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  1. Point in time
    2006-06-01

CIS 5A.1 Introduction

Application

CIS 5A.1.1 R
  1. (1)

    This chapter applies in relation to ICVCs and AUTs which:

    1. (a)

      are not UCITS schemes; or

    2. (b)

      were UCITS schemes when their authorisation order was made and operate under Transitional provision 14.

  2. (2)

    This section (CIS 5A.1) applies to authorised fund managers and depositaries of schemes within (1).1

Application guidance

CIS 5A.1.2 G

This chapter applies to non UCITS schemes which are geared futures and options schemes, property schemes, money market schemes, futures and options schemes, fund of funds schemes, umbrella schemes which do not comply with the requirements of the UCITS Directive and feeder fund schemes. This chapter also applies to UCITS schemes within transitional provision 14 (securities schemes, warrant schemes, or an umbrella scheme consisting of sub-funds which would, if separately authorised be a securities scheme or a warrant scheme). Therefore, only the sections relevant to these fund types and the cross references contained within are of application. Cross references to other rules in the relevant section for each fund type should be applied in respect only of that relevant fund type.1

Purpose

CIS 5A.1.3 G

This chapter helps in achieving the regulatory objective of protecting consumers by laying down minimum standards for the investments that may be held by an authorised fund. In particular:

  1. (1)

    the proportion of transferable securities and derivatives that may be held by an authorised fund is restricted if those securities and derivatives are not listed on an eligible market; the intention of this is to restrict investment in transferable securities or derivatives that cannot be accurately valued and readily disposed of; and

  2. (2)

    authorised funds are required to comply with a number of investment rules that require the spreading of risk.

Explanation of this chapter

CIS 5A.1.4 G
  1. (1)

    Product Distinctiveness - CIS 2.1.4 R (Types of authorised fund) sets out the types of scheme. Each of these authorised fund types has distinct characteristics and can therefore only hold certain types of investments. The rules in this chapter outline the permitted investments for non UCITS schemes which are of the geared futures and options, property, money market, futures and options, fund of funds, non-UCITS compliant umbrella and feeder fund scheme type and for UCITS schemes within transitional provision 14. This ensures that the distinct character of each authorised fund is maintained.

  2. (2)

    Investment and borrowing powers. This chapter sets out investment and borrowing rules with which the following types of authorised fund must comply:

    1. (a)

      geared futures and options schemes;

    2. (b)

      property schemes;

    3. (c)

      money market schemes;

    4. (d)

      futures and options schemes;

    5. (e)

      fund of funds schemes;

    6. (f)

      feeder funds;

    7. (g)

      umbrella schemes which do not comply with the UCITS Directive; and

    8. (h)

      UCITS schemes under transitional provision 14.

  3. (3)

    Transitional provision 14 specifies the periods allowed under UCITS Amending Directive 2001/108/EC for UCITS schemes to continue under the narrower range of UCITS investment powers and more restricted disclosures and thus applies to:

    1. (a)

      UCITS schemes authorised on or before the entry into force (13 February 2002) of UCITS Amending Directive 2001/108/EC for a period of 5 years from that entry into force; or

    2. (b)

      UCITS schemes authorised after the entry into force of UCITS Amending Directive 2001/108/EC but before the entry into force of the rules in CIS 5A, for a period of two years from entry into force of the UCITS Amending Directive 2001/108/EC; or

    3. (c)

      UCITS schemes authorised under the rules in CIS 5A until 2 years from the entry into force of UCITS Amending Directive 2001/108/EC.1

Distinct meaning of certain terms

CIS 5A.1.5 G

Terms used in this sourcebook should be interpreted and applied as they are defined. However, because of the distinct nature of investments in which an authorised fund is permitted to invest, some of these terms are not always used in a way that corresponds with their usage in certain markets, for example, the term "warrants". In the CIS sourcebook "warrants" has a slightly wider meaning than is usually attributed to it in warrant markets. The definition of warrants reflects this distinction (see also CIS 5A.9.2 G(2))1

CIS 5A.1.6 G

[deleted]1

CIS 5A.2 General investment powers and limits for authorised funds

Application

CIS 5A.2.1 R

This section (CIS 5A.2) applies to authorised fund managers, except :

  1. (1)

    CIS 5A.2.13 R (Significant influence for ICVCs), which applies only to ICVCs;

  2. (2)

    CIS 5A.2.14 R (Significant influence for managers of AUTs), which applies only to managers of AUTs; and

  3. (3)

    CIS 5A.2.15 R (Concentration), which also applies to ICVCs.

Explanation of CIS 5A.2

CIS 5A.2.2 G

This section outlines some general investment rules, with which all authorised funds must comply, in order to ensure that they adhere to the same common standards. In line with requirements of the UCITS directive, this section also contains rules which would prevent an ICVC and a manager of an AUT from exercising influence over a body corporate.

Prudent spread of risk

CIS 5A.2.3 R

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.

Investment powers: general

CIS 5A.2.4 R
  1. (1)

    The scheme property of an authorised fund may, subject to the rules in this chapter, comprise any assets or investments to which it is dedicated. For ICVCs, the scheme property may also include movable or immovable property that is necessary for the direct pursuit of the ICVC's business of investing in those assets or investments.

  2. (2)

    The scheme property of each authorised fund must be invested only in accordance with the relevant provisions in this chapter that are applicable to that authorised fund and within any upper limit in this chapter. However, the instrument constituting the scheme may further restrict:

    1. (a)

      the kind of property in which the scheme property may be invested;

    2. (b)

      the proportion of the capital property of the authorised fund to be invested in assets of any description;

    3. (c)

      the descriptions of transactions permitted; and

    4. (d)

      the borrowing powers of the authorised fund.

Valuation

CIS 5A.2.5 R
  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 (including, in the case of a property scheme, any capital outstanding on a mortgage of an immovable), 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, CIS 15.8.4 R (Valuation) applies to any valuation of the scheme property for the purposes of this chapter, and in 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.

Valuation

CIS 5A.2.6 G

It should be noted that for the purpose of CIS 5A.2.5 R, CIS 4.8 or CIS 15.8 may be affected by specific provisions in this chapter such as, for example, CIS 5A.14.6 R (Stock lending: treatment of collateral) or CIS 12 (Special provisions for certain categories of scheme).

Chapter to be construed as a whole

CIS 5A.2.7 R
  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:

    1. (a)

      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; and

    2. (b)

      the scheme property must be valued in accordance with CIS 4.8 (Valuation) (for ICVCs and single-priced AUTs) or CIS 15.8 (Valuation) (for dual-priced AUTs).

  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.

Examples

CIS 5A.2.8 G

Examples of the "provisions" referred to in CIS 5A.2.7 R(1) are: CIS 5A.4.6 R (Investment in warrants and nil and partly paid securities) and CIS 5A.15.7 R (General power to accept or underwrite placings).

Transferable securities

CIS 5A.2.9 R
  1. (1)

    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.

  2. (2)

    In applying (1) 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.

  3. (3)

    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.

Investment in associated collective investment schemes

CIS 5A.2.10 R

Units in a collective investment scheme do not fall within CIS 5A.4.5 R (Securities Schemes : Investment in collective investment schemes), CIS 5A.5.3 R (2)(e) (Money market schemes: general), CIS 5A.6.7 R (Investment in collective investment schemes) (for futures and options schemes), CIS 5A.7.8 R (for geared futures and options schemes) or CIS 5A.8.7 R (for property 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 instrument constituting the scheme in which the authorised fund is investing states that investment by that scheme will be restricted or specialised in terms of a particular geographic area or economic sector;

  2. (2)

    the instrument constituting the scheme of the investing authorised fund and its prospectus clearly state that the property of the investing authorised fund may include such units; and

  3. (3)

    CIS 5A.2.11 R (Investment in other group schemes) is complied with.

Investment in other group schemes

CIS 5A.2.11 R
  1. (1)

    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):

    1. (a)

      the authorised fund manager of such authorised fund; or

    2. (b)

      an associate of that authorised fund manager;

    unless 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 (2) and (3).

  2. (2)

    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.

  3. (3)

    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.

  4. (4)

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

    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.

Investment in other collective investment schemes: interpretation

CIS 5A.2.12 R

Where a reference to an authorised fund of a particular type is made in CIS 5A.5.3 R (2)(e) (Money market schemes: general), CIS 5A.6.7 R (Investment in collective investment schemes) (for futures and options schemes), CIS 5A.7.8 R (for geared futures and options schemes) or CIS 5A.8.7 R (for property schemes), that reference is to be treated as a reference also to: 1

  1. (1)

    a sub-fund which would, if it were the subject of a separate authorisation order be an authorised fund of that particular type; and1

  2. (2)

    a separate part of a recognised scheme that is equivalent to a sub-fund within (1).

Significant influence for ICVCs

CIS 5A.2.13 R
  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).

  3. (3)

    This rule (CIS 5A.2.13 R) does not apply to investment by a property scheme in property related assets.

Significant influence for managers of AUTs

CIS 5A.2.14 R
  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).

  3. (3)

    This rule (CIS 5A.2.14 R) does not apply to investment by a property scheme in property related assets.

Concentration

CIS 5A.2.15 R

An authorised fund must not hold:

  1. (1)

    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)

    more than 10% of the debt securities issued by any single issuing body; and

  3. (3)

    except in the case of a fund of funds scheme and a feeder fund, more than 10% of the units in a collective investment scheme.

CIS 5A.2.16 G

In accordance with CIS 12.5.7 R (Investment and borrowing powers), CIS 5A.2.13 R, CIS 5A.2.14 R and CIS 5A.2.15 R will apply only at the level of the umbrella scheme.

CIS 5A.3 Eligible markets regime

Application

CIS 5A.3.1 R

This section (CIS 5A.3) applies to authorised fund managers, except CIS 5A.3.3 R (2)(d), which applies to depositaries.

Purpose

CIS 5A.3.2 G

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.

Eligible markets: requirements

CIS 5A.3.3 R
  1. (1)

    A securities market is eligible for the purposes of the rules in this sourcebook if it is a market established in an EEA State on which transferable securities admitted to the official list1 in the EEA State are dealt in or traded.

    1
  2. (2)

    A securities market not falling within (1) or a derivatives market is, at any time, eligible for the purposes of the rules in this sourcebook if:

    1. (a)

      the authorised fund manager, after consultation with the depositary (and in the case of an ICVC, any directors in addition to the ACD), has decided to choose that market as one which is appropriate for the purpose of investment of, or dealing in, the scheme property beyond, where appropriate, any limit which under the rules in this chapter would otherwise apply;

    2. (b)

      the decision is notified in writing to the depositary and has not been revoked;

    3. (c)

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

    4. (d)

      the depositary has taken reasonable care to determine that:

      1. (i)

        adequate custody arrangements can be provided for the investments dealt in on the market in question; and

      2. (ii)

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

  3. (3)

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

    1. (a)

      is regulated (CIS 5A.3.5 G);

    2. (b)

      operates regularly (CIS 5A.3.6 G);

    3. (c)

      is recognised (CIS 5A.3.7 G); and

    4. (d)

      is open to the public (CIS 5A.3.8 G).

  4. (4)

    In exercising the choice in (2), the authorised fund manager must have regard to:

    1. (a)

      whether the market is adequately liquid (CIS 5A.3.9 G); and

    2. (b)

      the arrangements relevant to the market for unimpeded transmission of income and capital to or to the order of investors.

Guidance on eligible markets: introduction

CIS 5A.3.4 G
  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.

Regulated

CIS 5A.3.5 G
  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.

Operating regularly

CIS 5A.3.6 G
  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.

Recognised

CIS 5A.3.7 G

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.

Open to the public

CIS 5A.3.8 G
  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.

Liquidity and repatriation of funds

CIS 5A.3.9 G

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).

Responsibility of authorised fund manager

CIS 5A.3.10 G
  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.

CIS 5A.4 Securities schemes

Application

CIS 5A.4.1 R

This section (CIS 5A.4) applies to authorised fund managers of securities schemes.

Securities schemes: general

CIS 5A.4.2 R
  1. (1)

    The scheme property of a securities scheme must, except where otherwise provided in the rules in this chapter, only consist of transferable securities.

  2. (2)

    Not more than 10% in value of the scheme property of a securities scheme is to consist of transferable securities which are not approved securities, but there is no limit on the value of the scheme property which is to consist of approved securities.

  3. (3)

    Not more than 5% in value of the scheme property is to consist of transferable securities which are units in collective investment schemes, and those units must fall within CIS 5A.4.5 R(Securities Schemes : Investment in collective investment schemes).

  4. (4)

    Investment under (3) counts towards the limit in (2) (except where the units are approved securities).

  5. (5)

    CIS 5A.4.3 R(Spread: general) and CIS 5A.4.4 R(Spread: government and public securities) do not apply until the earlier of:

    1. (a)

      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); or

    2. (b)

      the date when the value of the scheme property of the securities scheme first exceeds ÂŁ2 million (or the equivalent in the base currency of the securities scheme).

