CIS 5A.3 Eligible markets regime

In order to protect investors, this sourcebook tries to ensure that markets on which investments of authorised funds are dealt in or traded on are of an adequate quality. To that effect, the eligible markets regime lays down a number of requirements relating to the nature of the markets in which the property of an authorised fund may be dealt in or traded. This regime is based on criteria in the UCITS directive.

1. (1)

   CIS 5A.3.3 R (Eligible markets: requirement) will involve authorised fund managers exercising integrity and competence in making a judgement as to what constitutes an eligible market.

2. (2)

   The guidance paragraphs in this section (CIS 5A.3) are indicative of the matters that authorised fund managers will need to take into account, using such information as is available to them, making inquiries as necessary, and taking advice as appropriate, in order to have taken reasonable care to determine that a market is eligible.

3. (3)

   The items listed in the guidance paragraphs are not necessarily exhaustive, nor are they in any particular order of relative importance. An overall view will need to be taken on each market.

1. (1)

   In considering whether a market is regulated, the authorised fund manager should assess whether the market is subject to supervision by an authority which is a statutory body, an agency of a national or State government, a department of a national government or another body designated for the purpose by one of these.

2. (2)

   In addition, the authorised fund manager should take account of any of (a) to (i):

   1. (a)

      the degree to which persons who are bound by rules of the market are subject to formal supervision by the market or another body, and in particular whether that supervision includes level of capital;

   2. (b)

      the powers of the market, or the supervising body, or both, to intervene in the business of persons who are bound by the rules of the market in the event of misconduct, financial difficulties or otherwise, including the power to reject applicants, terminate membership and de-list a security;

   3. (c)

      the initial listing standards and ongoing supervision of securities traded on the market including the publication of prospectuses and audited annual financial statements;

   4. (d)

      the everyday availability of current information about securities, derivatives, quotations, transactions, prices and spreads;

   5. (e)

      requirements for the issue of contract notes (or their equivalents);

   6. (f)

      whether there is a requirement for trade reporting to the market or other supervisory body of the securities or derivatives the authorised fund manager is intending to buy;

   7. (g)

      whether the clearance and settlements arrangements normally used for transactions on the market are prompt and secure;

   8. (h)

      the risk of loss in the event of insolvency of a person who is bound by the rules of the market; and

   9. (i)

      how the market investigates and deals with complaints.

1. (1)

   In considering whether a market is operating regularly, the authorised fund manager should assess whether the market has regular trading hours during which the investments listed or admitted to dealing may be dealt in.

2. (2)

   In addition, the authorised fund manager should take account of:

   1. (a)

      the availability and timing of price and volume information and the way it is distributed; and

   2. (b)

      in respect of securities, the degree to which, and the speed at which, companies listed on the market must release price-sensitive information, and the medium through which that information is distributed.

In considering whether a market or exchange is recognised, the authorised fund manager should assess whether the market is recognised or registered as a market or exchange or as a self-regulating organisation (or as both) by an authority which is a statutory body, or an agency of a national or State government or department of a national government or another body designated for the purpose by one of these.

1. (1)

   In considering whether a market is open to the public, the authorised fund manager should assess whether investments listed or admitted to dealing on the market are freely available for trading by the public directly, or through members of the market, during normal trading hours.

2. (2)

   In addition, the authorised fund manager should take account of the extent to which overseas investors are permitted to hold securities listed on the market.

In considering whether a market is adequately liquid, the authorised fund manager should assess:

1. (1)

   the overall liquidity of the market or exchange; whether securities or derivatives or both can be bought and sold in a reasonable time, at best execution and in adequate amounts; and

2. (2)

   the procedures and restrictions (if they exist) on the repatriation of funds to the United Kingdom, bearing in mind in particular the open-ended nature of a collective investment scheme and the requirement that the authorised fund manager must at all times during the dealing day be willing to redeem units, including large redemptions, at a price arrived at in accordance with CIS 4 (Single-pricing and dealing) or CIS 15 (Dual-pricing and dealing).

1. (1)

   The authorised fund manager should, after consultation with the depositary about safe custody:

   1. (a)

      for any particular market, consider all the characteristics mentioned in CIS 5A.3.3 R(3) and CIS 5A.3.3 R(4) of that market or the lack of them, and any other characteristics which are relevant, in order to reach a view on whether that market or exchange should be an eligible market, for approved securities and approved derivativeinvestment purposes; and

   2. (b)

      continue to take reasonable care to ensure that the market continues to exhibit the characteristics which led to it being considered eligible and that there are no events or characteristics which undermine that eligibility.

2. (2)

   Where a market ceases to be eligible, investments on that market will cease to be approved securities. The 10% restriction in CIS 5A.4.2 R(2) (Securities schemes: general) applies and, if necessary, the level of investment on that market must be reduced to ensure that this 10% limit is not exceeded. Exceeding the 10% limit because a market ceases to be eligible will generally be regarded as an inadvertent breach under CIS 7.5.3 R(Duties of the ACD and depositary: investment and borrowing powers) (in the case of an ICVC) and CIS 7.10.3 R (Duties of the manager and trustee: investment and borrowing powers). In addition, no new derivativesexposures on the investments that cease to be approved securities should be created.