumstances to which CIS 15.2.7 R (Creation of units) applies.