  6. (6)

    The following sections also apply to securities schemes:

    1. (a)

      CIS 5A.2(General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.13(Efficient portfolio management);

    3. (c)

      CIS 5A.14(Stock lending);

    4. (d)

      CIS 5A.15(Cash, borrowing, lending and other provisions); and

    5. (e)

      CIS 5A.16(Cover for sales).

Spread: general

CIS 5A.4.3 R
  1. (1)

    This rule (CIS 5A.4.3 R) does not apply to government and public securities.

  2. (2)

    Not more than 5% in value of the scheme property is to consist of transferable securities issued by any one issuer.

  3. (3)

    In applying (2), certificates representing certain securities are treated as equivalent to the underlying security.

  4. (4)

    The figure of 5% in (2) may be increased to 10% in respect of up to 40% of the value of the scheme property.

Spread: government and public securities

CIS 5A.4.4 R
  1. (1)

    This rule (CIS 5A.4.4 R) applies to government and public securities ("such securities") only.

  2. (2)

    As long as no more than 35% of the value of the scheme property of an authorised fund is invested in such securities issued by any one issuer, there is no limit on the amount which may be invested in such securities or such securities issued by any one issuer or of any one issue.

  3. (3)

    No more than 35% in value is to be invested in such securities issued by any one issuer unless the authorised fund manager, after consultation with the depositary, considers the issuer of such securities as one which is appropriate in accordance with the investment objectives of the authorised fund.

  4. (4)

    Where more than 35% in value of the scheme property is invested in such securities issued by any one issuer:

    1. (a)

      up to 30% in value of the scheme property may consist of such securities of any one issue;

    2. (b)

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

    3. (c)

      the disclosures in (5) must have been duly made.

  5. (5)

    Where it is intended that (3) and (4) may apply, the instrument constituting the scheme, and the most recently published prospectus, must clearly state:

    1. (a)

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

    2. (b)

      the names of the States, and of the local authorities or public international bodies or both in whose government and public securities the authorised fund may invest over 35% of its assets.

  6. (6)

    In (2), (3), (4) and (5), in relation to government and public 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.

Securities schemes: investment in collective investment schemes

CIS 5A.4.5 R

A securities scheme may invest in units in a collective investment scheme only if the second scheme is a collective investment scheme that complies with the conditions necessary for it to enjoy the rights conferred by the UCITS directive or is a collective investment scheme that:

  1. (1)

    complies with section 243(10) of the Act (Authorisation orders: entitlement to have units redeemed) or is treated as complying with it by section 243(11) of the Act;

  2. (2)

    is either:

    1. (a)

      a recognised scheme; or

    2. (b)

      a collective investment scheme constituted outside the United Kingdom in which the investments of the scheme consist of units which are approved securities;

  3. (3)

    is dedicated to investing funds raised from the public in transferable securities;

  4. (4)

    operates on the principle of risk spreading; and

  5. (5)

    has terms which prohibit more than 5% in value of the property of the scheme consisting of units in collective investment schemes.

Investment in warrants and nil and partly paid securities

CIS 5A.4.6 R
  1. (1)

    A warrant ("the proposed warrant") falls within any power of investment only if, on the assumptions that:

    1. (a)

      there is no change to the scheme property between the acquisition of the proposed warrant and its exercise; and

    2. (b)

      the rights conferred by the proposed warrant and all other warrants forming part of the scheme property at the time of the acquisition of the proposed warrant will be exercised (whether or not it is intended that they will be);

    it is reasonably foreseeable that the right conferred by the proposed warrant could be exercised by the authorised fund without contravening the rules in this chapter.

  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)

    Not more than 5% in value of the scheme property is to consist of warrants.

  4. (4)

    A warrant which is an investment falling within article 80 of the Regulated Activities Order (Certificates representing certain securities) and which is akin to an investment falling within article 79 (Instruments giving entitlement to investments) of the Regulated Activities Order may not be included in the scheme property unless it is listed on an eligiblesecurities market. 1

CIS 5A.5 Money market schemes

Application

CIS 5A.5.1 R

Introduction

CIS 5A.5.2 G
  1. (1)

    This section (CIS 5A.5) sets out specific rules for money market schemes. Money market schemes are authorised funds investing in cash and near cash and, subject to specified restrictions (as to which see CIS 5A.5.3 R (Money market schemes: general)) in bills of exchange and in debentures and other instruments creating or acknowledging indebtedness.

  2. (2)

    The rules in this section governing the investment limits of money market schemes are intended to ensure that money market schemes maintain a high level of liquidity.

Money market schemes: general

CIS 5A.5.3 R
  1. (1)

    The scheme property of a money market scheme must, except where otherwise provided in the rules in this chapter, consist of "money market scheme assets".

  2. (2)

    For this purpose, "money market scheme assets" means any of:

    1. (a)

      cash and near cash;

    2. (b)

      bills of exchange accepted by an eligible institution or an approved bank, if repayable within 12 months;1

    3. (c)

      instruments creating or acknowledging indebtedness which are:

      1. (i)

        repayable within 12 months;

      2. (ii)

        not subordinated; and

      3. (iii)

        either approved securities or investments which are issued by an eligible institution or an approved bank otherwise than in return for a deposit in (a);1

    4. (d)

      a deposit which would be within (a) (near cash) except that it is repayable within six months (instead of immediately) and without payment of a penalty exceeding seven days' interest calculated at ordinary commercial rates; and

    5. (e)

      units in one or more regulated collective investment schemes, each of which is either a money market scheme or a scheme of a category that is equivalent to a money market scheme.

  3. (3)

    The following also apply to money market schemes:

    1. (a)

      CIS 5A.2 (General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.4.6 R (2) (Investment in warrants and nil or partly paid securities);

    3. (c)

      CIS 5A.13 (Efficient portfolio management);

    4. (d)

      CIS 5A.14 (Stock lending);

    5. (e)

      CIS 5A.15 (Cash, borrowing, lending and other provisions); and

    6. (f)

      CIS 5A.16 (Cover for sales).

Investment limits

CIS 5A.5.4 R
  1. (1)

    At least 50% in value of the scheme property of a money market scheme must consist of instruments or deposits which are permitted under CIS 5A.5.3 R (Money market schemes: general) and which are:

    1. (a)

      redeemable or repayable within two weeks; or

    2. (b)

      in the case of instruments, capable of being transferred without the consent of a third party (and for this purpose the issuer of the instrument must be regarded as a third party).

  2. (2)

    Not more than 80% in value of the scheme property is to consist of transferable securities, in accordance with CIS 5A.4 (Securities schemes) (but excluding investment in units in collective investment schemes under CIS 5A.4.5 R).

Spread

CIS 5A.5.5 R
  1. (1)

    This rule (CIS 5A.5.5 R) does not apply to a money market scheme until the date on which the value of its scheme property first exceeds ÂŁ1 million (or the equivalent in the base currency of the money market scheme).

  2. (2)

    Not more than 5% in value of the scheme property of a money market scheme is to consist of instruments issued by any one issuer; but this limit does not apply to instruments which are government and public securities.

  3. (3)

    Not more than 30% in value of the scheme property is to consist of government and public securities of the same issue.

  4. (4)

    Where more than 35% in value of the scheme property is invested in government and public securities, it must include such securities of at least six different issues.

  5. (5)

    Not more than 5% in value of the scheme property is to consist of units within CIS 5A.5.3 R (2)(e) (Money market schemes: general).

  6. (6)

    Whenever the total value of the scheme property of a money market scheme which is held on deposit is more than ÂŁ1 million:

    1. (a)

      not more than 10% in value is to be kept on deposit with any one person;

    2. (b)

      for the purposes of (a):

      1. (i)

        the depositary and its associates are regarded as one person;

      2. (ii)

        the manager and its associates are regarded as one person; and

      3. (iii)

        each director of an ICVC including the ACD and his or its associates are regarded as one person; and

    3. (c)

      the figure of 10% in (a) may be increased to 20% if:

      1. (i)

        the person is an eligible institution and is not one of the persons referred to in (b); and

      2. (ii)

        the amount of the deposit does not exceed 10% in value of that eligible institution's issued capital and reserves as shown in its most recently published annual accounts.

CIS 5A.6 Futures and options schemes

Application

CIS 5A.6.1 R

This section (CIS 5A.6) applies to authorised fund managers of futures and options schemes except:

  1. (1)

    CIS 5A.6.6 R (3), which also applies to depositaries of futures and options schemes; and

  2. (2)

    CIS 5A.6.14 R, which applies to ICVCs that are futures and options schemes and to trustees of AUTs that are futures and options schemes.

Introduction

CIS 5A.6.2 G
  1. (1)

    This section (CIS 5A.6) sets out specific rules for futures and options schemes. Futures and options schemes are authorised fundsdedicated to investment in approved derivatives and other derivatives (whether with or without transferable securities), where most or all of the transactions are fully covered. The next section (CIS 5A.7) deals with geared futures and options schemes. While the types of scheme property are almost the same for both of these categories, there are important differences between them in the degree to which exposure is permitted and in the manner in which exposure is measured.

  2. (2)

    The futures and options scheme must be "covered", in the sense that it is permitted to invest in derivatives and forward transactions only as long as the exposure itself is suitably covered from within its scheme property, including permitted borrowing. Some limited form of investment without cover is permitted, in the form of purchased options.

  3. (3)

    The geared futures and options scheme, on the other hand, is permitted to devote 20% of its scheme property to initial outlay, and this may therefore lead in volatile markets to a greater exposure to profit or loss than in the case of a futures and options scheme.

Futures and options schemes: general

CIS 5A.6.3 R
  1. (1)

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

    1. (a)

      transferable securities available to a securities scheme, in accordance with CIS 5A.4 (Securities schemes) (but excluding investment in units in collective investment schemes under CIS 5A.4.5 R);

    2. (b)

      derivatives permitted under this rule (CIS 5A.6.3 R) and CIS 5A.6.4 R - CIS 5A.6.6 R;

    3. (c)

      forward transactions in currencies or gold permitted under this rule (CIS 5A.6.3 R), CIS 5A.6.4 R and CIS 5A.6.5 R;

    4. (d)

      cash or near cash;

    5. (e)

      units in collective investment schemes under CIS 5A.6.7 R (Investment in collective investment schemes); and

    6. (f)

      gold.

  2. (2)

    For investment within (1)(a), CIS 5A.4 (Securities schemes) applies as if the futures and options scheme were a securities scheme, but subject to any specific modification in this section (CIS 5A.6).

  3. (3)

    For investment within (1)(b) or (1)(c), a transaction in derivatives or a forward transaction must not be effected unless:

    1. (a)

      the transaction is of the kind specified in CIS 5A.6.4 R (Permitted transactions); and

    2. (b)

      the transaction is:

      1. (i)

        fully covered, as required by CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions); or

      2. (ii)

        the subject of deposit arrangements, as required by CIS 5A.6.13 R (Deposit arrangements (for purchased options)).

  4. (4)

    Not more than 10% in value of the scheme property is to be used for transactions in derivatives in the form of uncovered purchased options (taking the current market value of the option as its value for this purpose), but there must be deducted from that figure of 10% any percentage of the value of the scheme property invested in transferable securities in the form of warrants.

  5. (5)

    Not more than 10% in value is to be held in the form of gold.

  6. (6)

    Whenever the total value held on deposit of the scheme property of a futures and options scheme is more than ÂŁ1 million:

    1. (a)

      not more than 10% in value is to be kept as cash on deposit with any one person;

    2. (b)

      in (a):

      1. (i)

        the depositary and its associates are regarded as one person;

      2. (ii)

        the manager and its associates are regarded as one person; and

      3. (iii)

        each director of an ICVC including the ACD and his or its associates are regarded as one person; and

    3. (c)

      the figure of 10% in (a) may be increased to 20% if:

      1. (i)

        the person is an eligible institution or an approved bank and is not one of the persons referred to in (b); and

      2. (ii)

        the amount of the deposit does not exceed 10% in value of that eligible institution's or an approved bank's issued capital and reserves as shown in its most recently published annual accounts.1

  7. (7)

    The following also apply to futures and options schemes:

    1. (a)

      CIS 5A.2 (General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.13 (Efficient portfolio management);

    3. (c)

      CIS 5A.14 (Stock lending);

    4. (d)

      CIS 5A.15 (Cash, borrowing, lending and other provisions); and

    5. (e)

      CIS 5A.16 (Cover for sales).

Permitted transactions (derivatives and forwards)

CIS 5A.6.4 R
  1. (1)

    A transaction in derivatives under this section (CIS 5A.6) must be:

    1. (a)

      in an approved derivative; or

    2. (b)

      one which complies with CIS 5A.6.6 R (OTC transactions in derivatives); or

    3. (c)

      a synthetic future.

  2. (2)

    Any transaction in an approved derivative must be effected on or under the rules of an eligiblederivatives market.

  3. (3)

    Any forward transaction must be with an approved counterparty under CIS 5A.6.6 R (2)(OTC transactions in derivatives).

  4. (4)

    Not more than 5% in value of the scheme property is to be directed to initial outlay in respect of over the counter transactions with any one counterparty.

