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COLL 5.3 Derivative exposure

Application

COLL 5.3.1RRP

This section applies to an authorised fund manager of a UCITS scheme and to an ICVC which is a UCITS scheme.

Introduction

COLL 5.3.2GRP

  1. (1)

    A scheme may invest in derivatives and forward transactions as long as the exposure to which the scheme is committed by that transaction itself is suitably covered from within its scheme property. Exposure will include any initial outlay in respect of that transaction.

  2. (2)

    Cover ensures that a scheme is not exposed to the risk of loss of property, including money, to an extent greater than the net value of the scheme property. Therefore, a scheme is required to hold scheme property sufficient in value or amount to match the exposure arising from a derivative obligation to which the scheme is committed. COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions) sets out detailed requirements for cover of a scheme.

  3. (3)

    In accordance with COLL 5.1.3 R (2)(b) (Treatment of obligations), cover used in respect of one transaction in derivatives or forward transaction should not be used for cover in respect of another transaction in derivatives or a forward transaction.

Cover for transactions in derivatives and forward transactions

COLL 5.3.3R

  1. (1)

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

  2. (2)

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

  3. (3)

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

  4. (4)

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

  5. (5)

    The total exposure relating to derivatives held in a UCITS scheme may not exceed the net value of the scheme property.

Guidance on cover

COLL 5.3.4GRP

An authorised fund manager should note that the scope of COLL 5.3.3 R is extended in relation to underwriting commitments by COLL 5.5.8 R (4) (General power to accept or underwrite placings).

Borrowing

COLL 5.3.5RRP

  1. (1)

    Cash obtained from borrowing, and borrowing which the authorised fund manager reasonably regards an eligible institution or an approved bank to be committed to provide, is not available for cover under COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions), except if (2) applies.

  2. (2)

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

    1. (a)

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

    2. (b)

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

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

Continuing nature of limits and requirements

COLL 5.3.6R

  1. (1)

    An authorised fund manager must, (as frequently as necessary), re-calculate the amount of cover required in respect of derivatives and forward positions already in existence under this section.

  2. (2)

    Derivatives and rights under forward transactions may be retained in the scheme property only so long as they remain covered globally under COLL 5.3.3 R.