COLL 5.2 General investment powers and limits for UCITS schemes

This section applies to an ICVC, an ACD, a manager of an AUT, a depositary of an ICVC and a trustee of an AUT, where such ICVC or AUT is a UCITS scheme, in accordance with COLL 5.2.2 R (Table of application).

1. (1)

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

2. (2)

   The rules in this section relating to spread of investments do not apply until the expiry of a period of six months after the date of which the authorisation order, in respect of the UCITS scheme, takes effect or on which the initial offer commenced, if later, provided that (1) is complied with during such period.

The scheme property of each UCITS scheme must be invested only in accordance with the relevant provisions in sections COLL 5.2 to COLL 5.5 that are applicable to that UCITS scheme and up to any maximum limit so stated, but, the instrument constituting the scheme may further restrict:

1. (1)

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

2. (2)

   the proportion of the capital property of the UCITS scheme be invested in assets of any description;

3. (3)

   the descriptions of transactions permitted; and

4. (4)

   the borrowing powers of the UCITS scheme.

1. (1)

   In this chapter, the value of the scheme property of a UCITS scheme means the net value determined in accordance with COLL 6.3 (Valuation and pricing), after deducting any outstanding borrowings, whether immediately due to be repaid or not.

2. (2)

   When valuing the scheme property for the purposes of 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 COLL 6.3 (Valuation and pricing);

   2. (b)

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

   3. (c)

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

3. (3)

   2When valuing the scheme property of a dual-priced authorised fund, the cancellation basis of valuation referred to in COLL 6.3.3 R (2) (Valuation) is to be applied.

1. (1)

   A transferable security is an investment which is any of the following:

   1. (a)

      a share;

   2. (b)

      a debenture;

   3. (c)

      a government and public security;

   4. (d)

      a warrant; or

   5. (e)

      a certificate representing certain securities.

2. (2)

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

3. (3)

   In applying (2) to an investment which is issued by a body corporate, and which is a share or a debenture, the need for any consent on the part of the body corporate or any members or debenture holders of it may be ignored.

4. (4)

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

1. (1)

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

   1. (a)

      transferable securities;

   2. (b)

      units in collective investment schemes permitted under COLL 5.2.13 R (Investment in collective investment schemes);

   3. (c)

      approved money-market instruments permitted under COLL 5.2.18 R (Investment in money-market instruments);

   4. (d)

      derivatives and forward transactions permitted under COLL 5.2.20 R (Permitted transactions (derivatives and forwards)); and

   5. (e)

      deposits permitted under COLL 5.2.26 R (Investment in deposits).

2. (2)

   For an ICVC the scheme property may also include movable and immovable property that is necessary for the direct pursuit of the ICVC's business.

3. (3)

   Transferable securities and money-market instruments held within a UCITS scheme must be;

   1. (a)

      admitted to or dealt in on an eligible market within COLL 5.2.10 R (1)(a) (Eligible markets: requirements); or

   2. (b)

      dealt in on an eligible market within COLL 5.2.10 R (1)(b); or

   3. (c)

      admitted to or dealt in on an eligible market within COLL 5.2.10 R (2); or

   4. (d)

      for a money-market instrument,within COLL 5.2.18 R (2).

4. (4)

   Not more than 10% in value of the scheme property of a UCITS scheme is to consist of transferable securities, which do not fall within (3) or of money-market instruments, which do not fall within COLL 5.2.18 R (2).

1. (1)

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

   1. (a)

      a regulated market;

   2. (b)

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

   3. (c)

      any market within (2).

2. (2)

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

   1. (a)

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

   2. (b)

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

   3. (c)

      the depositary has taken reasonable care to determine that:

      1. (i)

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

      2. (ii)

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

3. (3)

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

   1. (a)

      is regulated;

   2. (b)

      operates regularly;

   3. (c)

      is recognised as a market or exchange or as a self-regulating organisation by an overseas regulator;

   4. (d)

      is open to the public;

   5. (e)

      is adequately liquid; and

   6. (f)

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

1. (1)

   This rule does not apply to government and public securities.

2. (2)

   For the purposes of this rule companies included in the same group for the purposes of consolidated accounts as defined in accordance with the Seventh Council Directive 83/349/EEC of 13 June 1983 based on Article 54(3)(g) of the Treaty on consolidated accounts or, in the same group in accordance with international accounting standards, are regarded as a single body.

3. (3)

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

4. (4)

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

5. (5)

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

6. (6)

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

7. (7)

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

8. (8)

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

9. (9)

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

10. (10)

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

    1. (a)

       transferable securities or money-market instrumentsissued by; or

    2. (b)

       deposits made with; or

    3. (c)

       exposures from OTC derivatives transactions made with a single body.

11. (11)

    1For the purpose of calculating the limits in (7) and (10), the exposure in respect of an OTC derivative may be reduced to the extent that collateral is held in respect of it if the collateral meets each of the conditions specified in (12).