Transactions for the purchase of property

CIS 5A.6.5 R

A derivatives or forward transaction (which is a permitted transaction under CIS 5A.6.4 R (Permitted transactions (derivatives and forwards)) which will or could lead to 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 (or else the transaction is a bought future or bought call option); 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.

OTC transactions in derivatives

CIS 5A.6.6 R

Any transaction in derivatives under CIS 5A.6.4 R (1)(b)must be:

  1. (1)

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

  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; or1

    2. (b)

      a firm whose permission (including any requirements or limitations), as published in the FSA record, permits it to enter into the transaction as principaloff-exchange;

  3. (3)

    on approved terms; the terms of a 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 with the manager:

    1. (a)

      to provide a valuation in respect of that transaction (which, for dual-priced AUTs should be on a buying and selling basis) at least once a week 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 a reasonable price 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 a 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.

Investment in collective investment schemes

CIS 5A.6.7 R
  1. (1)

    Investments in units of a collective investment scheme must not be made unless that scheme:

    1. (a)

      is a regulated collective investment scheme which is either a futures and options scheme or a money market scheme or a scheme of a category that is equivalent to the category of one of such schemes; or

    2. (b)

      (after taking account of CIS 5A.2.10 R) (Investment in associated collective investment schemes):

      1. (i)

        is within CIS 5A.4.5 R (Securities schemes: investment in collective investment schemes); or

      2. (ii)

        would be within CIS 5A.4.5 R (Securities schemes: investment in collective investment schemes) if paragraph (3) of that rule read: "is dedicated to investing funds raised from the public in approved and other derivatives (where most or all of the transactions in derivatives are fully covered by cash, securities or other derivatives) whether with or without transferable securities or covered forward transactions in currency or gold."

  2. (2)

    Not more than 5% in value of the scheme property of a futures and options scheme is to consist of units in collective investment schemes.

What is cover and what is the purpose of cover?

CIS 5A.6.8 G
  1. (1)

    A futures and options scheme should be covered. This means that a futures and options scheme is permitted to invest in derivatives and forward transactions as long as the exposure itself is suitably covered from within its scheme property (including permitted borrowing).

  2. (2)

    A purpose of cover is to ensure that a futures and options scheme is not, and cannot become, exposed to the risk of loss of property, including money, to an extent greater than the value of the futures and options scheme, together with permitted borrowing of 10%. At any time, therefore, the futures and options scheme must hold scheme property which is of the right kind and sufficient in value or amount to match the exposure which exists as a result of the derivative. CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions) sets out detailed requirements for cover of a futures and options scheme.

  3. (3)

    In accordance with CIS 5A.2.7 R (2)(b), cover used in respect of one transaction in derivatives or forward transaction must not be used for cover in respect of another transaction in derivatives or a forward transaction.

  4. (4)

    However, some limited form of investment without cover is permitted, in the form of purchased options. Since purchased options result in no exposure except that of loss of the premium paid, they can be held on an uncovered basis, but with a cash "set aside" to ensure that holdings of such derivatives do not unbalance the futures and options scheme.

  5. (5)

    CIS 5A.6.9 R to CIS 5A.6.13 R set out detailed requirements for "cover" of a futures and options scheme.

  6. (6)

    CIS 5A.6.16 G sets out, in diagrammatic form, the various stages in defining the cover requirements in CIS 5A.6.9 R.

Cover for transactions in derivatives and forward transactions

CIS 5A.6.9 R
  1. (1)

    Except where CIS 5A.6.13 R (1) (Deposit arrangements (purchased options)) applies, a transaction in derivatives or forward transaction is to be entered into under this section (CIS 5A.6) only if the maximum potential exposure created by the transaction, in terms of the principal or notional principal of the derivative contract or forward contract, is:

    1. (a)

      covered individually under (2) or (3); and

    2. (b)

      covered globally under (4).

  2. (2)

    Exposure is covered individually if there is, in the scheme property:

    1. (a)

      (in the case of an exposure in terms of property) a transferable security or other property which is of the right kind, and sufficient in amount, to match the exposure; and

    2. (b)

      (in the case of an exposure in terms of money), cash or near cash (or borrowing under CIS 5A.6.14 R (Borrowing)) or transferable securities which is or are, or, on being turned into money in the right currency, will be, sufficient in amount to match the exposure.

  3. (3)

    However, exposure to an index or basket of securities or other assets is covered individually for the purposes of (2) if the futures and options scheme holds transferable securities or other property which (taking into account the closeness of the relation between fluctuations in the price of the two) can reasonably be regarded as appropriate to provide cover for the exposure; they may be so regarded even if there is not complete congruence between the cover and the exposure.

  4. (4)

    Exposure is covered globally if, after taking account of all the cover required under (2) or (3) for other positions already in existence, adequate cover from within the scheme property is available to enable the fresh transaction to be entered into.

  5. (5)

    Whether or not a derivative or forward transaction is available under CIS 5A.6.12 R (Derivatives covering derivatives : requirements) to provide cover for another derivative or forward transaction under this section (CIS 5A.6):

    1. (a)

      the two transactions involved in a synthetic future are to be treated as if they were a single derivative, and the net exposure from the combination is to be covered on the basis of the higher of the cover requirements of the options which make up the synthetic future; and

    2. (b)

      synthetic cash is available to provide cover for a transaction as if it were cash.

  6. (6)

    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)(b) and (3).

  7. (7)

    Property is not available for cover if it is the subject of a transaction under CIS 5A.14 (Stock lending), unless the authorised fund manager having taken reasonable care determines that it is obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.

Examples of cover requirements

CIS 5A.6.10 G

Examples of the cover requirements:

  1. (1)

    A bought put option (or a written call option) on 1000 ordinary ÂŁ1 shares (fully paid) of ABC plc is covered by an existing holding in the futures and options scheme of 1000 ordinary ÂŁ1 shares (fully paid) of ABC plc (CIS 5A.6.9 R (2)(a)).

  2. (2)

    A bought call option (or written put option) on 1000 ordinary ÂŁ1 shares (fully paid) of ABC plc is covered by cover (in the form of cash or an allowable substitute for cash or transferable securities) which is sufficient in amount to meet the purchase of the shares on exercise of the option ( CIS 5A.2.7 R (2)(b)).

  3. (3)

    A sold contract for differences on short-dated sterling is covered by cash or near cash or transferable securities, the values of which together at least match the notional principal of the contract (for example a LIFFE short sterling contract, or a succession of such contracts, is covered by ÂŁ500,000) (CIS 5A.6.9 R (2)(b) and CIS 5A.2.7 R (2)(b)).

  4. (4)

    A sold future on the FT-SE 100 Index is covered by holdings of equities (or a combination of cash (or near cash) and call options on that future) which satisfy the test of appropriateness for cover in CIS 5A.6.9 R(3) in relation to that future, and the values of which together at least match the current mark to market valuation of the future (for example, if the multiplier per full index point is ÂŁ10, and if the eventual obligation under the future is currently at 2800, the valuation of the futures position is 2800 x ÂŁ10 = ÂŁ28,000) (CIS 5A.6.9 R(3) and CIS 5A.6.12 R).

  5. (5)

    Where an ICVC or the manager of an AUT has holdings in blue chip UK shares, wishes to provide more exposure to the US market, and decides to sell a FT-SE index future to the value of those shares (this transaction satisfying the test of appropriateness for cover in CIS 5A.6.9 R(3)), then the sterling synthetic cash position created is used as cover for a S&P 500 index future provided that the authorised fund ensures that the cover remains sufficient (for example by reference to the sterling/US dollar exchange rate) (CIS 5A.6.9 R(3) and CIS 5A.6.9 R(5)(b)).

  6. (6)

    For guidance on congruence see CIS 5A.13.10 G(1) (The use of index derivatives : congruence).

Derivatives covering derivatives: explanation of the use of derivatives for cover

CIS 5A.6.11 G
  1. (1)

    The general requirements about cover in CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions) are modified in some respects where it is sought to use two derivatives on the same underlying asset or security as cover for each other. CIS 5A.6.12 R (Derivatives covering derivatives: requirements) provides the basis for such mutual cover.

  2. (2)

    The main features are that:

    1. (a)

      only a countervailing exposure can provide adequate cover;

    2. (b)

      written options may be used as cover for futures only where the option is in the money to the purchaser: if the option is out of the money to him, the option and the future each have to be covered in the ordinary way, though the premium acquired for writing the option will count as cash for that purpose; and

    3. (c)

      contracts for differences, such as index contracts, are included in the cover arrangements so far as they resemble futures or options.

  3. (3)

    The general effect of CIS 5A.6.12 R(1) and (2) is explained in CIS 5A.6.12 R(3).

  4. (4)

    In applying CIS 5A.6.12 R, it may help to regard a future as an obligation (in that, unless closed out, the future will require something to be delivered, or accepted and paid for); a bought option as a right (in that the purchaser can, but need not, exercise the right to require the writer to deliver and accept and pay for something); and a written option as a potential obligation (in that it both creates exposure and gives the right of exercise to another).

  5. (5)

    CIS 5A.6.17 G sets out in diagrammatic form the various cover requirement in CIS 5A.6.12 R

Derivatives covering derivatives: requirements

CIS 5A.6.12 R
  1. (1)

    Where an authorised fund manager proposes to use a position resulting from a transaction in derivatives as cover (whether in whole or in part) for the exposure of another transaction in derivatives, CIS 5A.6.9 R (Cover for derivatives and forward transactions) has effect as modified by this ruleCIS 5A.6.12 R).

  2. (2)

    On the basis that the requirements of CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions) about the amount and right kind of assets as cover are satisfied, (3) contains the requirements for the purposes of (1).

  3. (3)
    1. (a)

      In this rule (CIS 5A.6.12 R) "countervailing" means that one of the two derivatives has an exposure which, in terms of risk, is equal and opposite to the exposure of the other, and "offset" means that there is an equal and opposite coverage in terms of risk.

    2. (b)

      A derivative of one type provides cover for a countervailing derivative of the same type.

    3. (c)

      A derivative of one type provides cover for a countervailing derivative of a different type if, but only if:

      1. (i)

        the right under one offsets and is offset by the obligation under the other; or

      2. (ii)

        Paragraph (g) applies.

    4. (d)

      In applying (b) and (c), differences between the derivatives in terms of price, maturity and exercise price may be ignored, except where (b) is disapplied by (e).

    5. (e)

      Paragraph (b) does not apply if an opportunity to exercise the right under the one derivative will become available to the futures and options scheme only after the first date on which the potential obligation under the other may become an actual obligation.

    6. (f)

      Where, under (b), an authorised fund manager decides that a written option and a bought option should provide mutual cover, the authorised fund manager must arrange for the depositary to deposit and set aside with an eligible institution or an approved bank the whole amount of the difference between the exercise value of the two options (that is the amount which would be payable by or to the futures and options scheme on exercise of the options) inclusive of any margin requirements of the exchange. That amount must not be used for the purposes of providing cover, other than under this paragraph (f), under the rules of this chapter.

    7. (g)

      A written option provides cover for, and is covered by, a countervailing future only if the option is in the money to the purchaser of the option. If the written option is out of the money to the purchaser, then both it and the future must each be separately covered under CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions).

    8. (h)

      A contract for differences may be included in this rule (CIS 5A.6.12 R) if and to the extent that it has the characteristics of a future or an option.1

Deposit arrangements (for purchased options)

CIS 5A.6.13 R
  1. (1)

    Where the purchase of an uncovered option is proposed in reliance on CIS 5A.6.3 R (4)(Futures and options schemes: general), the authorised fund manager must arrange for the depositary to deposit and set aside with an eligible institution or an approved bank any amount by which 5% of the exercise value of the option (that is the amount which would be payable by the futures and options scheme on exercise of the option) exceeds the amount paid by way of premium. That excess (if any) must not be used for the purposes of providing cover under the rules in this chapter.1

  2. (2)

    The amount to be deposited and set aside may be in cash or in government and public securities (which are to be valued for this purpose at the current mark to market valuation).

Borrowing

CIS 5A.6.14 R
  1. (1)

    Cash obtained by borrowing, and borrowings which the authorised fund manager reasonably regards an eligible institution or an approved bank to be committed to provide, are available for cover under CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions) as long as the normal limits on borrowing (as to which see CIS 5A.15.3 R (General power to borrow) and CIS 5A.15.4 R (Borrowing limits)) are observed.1

  2. (2)

    Where, for the purposes of this section (CIS 5A.6), 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; and1

    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);

    then this section (CIS 5A.6) applies as if the borrowed currency, and not the deposited currency, were part of the scheme property, and the normal limits on borrowing under CIS 5A.15.3 R and CIS 5A.15.4 R do not apply to that borrowing.

Continuing nature of limits and requirements

CIS 5A.6.15 R
  1. (1)

    An authorised fund manager must, at each valuation point (and more frequently if necessary), re-calculate the amount of cover required in respect of derivatives and forward positions already in existence under this section (CIS 5A.6). Derivatives and rights under forward transactions under this section may be retained in the scheme property only so long as they remain covered both individually and globally under CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions) (or, where relevant, the deposit requirements in CIS 5A.6.13 R (Deposit arrangements (for purchased options)) are complied with).

  2. (2)

    If at any time:

    1. (a)

      any fact or matter relating to the futures and options scheme or its economic environment; or

    2. (b)

      the aggregate of all outstanding derivatives or forward positions under this section;

    is such that at least one of the relevant transactions (assuming it did not exist) could not properly have been effected, either in that size or at all, the authorised fund manager must immediately on becoming aware of that fact or matter take the necessary steps to rectify the situation, whether by closing out or providing additional cover or otherwise.

CIS 5A.6.16 G

Stages in defining cover

This table belongs to CIS 5A.6.8 G

100%

1

Take the scheme property

Transferable Securities (TS)

Cash (and Near Cash)

Gold

Rights obtained through derivatives

Stock Lent

2

ADD borrowing facilities to make a maximum of 110%

10%

100%

3

SUBTRACT property not eligible to provide cover to reach total of Y%

TS

Cash

Gold

Rights

Stock Lent

(used as cover) Note 1

(used as cover or as deposit)

(used as cover)

(used as cover)

(unless obtainable in time)

4

Find the total available: T = 110% - Y%

5

Take T and subdivide

110% - Y%

AVAILABLE SCHEME PROPERTY (T)

Property

Rights to property

Cash

Allowable substitutes for cash

TS

cover for

cover for

EXPOSURE TO BE COVERED

exposure in terms of property

exposure in terms of money

Note 1: TS, Cash, Gold or Rights are not eligible if they are being used as cover under this section (CIS 5A.6) or under section CIS 5A.13 (Efficient portfolio management).

CIS 5A.6.17 G

Mutual cover as between derivatives

This table belongs to CIS 5A.6.12 R

DERIVATIVE A (covers/is covered by)

DERIVATIVE B

(i)

(ii)

(iii)

Bought Future

Sold Future

Bought Put Option

Written Call Option (if in the money)

Sold Future

Bought Future

Bought Call Option

Written Put Option (if in the money)

Bought Call Option

Written Call Option

-

-

Bought Put Option

Written Put Option

-

-

NoteColumn B(i) shows the effect of CIS 5A.6.12 R (3)(b); Column B(ii) shows the effect of CIS 5A.6.12 R (3)(c)(i); and Column B(iii) shows the effect of CIS 5A.6.12 R (3)(c)(ii) and CIS 5A.6.12 R (3)(g).

CIS 5A.7 Geared futures and options schemes

Application

CIS 5A.7.1 R

Introduction

CIS 5A.7.2 G
  1. (1)

    This section (CIS 5A.7) sets out specific rules for geared futures and options schemes. Geared futures and options schemes are authorised fundsdedicated to investment in derivatives (whether with or without transferable securities) where the extent of that investment is limited by the amount of property available to be put up as initial outlay or used as cover.

  2. (2)

    A geared futures and options scheme is permitted to take on exposure to the extent of putting 20% of its scheme property into initial outlay on derivatives. The property for this purpose is not to be increased by borrowing, since a geared futures and options scheme cannot borrow (see CIS 5A.15.3 R (General power to borrow)). There is no limit on the amount of cash that can be held by the geared futures and options scheme.

Geared futures and options scheme: general

CIS 5A.7.3 R
  1. (1)

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

    1. (a)

      transferable securities available to a securities scheme in accordance with CIS 5A.4 (Securities schemes), (but excluding investments in units in collective investment schemes under CIS 5A.4.5 R);

    2. (b)

      transactions in derivatives or forward transactions which are covered on the basis available to a futures and options scheme (see CIS 5A.6.9 R - CIS 5A.6.12 R for requirements for cover);

    3. (c)

      derivatives permitted under the rules in this section (CIS 5A.7);

    4. (d)

      forward transactions in currencies or gold permitted under the rules in this section (CIS 5A.7);

    5. (e)

      cash or near cash;

    6. (f)

      units in collective investment schemes under CIS 5A.7.8 R(Investment in collective investment schemes);

    7. (g)

      gold.

  2. (2)

    In respect of investment within (1)(a), CIS 5A.4 (Securities schemes) applies as if the geared futures and options scheme were a securities scheme, but subject to any special modifications in this section (CIS 5A.7).

  3. (3)

    In respect of transactions in derivatives and forward transactions under (1)(b), CIS 5A.6 (Futures and options schemes), except CIS 5A.6.7 R (Investment in collective investment schemes), applies as if the geared futures and options scheme were a futures and options scheme, but subject to any special modifications in this section ( CIS 5A.7).

  4. (4)

    In respect of derivatives within (1)(c):

    1. (a)

      any transaction in derivatives must be in an approved derivative, or in one which complies with CIS 5A.6.6 R (OTC transactions in derivatives); and

    2. (b)

      any transaction in an approved derivative must be effected on or under the rules of an eligiblederivatives market.

  5. (5)

    In respect of transactions within (1)(d), this section (CIS 5A.7), except (4) and CIS 5A.7.4 R (7) (Limit on investment in initial outlay), applies as if any forward transaction were a transaction in derivatives; and the transaction must be with a counterparty which is approved for the purposes of CIS 5A.6.6 R (2).

  6. (6)

    Not more than 10% in value of the scheme property is to be held in the form of gold.

  7. (7)

    The following also apply to geared futures and options schemes:

    1. (a)

      CIS 5A.2 (General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.13 (Efficient portfolio management);

    3. (c)

      CIS 5A.14 (Stock lending);

    4. (d)

      CIS 5A.15 (Cash, borrowing, lending and other provisions); and

    5. (e)

      CIS 5A.16 (Cover for sales).

  8. (8)

    Despite the rules referred to in (7), an ICVC that is a geared futures and options scheme or the trustee of an AUT that is a geared futures and options scheme does not have power to borrow, whether under this section (CIS 5A.7) or CIS 5A.13 (Efficient portfolio management) or otherwise.

Limits on investment in initial outlay

CIS 5A.7.4 R
  1. (1)

    At any time, not more than 20% in value of the scheme property of a geared futures and options scheme is, subject to (3), to be devoted to initial outlay in any transactions in derivatives which are outstanding.

  2. (2)

    For the purposes of initial outlay:

    1. (a)

      regard must be had to the rules of any relevant eligiblederivatives market;

    2. (b)

      any increase in margin or initial margin, if required by such a market, is regarded as initial outlay from then on;

    3. (c)

      any decrease in margin or initial margin, if allowed by such a market, ceases to be initial outlay from then on;

    4. (d)

      variation margin (that is, an additional sum required to be paid to retain the rights following a movement in prices or other movements) is not initial outlay;

    5. (e)

      premium which may become payable in the future under the transaction in respect of an option is regarded as initial outlay from the outset;

    6. (f)

      in the case of a purchased option, the amount mentioned in (6) is to be regarded as initial outlay;

    7. (g)

      in the case of a written option, the amount mentioned in (7) is to be regarded as initial outlay;

    8. (h)

      in the case of an over the counterfuture, the amount mentioned in (8) is to be regarded as initial outlay; and

    9. (i)

      in the case of a forward transaction, the amount mentioned in (9) is to be regarded as initial outlay.

  3. (3)

    Not more than 10% in value of the scheme property is to be used for initial outlay on transactions in derivatives in the form of purchased options without counting this towards the 20% in (1). The figure of 10% must be reduced by any percentage of the value of the scheme property invested in transferable securities in the form of warrants.

  4. (4)

    The authorised fund manager must arrange for the depositary to deposit and set aside with an eligible institution or an approved bank the amounts for the time being required by (6), (7), (8) and (9), and these amounts must not be used for the purpose of providing cover under the rules in this chapter.1

  5. (5)

    The amounts to be deposited and set aside may be in cash or in government and public securities (which are to be valued for this purpose at the current mark to market valuation).

  6. (6)

    Where an option is purchased for the account of the ICVC or of the AUT, the authorised fund manager must ascertain the amount, if any, by which 5% of the exercise value of the option (that is the amount which would be payable or receivable by the geared futures and options scheme on exercise of the option) exceeds the amount paid by way of premium.

  7. (7)

    Where an option is written for the account of the ICVC or of the AUT, the authorised fund manager must ascertain at the outset and at each valuation the amount which is the sum of:

    1. (a)

      5% of the exercise value of the option (that is the amount which would be payable or receivable by the purchaser of the option, on exercise of the option); and

    2. (b)

      the amount, if any, by which the option is in the money to the purchaser of the option.

  8. (8)

    Where a transaction in an over the counterfuture is entered into for the account of the ICVC or of the AUT, the authorised fund manager must ascertain at the outset and at each valuation the amount which is the sum of:

    1. (a)

      5% of the value of the amount of property to be bought or sold under the contract; and

    2. (b)

      the amount, if any, by which the future would cause a loss to the geared futures and options scheme if it were to be closed out.

  9. (9)

    Where a forward transaction is entered into for the account of the ICVC or of the AUT, the authorised fund manager must ascertain at the outset and at each valuation the amount which is 5% of the value of the forward contract (that is the amount of currency or of gold to be purchased or sold by the transaction at the current valuation in the currency or one of the currencies relevant for the purposes of the transaction) for each period of three months (or part of them) between the date of the latest valuation and the date of maturity.

Stages in using limit on initial outlay

CIS 5A.7.5 G

CIS 5A.7.6 G sets out the various stages in using initial outlay

CIS 5A.7.6 G

Stages in using limit on initial outlay

This table belongs to CIS 5A.7.5 G

Calculating maximum limit on initial outlay

Example 1 - Start point

Take the value of the scheme property (ÂŁ10 million)

Divide by 20% to find limit (ÂŁ10m) 20% = ÂŁ2million.

Note:

(1)

In general, potential exposure of the geared futures and options scheme will increase with any increase in initial outlay.

(2)

If the value of the scheme property changes on a subsequent valuation, the maximum permitted initial outlay will also change as shown in Example 2 and Example 3.

Example 2 - Successful scheme

The scheme is subsequently valued at ÂŁ12 million. Corresponding value of initial outlay becomes: -

20% of ÂŁ12 million = ÂŁ2.4 million.

Example 3 - Unsuccessful scheme

The scheme is subsequently valued at ÂŁ8 million. Corresponding value of initial outlay becomes:-

20% of ÂŁ8 million = ÂŁ1.6 million.

Spread

CIS 5A.7.7 R
  1. (1)

    There are no limits, other than those resulting from the requirement in CIS 5A.7.4 R (Limit on investment in initial outlay), on the value of the scheme property of a geared futures and options scheme which may be devoted to initial outlay in respect of derivatives on or related to any one category of underlying security, commodity or other factor.

  2. (2)

    Not more than 5% in value of the scheme property of a geared futures and options scheme is to be devoted to initial outlay in respect of over the counter transactions with any one counterparty.

  3. (3)

    Wherever the total value held on deposit of the scheme property of a geared futures and options scheme is more than ÂŁ1 million:

    1. (a)

      not more than 10% in value is to be kept as cash on deposit with any one person;

    2. (b)

      for the purposes of (a):

      1. (i)

        the depositary and its associates are regarded as the same person;

      2. (ii)

        the manager and its associates are regarded as one person; and

      3. (iii)

        each director of an ICVC including the ACD and his or its associates are regarded as one person; and

    3. (c)

      the figure of 10% in (5) may be increased to 20% if:

      1. (i)

        the person is an eligible institution or an approved bank and is not one of the persons referred to in (b); and1

      2. (ii)

        the amount of the deposit does not exceed 10% of that eligible institution's or an approved bank's issued capital and reserves as shown in its most recently published annual accounts.1

Investment in collective investment schemes

CIS 5A.7.8 R
  1. (1)

    Investments in units of a collective investment scheme must not be made unless that scheme:

    1. (a)

      is a regulated collective investment scheme which is either a futures and options scheme or a geared futures and options scheme or a money market scheme or a scheme of a category that is equivalent to the category of one of such authorised funds; or

    2. (b)

      (after taking account of CIS 5A.2.10 R (Investment in associated collective investment schemes)):

      1. (i)

        is within CIS 5A.4.5 R (Securities scheme: investment in collective investment schemes); or

      2. (ii)

        would be within CIS 5A.4.5 R if CIS 5A.4.5 R (3)read: "is dedicated to investing funds raised from the public:

      (a) in approved and other derivatives (where most or all of the transactions in derivatives are fully covered by cash, securities and other derivatives), whether with or without transferable securities or covered forward transactions in currency or gold; or(b) in approved and other derivatives (where the extent of investment is limited by the amount of scheme property available to be put up as initial outlay), whether with or without transferable securities and whether with or without investment within (a)".

  2. (2)

    Not more than 5% in value of the scheme property of a geared futures and options scheme is to consist of units in collective investment schemes.