12. (12)

    1The conditions referred to in (11) are that the collateral:

    1. (a)

       1is marked-to-market on a daily basis and exceeds the value of the amount at risk;

    2. (b)

       1is exposed only to negligible risks (e.g. government bonds of first credit rating or cash) and is liquid;

    3. (c)

       1is held by a third party custodian not related to the provider or is legally secured from the consequences of a failure of a related party; and

    4. (d)

       1can be fully enforced by the UCITS scheme at any time.

13. (13)

    1For the purpose of calculating the limits in (7) and (10), OTC derivative positions with the same counterparty may be netted provided that the netting procedures:

    1. (a)

       1comply with the conditions set out in Section 3 (Contractual netting (Contracts for novation and other netting agreements)) of Annex III to the Banking Consolidation Directive; and

    2. (b)

       1are based on legally binding agreements.

14. (14)

    1In applying this rule, all derivatives transactions are deemed to be free of counterparty risk if they are performed on an exchange where the clearing house meets each of the following conditions:

    1. (a)

       1it is backed by an appropriate performance guarantee; and

    2. (b)

       1it is characterised by a daily mark-to-market valuation of the derivative positions and an at least daily margining.

1. (1)

   This rule applies

   to government and public securities ("such securities").

2. (2)

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

3. (3)

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

   1. (a)

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

   2. (b)

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

   3. (c)

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

   4. (d)

      the disclosures in (4) have been made.

4. (4)

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

   1. (a)

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

   2. (b)

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

5. (5)

   In this rule in relation to such securities:

   1. (a)

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

   2. (b)

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

A UCITS scheme must not invest in units in a collective investment scheme ("second scheme") unless the second scheme satisfies all of the following conditions, and provided that no more than 30% of the value of the UCITS scheme is invested in second schemes within (1)(b) to (d):

1. (1)

   the second scheme must:

   1. (a)

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

   2. (b)

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

   3. (c)

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

   4. (d)

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

2. (2)

   the second scheme must comply, where relevant, with COLL 5.2.15 R (Investment in associated collective investment schemes) and COLL 5.2.16 R (Investment in other group schemes);

   4
3. (3)

   the second scheme must have terms which prohibit more than 10% in value of the scheme property consisting of units in collective investment schemes; and4

   4
4. (4)

   where the second scheme is an umbrella, the provisions in (2) and (3) and COLL 5.2.11 R (Spread: general) 3apply to each sub-fund as if it were a separate scheme.4

A UCITS scheme must not invest in or dispose of units in another collective investment scheme (the second scheme) if the second scheme is managed or operated by (or, for an ICVC, whose ACD is) the authorised fund manager of the investing UCITS scheme or an associate of that authorised fund manager, unless:

1. (1)

   the prospectus of the investing UCITS scheme clearly states that the property of that investing scheme may include such units; and

2. (2)

   COLL 5.2.16 R (Investment in other group schemes) is complied with.

1. (1)

   Where:

   1. (a)

      an investment or disposal is made under COLL 5.2.15 R; and

   2. (b)

      there is a charge in respect of such investment or disposal;

   the authorised fund manager of the UCITS scheme making the investment or disposal must pay the UCITS scheme the amounts referred to in (2) or (3) within four business days following the date of the agreement to invest or dispose.

2. (2)

   When an investment is made, the amount referred to in (1)(a) is either:

   1. (a)

      any amount by which the consideration paid by the UCITS scheme 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)

   When a disposal is made, the amount referred to in (1)(a) is 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 this rule:

   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 COLL 6.3.8 R (Dilution) or SDRT provision made in accordance with COLL 6.3.7 (SDRT provision) is to be treated as part of the price of the units and not as part of any charge; and

   2. (b)

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

1. (1)

   Where a UCITS scheme invests in a warrant, the exposure created by the exercise of the right conferred by that warrant must not exceed the limits in COLL 5.2.11 R (Spread: general) and COLL 5.2.12 R (Spread: government and public securities).

2. (2)

   A transferable security or a money-market instrumenton 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 UCITS scheme, at the time when payment is required, without contravening the rules in this chapter.

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

1. (1)

   within COLL 5.2.8 R (3)(UCITS schemes: general); or

2. (2)

   a money-market instrument issued or guaranteed by:

   1. (a)

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

   2. (b)

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

3. (3)

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

1. (1)

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

   1. (a)

      the transaction is of a kind specified in COLL 5.2.20 R (Permitted transactions (derivatives and forwards)); and

   2. (b)

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

2. (2)

   Where a UCITS scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in COLL 5.2.11 R (Spread: general) and COLL 5.2.12 R (Spread: government and public securities) save as provided in (4).

3. (3)

   Where a transferable security or money-market instrumentembeds a derivative, this must be taken into account for the purposes of complying with this section.

4. (4)

   Where a scheme invests in an index based derivative, provided the relevant index falls within COLL 5.2.33 R (Relevant indices) the underlying constituents of the index do not have to be taken into account for the purposes of COLL 5.2.11 R and COLL 5.2.12 R.