Delivery of property under a transaction in derivatives

CIS 5A.7.9 R
  1. (1)

    When entering into any transaction in derivatives as a result of which any investment or asset may become part of the scheme property of the geared futures and options scheme, the authorised fund manager must take reasonable care to determine:

    1. (a)

      (where the investment or asset is one of which the scheme property could in some measure consist) that the transaction will not result in any breach of any other rule in this chapter:

      1. (i)

        because it can be readily closed out; or

      2. (ii)

        because the investment or asset concerned will at the expected time be included within the scheme property in a manner which conforms with the rules in this chapter; or

    2. (b)

      (in any other case) that the transaction can readily be closed out.

  2. (2)

    Where, in the event, the determination in (1)(a) or (1)(b) proves unjustified, and the authorised fund manager decides with the consent of the depositary, in accordance with CIS 7.5.3 R (Duties of the ACD and depositary: investment and borrowing powers) (in the case of an ICVC) or CIS 7.10.3 R (Duties of the manager and trustee: investment and borrowing powers) (in the case of an AUT) that it is in the interests of the holders that the property should be temporarily acquired, then the property concerned may, despite any other rule in this chapter, form part of the scheme property until the position can be rectified.

CIS 5A.8 Property schemes

Application

CIS 5A.8.1 R

This section (CIS 5A.8) applies to authorised fund managers of property schemes, except CIS 5A.8.11 R (1) (Initial periods), which also applies to the trustee of an AUT that is a property scheme.

Introduction

CIS 5A.8.2 G
  1. (1)

    This section (CIS 5A.8) sets out specific rules for property schemes, which can invest in property, whether in the United Kingdom or abroad.

  2. (2)

    Property schemes are authorised funds which may invest in approved immovables and property, related assets with or without other transferable securities. Under this section (CIS 5A.8) a property scheme may not invest in immovables until ÂŁ5 million has been subscribed or agreed to be subscribed. Under CIS 12.3.4 R(Failure to obtain minimum subscriptions) if this amount is not subscribed for during the period of the initial offer (or during the first 21 days after the date on which persons are first invited to become holders in the property scheme, where there is no initial offer) the authorised fund manager must use its best endeavours to enable the property scheme to be wound up. Provided the property scheme obtains ÂŁ5 million or more, it may then be invested within a band of 20%-80% in approved immovables as described in CIS 5A.8.4 R (Permitted immovables) and CIS 5A.8.5 R (Approved immovables).

  3. (3)

    For property schemes below ÂŁ15 million in size there is, for up to two years, some transitional relief from some of the limits: in the early period a property scheme of small size may not be able to achieve the spread between different properties and other investments, appropriate for ongoing property schemes (see CIS 5A.8.11 R(3) (Initial period)).

  4. (4)

    The remainder of the scheme property (also 20% - 80%) must be either invested in so-called property related assets (typically shares in a property investment company which must themselves be approved securities or else within one of the other special limits in this section) or in government and public securities, but subject to a maximum of 35% for such securities. In addition, 5% may be invested in property related collective investment schemes.

  5. (5)

    To help illuminate this section, CIS 5A.8.13 G(Construction of property schemes) gives two examples of how a property scheme may be constructed, and outlines how the spread rules will apply to those property schemes. Property schemes A and B are each invested at opposite ends of the 20%-80% band.

Property schemes: general

CIS 5A.8.3 R
  1. (1)

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

    1. (a)

      approved immovables;

    2. (b)

      property related assets;

    3. (c)

      government and public securities; and

    4. (d)

      units in collective investment schemes, under (5).

  2. (2)

    Not more than 80% in value of the scheme property is to consist of approved immovables, but this limit is subject to (6).

  3. (3)

    Not more than 80% in value is to consist of transferable securities, but the transferable securities must be property-related assets which are approved securities or else separately permitted under (4), (5) or (6).

  4. (4)

    Not more than 35% in value is to consist of government and public securities.

  5. (5)

    Not more than 5% in value is to consist of units in collective investment schemes under CIS 5A.8.7 R(Investment in collective investment schemes).

  6. (6)

    Not more than 10% in value is to consist of shares which are property-related assets but are not approved securities. Any shares included under this paragraph must be included in the 80% limit in (2), which may therefore on occasion produce a limit of 70% for approved immovables.

  7. (7)

    Not more than 5% in value is to consist of transferable securities within (3) which are warrants. These warrants must be property related assets which are approved securities.

  8. (8)

    The following also apply to property schemes:

    1. (a)

      CIS 5A.2(General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.4.6 R(Investment in warrants and nil and partly paid securities);

    3. (c)

      CIS 5A.13(Efficient portfolio management);

    4. (d)

      CIS 5A.14(Stock lending);

    5. (e)

      CIS 5A.15(Cash, borrowing, lending and other provisions); and

    6. (f)

      CIS 5A.16(Cover for sales).

Permitted immovables

CIS 5A.8.4 R

An interest in land or a building is a permitted immovable if:

  1. (1)

    the land or building is situated in a country or territory identified in the prospectus for the purpose of this rule (CIS 5A.8.4 R);

  2. (2)

    the land or building is situated in England and Wales or in Northern Ireland, and the interest is a freehold or leasehold interest; or if the land or building is situated in Scotland and the interest is any interest or estate in or over land or heritable right including a long lease; or if the land or building is situated elsewhere and the interest is equivalent to any of the interests mentioned in this paragraph; and

  3. (3)

    where the interest is leasehold (or its equivalent) and it has an unexpired term of 20 years or more;

and furniture, fittings or other contents of any building may for this purpose be regarded as part of it.

Approved immovables

CIS 5A.8.5 R
  1. (1)

    In this sourcebook, an approved immovable is a permitted immovable which satisfies all of the conditions in (3) to (6) and either (2)(a) or (2)(b).

  2. (2)
    1. (a)

      Unless (b) is satisfied, the immovable must be transferable; an immovable is not regarded as transferable unless the manager or the ICVC has received a report from an appropriate valuer that:

      1. (i)

        contains a valuation of the immovable (with and without any relevant subsisting mortgage); and

      2. (ii)

        states that, in the appropriate valuer's opinion, the immovable would, if acquired for the property scheme, be capable of being disposed of reasonably expeditiously at that valuation.

    2. (b)

      Unless (a) is satisfied, the approved immovable must have marriage value; an immovable is not regarded as having marriage value unless the manager or the ICVC has received a report from an appropriate valuer valuing the immovable and stating that:

      1. (i)

        the immovable is adjacent to or contiguous with another immovable included in the scheme property; and

      2. (ii)

        in the opinion of the appropriate valuer, the total value of the immovable, if acquired for the property scheme, and of the other immovable, would at least equal the sum of the price payable for the immovable and the existing value of the other immovable.

  3. (3)

    The immovable must be accessible; an immovable is not regarded as accessible unless the authorised fund manager has taken reasonable care to determine that reasonable access to it is assured.

  4. (4)

    The immovable must have a good root of title; an immovable is not regarded as having a good root of title unless the authorised fund manager has taken reasonable care to determine that the title to the immovable is a good marketable title.

  5. (5)

    The immovable must be unencumbered or adequately unencumbered; an immovable is not regarded:

    1. (a)

      as unencumbered, unless there is no subsisting mortgage over or on it; and

    2. (b)

      as adequately unencumbered, unless the only mortgages over or on it are one or more approved mortgages within CIS 5A.8.9 R (Mortgaged property), which secures, or together secure, on the immovable repayment of a sum or sums not exceeding 50% of the value at (2)(a) (that is, that part of the value which is valued on the assumption that the immovable is not mortgaged).

  6. (6)

    The immovable must be or have been or is to be bought promptly and at a reasonable price; an immovable is not regarded as bought promptly and at a reasonable price unless:

    1. (a)

      it is bought or agreed by enforceable contract to be bought within six months after receipt of the report of the appropriate valuer referred to in (2)(a) or (2)(b);

    2. (b)

      at the time of the purchase or agreement it would not have been apparent to the authorised fund manager that the report could no longer reasonably be relied upon; and

    3. (c)

      the immovable is bought at no more than 105% of the valuation in the report.

  7. (7)

    A person is an appropriate valuer if:

    1. (a)

      he has knowledge of and experience in the valuation of immovables of the relevant kind in the relevant area;

    2. (b)

      he is or is qualified to be the standing independent valuer of a property scheme or is reasonably considered by the property scheme'sstanding independent valuer to hold equivalent qualifications;

    3. (c)

      he is independent of the ICVC, the depositary and each of the directors of the ICVC or of the manager and the trustee of the AUT in the sense required for a standing independent valuer under CIS 12.3.1 R (2)(Standing independent valuer); and

    4. (d)

      neither he nor any of his partners (if any) nor a fellow director of a corporate appropriate valuer (if any) have been engaged, whether as principal or as agent, in relation to the finding of the immovable for the property scheme or the finding of the property scheme for the immovable.

Property-related assets

CIS 5A.8.6 R
  1. (1)

    Property-related assets qualify for investment purposes (under CIS 5A.8.3 R (6)) only if:

    1. (a)

      they are transferable securities; and

    2. (b)

      they are shares in a body corporate at least 75% of whose total assets (before deduction of liabilities and as shown in the most recently published accounts) consist of permitted immovables.

  2. (2)

    Not more than 5% in the value of the scheme property of a property scheme is to consist of investments of the type referred to in (1) issued by any one issuer. The figure of 5% may be increased to 10% if:

    1. (a)

      the property scheme owns at least 90% of the rights to vote which are exercisable in all circumstances at general meetings of the body corporate;

    2. (b)

      the shares are or were bought within six months after receipt by the authorised fund manager of:

      1. (i)

        a report by an appropriate valuer relating to permitted immovables owned by the body corporate, indicating that they are transferable (as in CIS 5A.8.5 R (2)(a)) or have marriage value (as in CIS 5A.8.5 R (2)(b)); and

      2. (ii)

        a report, on the value of any assets other than permitted immovables, from a person then qualified to be an auditor of a company under the relevant legislation in any part of the United Kingdom;

    3. (c)

      at the time of the purchase it would not have been reasonably apparent to the authorised fund manager that the report at (b)(i) or (ii) could no longer reasonably be relied on; and

    4. (d)

      the shares were bought at no more than 105% of the total of the values in the reports at (b)(i) and (ii).

Investment in a collective investment scheme

CIS 5A.8.7 R

Investments in units of a collective investment scheme must not be made unless that scheme:

  1. (1)

    is a regulated collective investment scheme which:

    1. (a)

      complies with section 243(10) of the Act (Authorisation orders: entitlement to have units redeemed) or is treated as complying with it by section 243(11) of the Act; and

    2. (b)

      is dedicated to approved immovables, with or without transferable securities which are property related assets or government and public securities; or

  2. (2)

    is a regulated collective investment scheme which is a money market scheme or a scheme of a category that is equivalent to a money market scheme.

Property related limits

CIS 5A.8.8 R
  1. (1)

    Not more than 10% in value of the scheme property of a property scheme is to consist of approved immovables which are leasehold interests (or the equivalent: see CIS 5A.8.4 R (2)) having an unexpired term of less than 60 years.

  2. (2)

    Not more than 25% in value is to consist of approved immovables which are unoccupied and non-income producing or in course of substantial development, redevelopment or refurbishment.

Mortgaged property

CIS 5A.8.9 R
  1. (1)

    Not more than 15% in value of that part of the scheme property of a property scheme which for the time being consists of immovables is to consist of mortgaged immovables.

  2. (2)

    An immovable subject to one or more mortgages may be retained by the property scheme only so long as the mortgage or each of the mortgages is an approved mortgage, the total sums outstanding under which do not exceed 50% of the value of the immovable (assuming for this purpose that the immovable is not mortgaged).

Spread

CIS 5A.8.10 R
  1. (1)

    Not more than 15% in value of the scheme property of a property scheme is to consist of any one immovable.

  2. (2)

    In (1), immovables which would be regarded as having marriage value under CIS 5A.8.5 R (2)(b)must be regarded as one immovable.

  3. (3)

    The figure of 15% in (1) may be increased to 25% once the immovable has been included in the scheme property of a property scheme in compliance with (1).

  4. (4)

    Not more than 5% in value is to consist of property related assets issued (or conferring rights to investments issued) by any one issuer.

  5. (5)

    The figure of 5% in (4) may be increased to 10% in respect of up to 40% of the value of the scheme property of a property scheme.

  6. (6)

    Not more than 20% of the income receivable in any accounting period is to derive from members of any one group; but there is no restriction on the income receivable from any issuer of government and public securities.

Initial periods

CIS 5A.8.11 R
  1. (1)

    During the period of the initial offer, no immovable may be:

    1. (a)

      bought or leased; or

    2. (b)

      agreed, by enforceable contract, to be bought or leased;

    unless it appears to the ACD or to the manager and trustee that more than ÂŁ5 million (or the equivalent amount in the base currency of the property scheme) has been paid or agreed to be paid for units to be issued or sold.

  2. (2)

    During the first two years starting with the date on which the property scheme is authorised or on which the units are first issued (if later) and subject to (3) and (4):

    1. (a)

      CIS 5A.8.8 R (1)(Property related limits) and CIS 5A.8.10 R (Spread) do not apply; and

    2. (b)

      the obligation, derived from CIS 5A.8.3 R (Property schemes: general), that at least 20% in value of the scheme property must consist of approved immovables does not apply.

  3. (3)

    Paragraph (2) ceases to apply if, at any time during the two year period, six months have elapsed from the first date on which the scheme property exceeds ÂŁ15 million in value (or the equivalent amount in the base currency of the property scheme).

  4. (4)

    Paragraph (2) postpones the application of CIS 5A.8.10 R (4)(Spread - (of property related assets)) for a maximum of only six months from the date on which the property scheme is authorised or on which the units are first issued (if later), and not of two years.

Grant of options and mortgages

CIS 5A.8.12 R
  1. (1)

    No option may be granted to buy any immovable comprised in the scheme property, whether under CIS 5A.13 (Efficient portfolio management) or otherwise.

  2. (2)

    No mortgage other than an approved mortgage may be created on or over any such immovable.

CIS 5A.8.13 G

Construction of property schemes

This table belongs to CIS 5A.8.2 G

Property Scheme A (fully invested in immovables)

Limits for Property scheme A

Type of Asset

Limits for Property Scheme B

Property scheme B (fully invested in transferable securities)

up to 10%

Leases 20-60 years

up to 10%

up to 25%

Vacant, repairs,...

up to 20%

80%

Immovables

up to 12%

Mortgaged immovables

up to 3%

Immovables

20%

up to 15%

any one immovable

up to 15%

up to 20%

rent from any one group

up to 20%

up to 20%

transferable securities which are property related assets (if approved)

up to 80%

0%

(if non approved)

up to 10%

20%

Transferable securities

up to 20%

Government and public securities

up to 35%

Transferable securities

80%

up to 5%

collective investment schemes

up to 5%

up to 5%

Any one issue of securities

up to 5%

Note 1:

This table does not include all the detail in this section (CIS 5A.8)

Note 2:

Property scheme A is invested in immovables to the maximum extent permitted, while Property scheme B is invested in immovables to the minimum extent permitted. Both property schemes are assumed to be fully invested in immovables and transferable securities, although in practice both would be likely to hold some cash as permitted by section CIS 5A.15 (Cash borrowing, lending and other provisions) and the cash held could therefore drive down to some lower figure the 20% minimum. The same effect would be produced if the property scheme were taking advantage of section CIS 5A.13 (Efficient portfolio management).

CIS 5A.9 Warrant schemes

Application

CIS 5A.9.1 R

This section (CIS 5A.9) applies to authorised fund managers of warrant schemes.

Introduction

CIS 5A.9.2 G
  1. (1)

    This section (CIS 5A.9) sets out specific rules for warrant schemes. Warrant schemes are authorised funds which are akin in all respects to securities schemes (as to which see CIS 5A.4 (Securities schemes)), except that they have an unlimited power to invest in warrants.

  2. (2)

    In this sourcebook, Investment and borrowing powers "warrant" has a wider meaning than normally attributed to it in warrant markets. In this sourcebook, warrants are not only instruments giving entitlement to investments (as defined in article 79 of the Regulated Activities Order) but also include any other transferable security (not being a nil or partly paid security) which is listed on an eligiblesecurities market, and which is akin to a warrant in that it involves a down payment and a right to surrender the instrument and pay more in due course in order to obtain a transferable security.

Warrant schemes

CIS 5A.9.3 R
  1. (1)

    The scheme property of a warrant scheme must, except where otherwise provided in the rules in this chapter, only consist of property which could be the scheme property of a securities scheme, except that up to 100% in value of the scheme property may consist of warrants.

  2. (2)

    Accordingly, CIS 5A.4 (Securities schemes) (except CIS 5A.4.6 R (Investment in warrants and nil and partly paid securities)) applies to a warrant scheme as it applies to a securities scheme.

  3. (3)

    The following also apply to warrant schemes:

    1. (a)

      CIS 5A.2 (General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.13 (Efficient portfolio management);

    3. (c)

      CIS 5A.14 (Stock lending);

    4. (d)

      CIS 5A.15 (Cash, borrowing, lending and other provisions); and

    5. (e)

      CIS 5A.16 (Cover for sales).

CIS 5A.10 Feeder funds

Application

CIS 5A.10.1 R

This section (CIS 5A.10) applies to managers of feeder funds, except CIS 5A.10.4 R (2) which applies to trustees of feeder funds.

Introduction

CIS 5A.10.2 G
  1. (1)

    This section (CIS 5A.10) sets out specific rules for feeder funds. Feeder funds are AUTs which are relevant pension schemes. Under this section (CIS 5A.10), a feeder fund must be invested in either a single regulated collective investment scheme or a single eligible investment trust.

  2. (2)

    The feeder fund investing in eligible investment trustshares is structured under the rules in this section (CIS 5A.10). The rules in this section set out the conditions that must be satisfied before a feeder fund can invest in an eligible investment trust.

Feeder funds: general

CIS 5A.10.3 R
  1. (1)

    The scheme property of a feeder fund must, except where otherwise provided in the rules in this chapter, only consist of:

    1. (a)

      units in a single regulated collective investment scheme; or

    2. (b)

      shares in or debentures of a single eligible investment trust (as to which see CIS 5A.10.4 R (Feeder funds investing in a single eligible investment trust)).

  2. (2)

    An AUT may be a feeder fund only if it is a relevant pension scheme.

  3. (3)

    A feeder fund under (1)(a) must not invest in:

    1. (a)

      a geared futures and options scheme;

    2. (b)

      a property scheme;

    3. (c)

      a warrant scheme;

    4. (d)

      a feeder fund;

    5. (e)

      a fund of funds scheme, unless the fund of funds scheme is prevented by the instrument constituting the scheme from investing in any authorised fund within (a), (b) or (c);

    6. (f)

      any sub-fund of a regulated collective investment scheme which is invested as if it were an authorised fund within (a) to (e); and

    7. (g)

      a recognised scheme which would, if authorised, fall within any of (a) to (f).

  4. (4)

    A sub-fund of an AUT that is an umbrella scheme, which (if it were itself the subject of a separate authorisation order) would be a feeder fund, is to be treated as a feeder fund for the purposes of this rule (CIS 5A.10.3 R) and ruleCIS 5A.10.4 R (Feeder funds investing in a single eligible investment trust); but an AUT that is an umbrella scheme must not contain such a sub-fund unless that AUT is a relevant pension scheme.

  5. (5)

    The following also apply to feeder funds:

    1. (a)

      CIS 5A.2 (General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.15 (Cash, borrowing, lending and other provisions); and

    3. (c)

      CIS 5A.16 (Cover for sales).

Feeder funds investing in a single eligible investment trust

CIS 5A.10.4 R

An investment trust is an eligible investment trust for the purposes of CIS 5A.10.3 R (1)(b) only if:

  1. (1)

    at the date of the authorisation of the feeder fund, the property of the investment trust included net assets worth at least ÂŁ25 million (or, if the base currency of the feeder fund is not sterling, the equivalent in that base currency); and

  2. (2)

    at any time in the last six months, the trustee of the feeder fund having taken reasonable care has determined that:

    1. (a)

      at least 70% of the income of the investment trust received during either or both of:

      1. (i)

        the last completed accounting period; and

      2. (ii)

        the first half of the current accounting period;

      consisted of income from approved securities;

    2. (b)

      (apart from transactions for hedging purposes) the property of the investment trust either:

      1. (i)

        cannot be invested in derivatives; or

      2. (ii)

        can be invested in derivatives only on the footing of cover to at least the extent required of a futures and options scheme under CIS 5A.6.9 R (Cover for transactions in derivatives and forward transactions);

    3. (c)

      not more than 5% of the property of the investment trust consists of warrants;

    4. (d)

      not more than 5% of the property of the investment trust consists of transferable securities issued by any one issuer, except that the figure of 5% may be increased to 15% in respect of up to 30% in value of the investment trust;

    5. (e)

      the feeder fund owns not more than 20% of the shares (or of any class of shares) in or of the debentures (or of any class of debentures) of the investment trust;

    6. (f)

      the borrowing of the investment trust does not exceed 50% of the market value of the shares of the investment trust at the mid-value share price for the time being;

    7. (g)

      the shares in (or debentures of) the investment trust are regularly offered for purchase and sale by at least three market makers who are recognised or registered as members of an eligiblesecurities market; and

    8. (h)

      the investment trust has no limit on its duration.

CIS 5A.11 Fund of funds schemes

Application

CIS 5A.11.1 R

Introduction

CIS 5A.11.2 G
  1. (1)

    This section (CIS 5A.11) sets out specific rules for fund of funds schemes. Fund of funds schemes are authorised funds designed to invest in a combination of at least five regulated collective investment schemes. A fund of funds scheme may combine investment in money market schemes or recognised schemes equivalent to a money market scheme, with investment in any one other permitted category of scheme. Alternatively, a fund of funds scheme may invest only in money market schemes or in recognised schemes equivalent to a money market scheme or only in regulated collective investment schemes from any one other permitted category of scheme.

  2. (2)

    The requirements in this section preserve product distinctiveness in the case of fund of funds schemes.

  3. (3)

    For the purpose of this section, each sub-fund of an umbrella scheme and of an equivalent recognised scheme is to be treated as if it were a separate authorised fund or separate scheme.

Fund of funds schemes: general

CIS 5A.11.3 R
  1. (1)

    The scheme property of a fund of funds scheme must, except where otherwise provided in the rules in this chapter, only consist of units in regulated collective investment schemes.

  2. (2)

    A fund of funds scheme may not invest in:

    1. (a)

      a fund of funds scheme;

    2. (b)

      a feeder fund;

    3. (c)

      any recognised scheme which is dedicated to investment in a number of regulated collective investment schemes;

    4. (d)

      any recognised scheme which is dedicated to investment in a single regulated collective investment scheme or in a single eligible investment trust; and

    5. (e)

      any sub-fund of an umbrella scheme or sub-fund of any other recognised scheme which is equivalent to a scheme within (a) to (d).

  3. (3)

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

  4. (4)

    The following also apply to fund of funds schemes:

    1. (a)

      CIS 5A.2 (General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.13 (Efficient portfolio management);

    3. (c)

      CIS 5A.15 (Cash, borrowing, lending and other provisions); and

    4. (d)

      CIS 5A.16 (Cover for sales).

Eligible combinations of scheme

CIS 5A.11.4 R
  1. (1)

    A fund of funds scheme may invest in units in any five or more authorised funds within:

    1. (a)

      any one of:

      1. (i)

        UCITS Schemes;

      2. (ii)

        CIS 5A.4 (Securities schemes);

      3. (iii)

        CIS 5A.5 (Money market schemes);

      4. (iv)

        CIS 5A.6 (Futures and options schemes);

      5. (v)

        CIS 5A.7 (Geared futures and options schemes);

      6. (vi)

        CIS 5A.8 (Property schemes); or

      7. (vii)

        CIS 5A.9 (Warrant schemes); or

    2. (b)

      any combination of:

      1. (i)

        UCITS schemes;

      2. (ii)

        CIS 5A.4 (Securities schemes); and

      3. (iii)

        CIS 5A.5 (Money market schemes).12

  2. (2)

    A fund of funds scheme may invest in units in one or more money market schemes (within CIS 5A.5 (Money market schemes)) and in units in any one or more authorised funds within any one scheme type in (1)(a) or any combination permitted by (1)(b).2

  3. (3)

    Each sub-fund of an umbrella scheme and each sub-fund of any recognised scheme that is equivalent to an umbrella scheme is to be treated for the purposes of (CIS 5A.11.4 R) and CIS 5A.11.3 R (3)as if it were a separate scheme.

  4. (4)

    A recognised scheme may be treated for the purpose of this rule (CIS 5A.11.4 R) as if it were a scheme falling within the section which would be the relevant section if the recognised scheme were an authorised fund.

CIS 5A.12 Umbrella schemes

Application

CIS 5A.12.1 R

This section (CIS 5A.12) applies to authorised fund managers of umbrella schemes.

Introduction

CIS 5A.12.2 G

This section (CIS 5A.12) sets out specific rules for umbrella schemes. Umbrella schemes are single authorised funds which have at least two sub-funds and provide the opportunity for holders to switch all or part of their investment from one sub-fund to another. CIS 12 (Special provisions for certain categories of scheme) and other provisions of the rules in this sourcebook enable the umbrella scheme to be treated as a single authorised fund or as a collection of separate sub-funds as appropriate. CIS 12 sets out specific other provisions that apply to umbrella schemes.

Umbrella schemes: general

CIS 5A.12.3 R

A sub-fund of an umbrella scheme must, subject to CIS 5A.12.4 R, only be invested as if it were a single authorised fund within one of CIS 5A.4 (Securities schemes) to CIS 5A.11 (Fund of fund schemes).

Restriction on investment

CIS 5A.12.4 R

No sub-fund of an umbrella scheme may invest in units in another sub-fund of the same umbrella scheme.