5. (5)

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

1. (1)

   A transaction in a derivative must:

   1. (a)

      be in an approved derivative; or

   2. (b)

      be one which complies with COLL 5.2.23 R (OTC transactions in derivatives).

2. (2)

   The underlying of a transaction in a derivative must consist of any one or more of the following to which the scheme is dedicated:

   1. (a)

      transferable securities;

   2. (b)

      money-market instruments permitted under COLL 5.2.18 R (Investment in money-market instruments);

   3. (c)

      deposits permitted under COLL 5.2.26 R (Investment in deposits);

   4. (d)

      derivatives permitted under this rule;

   5. (e)

      collective investment scheme units permitted under COLL 5.2.13 R (Investment in collective investment schemes);

   6. (f)

      financial indices;

   7. (g)

      interest rates;

   8. (h)

      foreign exchange rates; and

   9. (i)

      currencies.

3. (3)

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

4. (4)

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

5. (5)

   A transaction in a derivative must not be entered into if the intended effect is to create the potential for an uncovered sale of one or more transferable securities, money-market instruments, units in collective investment schemes or derivatives provided that a sale is not to be considered as uncovered if the conditions in COLL 5.2.22R (3) (Requirement to cover sales) are satisfied1.

6. (6)

   Any forward transaction must be made with an eligible institution or an approved bank.

A derivative or forward transaction which will or could lead to the delivery of property for the account of the UCITS scheme may be entered into only if:

1. (1)

   that property can be held for the account of the UCITS scheme; and

2. (2)

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

1. (1)

   No agreement by or on behalf of a UCITS scheme to dispose of property or rights may be made unless:

   1. (a)

      the obligation to make the disposal and any other similar obligation could immediately be honoured by the UCITS scheme 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 UCITS scheme at the time of the agreement.

2. (2)

   Paragraph (1) does not apply to a deposit.

3. (3)

   Paragraph (1) does not apply where:

   1. (a)

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

   2. (b)

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

      1. (i)

         cash;

      2. (ii)

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

      3. (iii)

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

4. (4)

   1In the asset classes referred to in (3), an asset may be considered as liquid where the instrument can be converted into cash in no more than seven business days at a price closely corresponding to the current valuation of the financial instrument on its own market.

A transaction in an OTC derivative under COLL 5.2.20 R (1) (b) must be:

1. (1)

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

   1. (a)

      an eligible institution or an approved bank; or

   2. (b)

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

2. (2)

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

   1. (a)

      to provide a reliable and verifiable valuation in respect of that transaction at least daily and at any other time at the request of the ICVC or authorised fund manager; and

   2. (b)

      that it or an alternative counterparty 3will, at the request of the ICVC or authorised fund manager, enter into afurther transaction to sell, liquidate or 3close out that transactionat any time, at afair value arrived at under the pricing model or other reliable basis agreed under (3); and

3. (3)

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

   1. (a)

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

   2. (b)

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

1. (1)

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

2. (2)

   The following details of the risk management process must be notified by the authorised fund manager to the FSA in advance of the use of the process as required by (1):

   1. (a)

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

   2. (b)

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

3. (3)

   The authorised fund manager must notify the FSA in advance of any material alteration to the details in (2)(a) or (b).

A UCITS scheme may invest in deposits only if it:

1. (1)

   is with an approved bank;

2. (2)

   is:

   1. (a)

      repayable on demand; or

   2. (b)

      has the right to be withdrawn; and

3. (3)

   matures in no more than 12 months.

1. (1)

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

   1. (a)

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

   2. (b)

      the acquisition gives the ICVC that power.

2. (2)

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

1. (1)

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

   1. (a)

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

   2. (b)

      the acquisition gives the manager that power.

2. (2)

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

A UCITS scheme:

1. (1)

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

   1. (a)

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

   2. (b)

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

2. (2)

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

3. (3)

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

4. (4)

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

5. (5)

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

1. (1)

   In relation to a UCITS scheme which is an umbrella, the provisions in COLL 5.2 to COLL 5.5 apply to each sub-fund as they would for an authorised fund, except the following rules which apply at the level of the umbrella only:

   1. (a)

      COLL 5.2.27 R (Significant influence for ICVCs);

   2. (b)

      COLL 5.2.28 R (Significant influence for managers of AUTs); and

   3. (c)

      COLL 5.2.29 R (Concentration).

2. (2)

   A sub-fund must not invest in another sub-fund of the same umbrella.

1. (1)

   A UCITS scheme may invest up to 20% in value of the scheme property in shares and debentures which are issued by the same body where the investment policy of that scheme as stated in the most recently published prospectus is to replicate the composition of a relevant index which satisfies the criteria specified in COLL 5.2.33 R (Relevant indices).

2. (2)

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

The indices referred to in COLL 5.2.31 R are those which satisfy the following criteria:

1. (1)

   the composition is sufficiently diversified;

2. (2)

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

3. (3)

   the index is published in an appropriate manner.