CIS 5A.13 Efficient portfolio management

Application

CIS 5A.13.1 R

This section (CIS 5A.13) applies to authorised fund managers, other than managers of feeder funds, except:

  1. (1)

    CIS 5A.13.3 R which applies to ICVCs and to managers of AUTs other than feeder funds;

  2. (2)

    CIS 5A.13.3 R (2)(c) which does not apply to ICVCs that are fund of funds schemes or to managers of AUTs that are fund of funds schemes or feeder funds;

  3. (3)

    CIS 5A.13.4 R (2)(b), which does not apply to authorised fund managers of fund of funds schemes and managers of feeder funds; and

  4. (4)

    CIS 5A.13.12 R, which applies to ICVCs and to trustees of AUTs, other than feeder funds.

Explanation: requirements of efficient portfolio management

CIS 5A.13.2 G
  1. (1)

    This section (CIS 5A.13) gives an ICVC or a manager of an AUT the ability to reduce the risks or costs associated with making investments. For that purpose, this section provides machinery to enable the property of an authorised fund to be used for efficient portfolio management.

  2. (2)

    There are three broadly based requirements:

    1. (a)

      the transactions must be economically appropriate;

    2. (b)

      the exposure must be fully covered; and

    3. (c)

      the transactions must be entered into for one or more of three specific aims.

  3. (3)

    On (2)(a), this section (CIS 5A.13) requires that the transaction must be economically appropriate for the purposes of efficient portfolio management.

  4. (4)

    On (2)(b), this section (CIS 5A.13) requires that the exposure must be fully covered by cash or other scheme property sufficient to meet any obligation to pay or deliver that could arise.

  5. (5)

    On (2)(c), this section (CIS 5A.13) sets out (in CIS 5A.13.3 R(2)) what these three aims are:

    1. (a)

      the reduction of risk;

    2. (b)

      the reduction of cost; and

    3. (c)

      the generation of additional capital or income for the authorised fund with an acceptably low level of risk.

  6. (6)

    The first two aims, together or separately, allow for tactical asset allocation. Tactical asset allocation is a switch in exposure through the use of derivatives rather than through the sale and purchase of underlying property. The limits on this are set out in CIS 5A.13.4 R(1) and (2)(a).

  7. (7)

    There is also a specific requirement for UCITS schemes which is derived from the UCITS directive. Authorised funds subject to that directive must be invested in transferable securities, and it therefore follows that an alternative exposure obtained through derivatives in the portfolio should not remain there indefinitely; the authorised fund must revert to transferable securities of some kind, within a reasonable time. Therefore, the rules in this section provide that any tactical asset allocation of a UCITS scheme must be temporary.

  8. (8)

    The first aim of reduction of risk allows for the use of derivatives with a view to switching the currency exposure of all or part of the scheme property away from a currency which is considered to be at risk.

  9. (9)

    The third aim, of taking a low-risk gain, is further defined in CIS 5A.13.5 R. The gains are to be derived from arbitrage and from writing covered options. Gains from stock lending are covered in CIS 5A.14.

Appropriate transactions

CIS 5A.13.3 R
  1. (1)

    This section enables the ICVC, or manager for the account of the AUT, to enter into transactions of the kind specified in CIS 5A.13.6 R (Permitted transactions) for the purpose of efficient portfolio management, but only when each of the following two conditions is satisfied:

    1. (a)

      the transaction is economically appropriate to that purpose, as required by CIS 5A.13.4 R (Economic appropriateness); and

    2. (b)

      the transaction is fully covered, as required by CIS 5A.13.8 R (Cover for transactions in derivatives and forward transactions)).

  2. (2)

    A transaction under (1) must only be entered into if it is to achieve one or more of the following in respect of the authorised fund:

    1. (a)

      the reduction of risk;

    2. (b)

      the reduction of cost; and

    3. (c)

      the generation of additional capital or income for the authorised fund with an acceptably low level of risk.

  3. (3)

    The purpose in (2) must relate to:

    1. (a)

      the scheme property of the authorised fund;

    2. (b)

      property (whether precisely identified or not) which is to be or is proposed to be acquired for the authorised fund; and

    3. (c)

      anticipated cash receipts of the authorised fund, if due to be received at some time and likely to be received within one month.

Economic appropriateness

CIS 5A.13.4 R
  1. (1)

    Any transaction under this section must be one which (alone or in combination with one or more others) is ascertained with reasonable care by the authorised fund manager to be economically appropriate to the efficient portfolio management of the authorised fund.

  2. (2)

    In consequence, the authorised fund manager must take reasonable care to determine that:

    1. (a)

      for transactions undertaken to reduce risk or cost (or both), the transaction (alone or in combination) will diminish a risk or cost of a kind or level which it is sensible to reduce; and

    2. (b)

      for transactions undertaken to generate additional capital or income, the authorised fund is certain (or certain barring events which are not reasonably foreseeable) to derive a benefit from the transaction.

  3. (3)

    A transaction may not be entered into under this section (CIS 5A.13) if its purpose could reasonably be regarded as speculative.

  4. (4)

    Where the transaction is for the account of a UCITS scheme and relates to the actual or potential acquisition of transferable securities, then the authorised fund manager must intend that the authorised fund should invest in transferable securities within a reasonable time; and it must thereafter ensure that, unless the position has itself been closed out, that intention is realised within that reasonable time.

Generation of additional capital or income

CIS 5A.13.5 R
  1. (1)

    There is an acceptably low level of risk for the purposes of CIS 5A.13.3 R (2)(c), in any case where the authorised fund manager has taken reasonable care to determine that the authorised fund is certain (or certain barring events which are not reasonably foreseeable) to derive a benefit:

    1. (a)

      on a basis set out in (2) or (3); or

    2. (b)

      from stock lending under section CIS 5A.14.

  2. (2)

    The first basis is to take advantage of pricing imperfections in relation to the acquisition and disposal (or disposal and acquisition) of rights in relation to property the same as, or equivalent to, property which the authorised fund holds or may properly hold.

  3. (3)

    The second basis is to receive a premium for the writing of a covered call option or a covered put option, even if that benefit is obtained at the expense of surrendering the chance of yet greater benefit.

Permitted transactions

CIS 5A.13.6 R
  1. (1)

    A transaction under this section must be:

    1. (a)

      a transaction in derivatives; or

    2. (b)

      a forward transaction in a currency (or where the scheme property may include gold, in gold).

  2. (2)

    A transaction in derivatives under (1)(a) must be:

    1. (a)

      in an approved derivative ; or

    2. (b)

      one which complies with CIS 5A.6.6 R (OTC transactions in derivatives); or

    3. (c)

      a synthetic future.

  3. (3)

    Any transaction in an approved derivative must be effected on or under the rules of an eligiblederivatives market.

  4. (4)

    Any forward transaction must be with an approved counterparty within the meaning of CIS 5A.6.6 R (2)(OTC transactions in derivatives).

  5. (5)

    Not more than 5% of the value of the scheme property is to be directed to initial outlay in respect of over the counter transactions with any one counterparty.

  6. (6)

    A transaction in derivatives or forward transaction which would or could lead to delivery of property to the depositary (or to the ICVC) may be entered into only if:

    1. (a)

      the property can be held by the authorised fund; and

    2. (b)

      the authorised fund manager has taken reasonable care to determine that delivery of the property by the transaction will not lead to a breach of the rules in this chapter.

Cover for transactions in derivatives and forward transactions

CIS 5A.13.7 G
  1. (1)

    Like futures and options schemes, transactions in derivatives and forward transactions entered into for the purpose of efficient portfolio management should be fully covered.

  2. (2)

    Cover is fully explained in CIS 5A.13.8 R. There is a general requirement for individual cover of the right kind (stock for stock, or cash sum for cash sum) and CIS 5A.13.9 G provides examples of how the cover is to be found. There is also a global cover requirement, to prevent or limit gearing.

  3. (3)

    In accordance with CIS 5A.2.7 R(2)(b) (Chapter to be construed as a whole) cover used in respect of one transaction in derivatives or forward transaction may not be used for cover in respect of another transaction in derivatives or forwards.

  4. (4)

    There must be sufficient available cover for all transactions concerned.

Cover for transactions in derivatives and forward transactions

CIS 5A.13.8 R
  1. (1)

    No transaction may be entered into under this section (CIS 5A.13) unless the maximum potential exposure created by the transaction, in terms of the principal or notional principal of the derivative or forward contract, is:

    1. (a)

      covered individually under (2) or (3); and

    2. (b)

      covered globally under (4).

  2. (2)

    Exposure is covered individually if there is, in the scheme property:

    1. (a)

      (in the case of an exposure in terms of property) a transferable security or other property which is of the right kind, and sufficient in amount, to match the exposure; and

    2. (b)

      (in the case of an exposure in terms of money), cash or near cash (or borrowing under CIS 5A.13.12 R (Borrowing in the context of efficient portfolio management)) or transferable securities which is or are, or, on being turned into money in the right currency, will be, sufficient in amount to match the exposure.

  3. (3)

    However, exposure to an index or basket of securities or other assets is covered individually for the purposes of (2) if the authorised fund holds securities or other property which (taking into account the closeness of the relationship between fluctuations in the price of the two) can reasonably be regarded as appropriate to provide cover for the exposure; they may be so regarded even if there is not complete congruence between the cover and the exposure.

  4. (4)

    Exposure is covered globally for the purposes of this section if, after taking account of all the cover required under (2) or (3) for other positions already in existence, adequate cover from within the scheme property is available to enable the fresh transaction to be entered into.

  5. (5)

    A transaction in derivatives or forward transaction is not available to provide cover for another derivative or forward transaction under this section, but:

    1. (a)

      the two transactions involved in a synthetic future are to be treated as if they were a single derivative, and the net exposure from the combination is to be covered on the basis of the higher of the cover requirements of the options which make up the synthetic future;

    2. (b)

      synthetic cash is available to provide cover for a transaction as if it were cash; and

    3. (c)

      a covered currency forward or a covered currency derivative may provide cover for a derivative.

  6. (6)

    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)(b) and (3).

  7. (7)

    Property anticipated under a derivative transaction does not count as property under (2)(a).

  8. (8)

    Property is not available for cover if it is the subject of a transaction under CIS 5A.14 (Stock lending), unless 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.

Examples of cover requirements

CIS 5A.13.9 G

Examples of the cover requirements:

  1. (1)

    A bought put option (or a written call option) on 1000 ordinary ÂŁ1 shares (fully paid) of ABC plc is covered by an existing holding in the authorised fund of 1000 ordinary A1 shares (fully paid) of ABC plc (CIS 5A.13.8 R(2)(a)).

  2. (2)

    A bought call option (or written put option) on 1000 ordinary ÂŁ1 shares (fully paid) of ABC plc is covered by cover (in the form of cash or an allowable substitute for cash or transferable securities) which is sufficient in amount to meet the purchaseprice of the shares on exercise of the option (CIS 5A.13.8 R(2)(b)).

  3. (3)

    A sold contract for differences on short-dated sterling is covered by cash or near cash or transferable securities, the values of which together at least match the notional principal of the contract (for example, a LIFFE short sterling contract, or a succession of such contracts, is covered by ÂŁ500,000) (CIS 5A.13.8 R(2)(b) and CIS 5A.2.7 R(2)(b)).

  4. (4)

    A sold future on the FT-SE 100 Index is covered by holdings of equities, which satisfy the test of appropriateness for cover in CIS 5A.13.8 R(3) in relation to that future, and the values of which together at least match the current mark to market valuation of the future (for example, if the multiplier per full index point is ÂŁ10, and if the eventual obligation under the future is currently at 2800, the valuation of the futures position is 2800 x ÂŁ10 = ÂŁ28,000) (CIS 5A.13.8 R(3)).

  5. (5)

    Where an authorised fund has holdings in blue chip UKshares and the authorised fund manager wishes to provide more exposure to the US market and decides to sell a FT-SE index future to the value of those shares (this transaction satisfying the test of appropriateness for cover in CIS 5A.13.8 R(3)), then the sterling synthetic cash position created is used as cover for a Standard and Poors 500 index future provided that the authorised fund ensures that the cover remains sufficient (for example, by reference to the sterling/US dollar exchange rate) (CIS 5A.13.8 R(3) and CIS 5A.13.8 R(5)(b)).

The use of index derivatives: congruence

CIS 5A.13.10 G
  1. (1)

    CIS 5A.13.6 R (Permitted transactions) permits the use of index derivatives for efficient portfolio management ("EPM"). CIS 5A.13.8 R sets out the cover requirements for derivatives (including for index derivatives). Where index derivatives are used, cover may be provided by securities even if there is not complete congruence between the components of the index and the securities, provided that it is reasonable to use one as appropriate to cover for the other, taking into account the closeness of the relationship between fluctuations in their prices (see CIS 5A.13.8 R(3)). In considering the appropriateness of the instrument, authorised fund managers will need to take reasonable care that it is economic, suitable and reasonably congruent. This guidance deals with the matter of congruence.

  2. (2)

    It is not possible for the FSA to reach a view, in the abstract, on any particular level of congruence. The level of congruence necessary to satisfy the requirement that it is reasonable to regard the index derivative as appropriate, should be determined only in light of the individual circumstances of the case concerning a particular authorised fund.

  3. (3)

    Clearly, the higher the level of congruence, the less likely the authorised fund manager would be open to any challenge that the index derivative chosen is not appropriate. Whilst it does not necessary follow that a low level of congruence means that the index derivative chosen will be inappropriate, the derivative used in those circumstances is likely to require much further justification. In certain types of authorised fund it may be that no index derivative is appropriate.

  4. (4)

    It should be noted that it is not the intention of CIS 5A.13.8 R to preclude the use of an appropriate index derivative that has a relationship with part of the scheme property. That is particularly so where the EPM technique is to be adopted in respect of part only of the scheme property, as will normally be the case.

  5. (5)

    The following steps can be taken by an authorised fund manager when using index derivatives and when determining whether or not an index derivative is "reasonably congruent" to an underlying portfolio of investments. Consideration of these steps needs to reflect the respective responsibilities of the authorised fund managers and depositaries under CIS 7 (Powers and duties).

    1. (a)

      In determining the extent and manner in which index derivatives are used for EPM, the authorised fund manager should set out why it considers the transaction to be appropriate. In-house rules should be prepared which identify, on a scheme by scheme basis, the instruments the authorised fund manager is likely to use and the extent of this use.

    2. (b)

      Authorised fund managers should show these in-house rules to, and discuss them with, the depositary. Depositaries need not endorse the rules, although they may wish to give a view on whether they consider them as being reasonable in principle.

    3. (c)

      If the matter is not covered by the in-house rules and the authorised fund manager is in doubt whether a particular transaction is appropriate, it should discuss this with the depositary before taking any action.

    4. (d)

      Any remaining doubt should be discussed with the FSA.

    5. (e)

      Procedures should be established between the authorised fund manager and depositary that enable the depositary to monitor the investment in derivatives in accordance with its duty under CIS 7. These procedures will cover the details of any transactions in index derivatives entered into and the authorised fund manager's justification that the transaction complies with the rules in this chapter.

  6. (6)

    Other approaches to those outlined in (5) may be appropriate in the light of the authorised fund manager's own circumstances. Whatever approach is taken, authorised fund managers will need to review, as and when circumstances dictate, and in the light of developments on indices, the instruments they regard as appropriate for use in their authorised funds.

Borrowing in the context of efficient portfolio management

CIS 5A.13.11 G
  1. (1)

    CIS 5A.13.12 R sets out requirements for borrowing in the context of efficient portfolio management. That rule deals with two aspects of such borrowing.

  2. (2)

    First, borrowed cash and cash committed for borrowing goes to swell the scheme property for the purpose of providing cover in the form of cash. Effectively, an additional 10% of cover can be found in this way.

  3. (3)

    Second, a back to back currency loan can be regarded as switching the borrowed currency into the scheme property, and switching the deposited currency out. The lending transaction does not require cover, as it is a loan rather than a forward or future. But it enables the authorised fund by borrowing to have cash in another currency to use as cover.

  4. (4)

    Although CIS 5A.13.8 R(2)(b) does not require cash cover to be in a currency matching the exposure, the authorised fund manager needs to monitor currency rates in order to ensure that cover remains sufficient. Borrowing in the right currency may thus make the cover simpler to operate.

Borrowing in the context of efficient portfolio management

CIS 5A.13.12 R
  1. (1)

    Cash obtained by borrowing, and borrowings which the authorised fund manager reasonably regards an eligible institution or an approved bank to be committed to provide, are available for cover under CIS 5A.13.8 R as long as the normal limits on borrowing (as to which see CIS 5A.15.3 R (General power to borrow) and CIS 5A.15.4 R (Borrowing limits)) are observed.1

  2. (2)

    Where, for the purposes of this section (CIS 5A.13), the ICVC or the trustee for the account of the AUT with the instructions of the manager:

    1. (a)

      borrows an amount of currency from an eligible institution or an approved bank; and1

    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);

    then this section (CIS 5A.13) applies as if the borrowed currency, and not the deposited currency, were part of the scheme property, and the normal limits on borrowing under CIS 5A.15.3 R and CIS 5A.15.4 R do not apply to that borrowing.

The continuing nature of requirements and limits

CIS 5A.13.13 R
  1. (1)

    The authorised fund manager must, at each valuation point (and more frequently if necessary), re-calculate the amount of cover required in respect of positions already in existence under this section (CIS 5A.13). Derivatives and rights under forward transactions under this section (CIS 5A.13) may be retained in the scheme property only so long as they remain covered both individually and globally under CIS 5A.13.8 R.

  2. (2)

    If at any time:

    1. (a)

      any fact or matter relating to the authorised fund or its economic environment; or

    2. (b)

      the aggregate of all outstanding positions under this section (CIS 5A.13);

    is such that at least one of the relevant transactions (assuming it did not exist) could not properly be effected, either in that size or at all, the authorised fund manager must immediately on becoming aware of that fact take the necessary steps to rectify the situation, whether by closing out or by providing additional cover or otherwise.

CIS 5A.14 Stock lending

Application

CIS 5A.14.1 R

This section (CIS 5A.14) applies to depositaries of authorised funds which are not fund of funds schemes or feeder funds, except:

  1. (1)

    CIS 5A.14.3 R, which applies to ICVCs other than fund of funds schemes, or to managers of AUTs other than fund of funds schemes and feeder funds; and

  2. (2)

    in the case of ICVCs, CIS 5A.14.4 R which applies to ICVCs other than fund of funds schemes if the ICVC enters into the stock lending agreement.

Stock lending permitted under this section (CIS 5A.14)

CIS 5A.14.2 G
  1. (1)

    This section (CIS 5A.14) should be regarded as an extension of section CIS 5A.13 (Efficient portfolio management). It permits the generation of additional income for the benefit of the authorised fund, and hence for its investors, by entry into stock lending transactions for the account of the authorised fund.

  2. (2)

    The specific method of stock lending permitted in this section is in fact not a transaction which is a loan in the normal sense. Rather it is an arrangement of the kind described in section 263B of the Taxation of Chargeable Gains Act 1992, under which the lender transfers securities to the borrower otherwise than by way of sale and the borrower is to transfer those securities, or securities of the same type and amount, back to the lender at a later date. In accordance with good market practice, a separate transaction by way of transfer of assets is also involved for the purpose of providing collateral to the "lender" to cover him against the risk that the future transfer back of the securities may not be satisfactorily completed.

  3. (3)

    Other forms of stock lending, whether combined with stock borrowing or by way of loan or transfer of a beneficial interest in stock, are not envisaged in this section, and, indeed, are prohibited by CIS 5A.15.6 R (Restrictions on lending of property other than money).

Stock lending: general

CIS 5A.14.3 R

The stock lending permitted by this section (CIS 5A.14) may be exercised by an authorised fund for the purpose of efficient portfolio management, that is, when it reasonably appears to the ICVC or to the manager to be economically appropriate to do so with a view to generating additional income for the authorised fund with an acceptable degree of risk.

Permitted stock lending

CIS 5A.14.4 R
  1. (1)

    The ICVC, or the depositary at the request of the ICVC, or 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; 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 5A.14.6 R (1); and

      3. (iii)

        sufficiently immediate within CIS 5A.14.6 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.

Stock lending: treatment of collateral

CIS 5A.14.5 G

Where a stock lending arrangement is entered into, the scheme property remains unchanged in terms of value: the securities transferred cease to be part of the scheme property, but there is obtained in return an obligation on the part of the counterparty to transfer back equivalent securities. The depositary will also receive collateral to set against the risk of default in transfer, and that collateral is equally irrelevant to the valuation of the scheme property (because it is transferred against an obligation of equivalent value by way of re-transfer). CIS 5A.14.6 R accordingly makes provision for the treatment of the collateral in that context.

Treatment of collateral

CIS 5A.14.6 R
  1. (1)

    Collateral is adequate for the purposes of this section (CIS 5A.14) 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;

      2. (ii)

        near cash;

      3. (iii)

        government and public securities;

      4. (iv)

        a certificate of deposit;

      5. (v)

        a letter of credit; and

      6. (vi)

        securities transferred in CREST.

  2. (2)

    Collateral is sufficiently immediate for the purposes of this section (CIS 5A.14) 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.

  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 5A.14) 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 5A.14).

  7. (7)

    Paragraph (5) and (6)(a) do not apply to any valuation of collateral itself for the purposes of this section (CIS 5A.14).

Limitation by value

CIS 5A.14.7 R

There is no limit on the value of the scheme property which may be the subject of stock lending transactions within this section (CIS 5A.14).

CIS 5A.15 Cash, borrowing, lending and other provisions

Application

CIS 5A.15.1 R
  1. (1)

    CIS 5A.15.1 R applies to authorised fund managers and depositaries.

  2. (2)

    CIS 5A.15.2 R (1)(Cash and near cash) applies to authorised fund managers, other than authorised fund managers of money market schemes, futures and options schemes and geared futures and options schemes.

  3. (3)

    CIS 5A.15.3 R (General power to borrow) applies (other than for geared futures and options schemes) to ICVCs and trustees of AUTs, except CIS 5A.15.3 R (3)and (4), which apply to authorised fund managers of authorised funds other than geared futures and options schemes and futures and options schemes.

  4. (4)

    CIS 5A.15.4 R (Borrowing limits) applies to authorised fund managers of authorised funds other than geared futures and options schemes.

  5. (5)

    CIS 5A.15.5 R (Restrictions on lending of money) applies to ICVCs or to managers and trustees, except for CIS 5A.15.5 R(3) which applies to ICVCs.

  6. (6)

    CIS 5A.15.6 R (Restrictions on lending of property other than money) applies to ICVCs or managers and trustees, except for CIS 5.15.6R (4) which applies to ICVCs or to depositaries of ICVCs.

  7. (7)

    CIS 5A.15.7 R (General power to accept or underwrite placings) applies to ICVCs or to managers.

  8. (8)

    CIS 5A.15.8 R (Guarantees and indemnities) applies to ICVCs or depositaries.

Cash and near cash

CIS 5A.15.2 R
  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)

      redemption of units; or

    2. (b)

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

    3. (c)

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

  2. (2)

    The scheme property of a money market scheme, a futures and options scheme and a geared futures and options scheme may consist of cash and near cash without limitation.

  3. (3)

    Paragraph (2) does not apply during the period of the initial offer, during which the scheme property may consist of cash and near cash without limitation.

General power to borrow

CIS 5A.15.3 R
  1. (1)

    The ICVC or trustee (on the instructions of the manager) may, in accordance with this rule (CIS 5A.15.3 R) and CIS 5A.15.4 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.1

  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 5A.15.3 R) does not apply to "back to back" borrowing under CIS 5A.13.12 R(2) (Borrowing in the context of efficient portfolio management).

  6. (6)

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

Borrowing limits

CIS 5A.15.4 R
  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)

    For a property scheme, the authorised fund manager must ensure that the borrowing does not, on any business day, exceed 10% of the value of that part of the scheme property which for the time being does not consist of immovables.

  3. (3)

    For a property scheme, an approved mortgage under CIS 5A.8.9 R (Mortgaged property) or CIS 5A.8.12 R (Grant of options, mortgages) does not count as borrowing for the purposes of (2).

  4. (4)

    This rule (CIS 5A.15.4 R) does not apply to "back to back" borrowing under CIS 5.13.12R(2).

  5. (5)

    In this rule (CIS 5A.15.4 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.

  6. (6)

    [deleted]2

    2

Restrictions on lending of money

CIS 5A.15.5 R
  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.

Restrictions on lending of property other than money

CIS 5A.15.6 R
  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 falling within CIS 5A.14 (Stock lending) are not lending for the purposes of (1).

  3. (3)

    The scheme property of an authorised fund must not be mortgaged except under CIS 5A.8 (Property schemes).

  4. (4)

    Nothing in this rule (CIS 5A.15.6 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.

General power to accept or underwrite placings

CIS 5A.15.7 R
  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 5A.15.7 R) applies, subject to compliance with any restriction in the instrument constituting the scheme.

  2. (2)

    This rule (CIS 5A.15.7 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)

    No agreement or understanding to which this rule (CIS 5A.15.7 R) applies may be entered into if it relates to units in a collective investment scheme.

  5. (5)

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

    1. (a)

      be covered under CIS 5A.13.8 R (Cover for transactions for efficient portfolio management) as if the exposure had been incurred in the context of CIS 5A.13 (Efficient portfolio management) by means of transactions in approved derivatives; 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.

Guarantees and indemnities

CIS 5A.15.8 R
  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) of the OEIC regulations (Exemptions from liability to be void);

      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.

CIS 5A.15.9 G

CIS 8.4.1 R (Payment of liabilities on transfer of assets) and CIS 8.5.5 R (Other payments out of scheme property) contain provisions restricting payments out of scheme property.

CIS 5A.16 Cover for sales

Application

CIS 5A.16.1 R

Requirement to cover sales

CIS 5A.16.2 R
  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 transaction in derivatives or a forward transaction under CIS 5A.13 (Efficient portfolio management).