COLL 5.7 Investment powers and borrowing limits for NURS operating as FAIFs

1. (1)

   1This section applies to the authorised fund manager and the depositary of a non-UCITS retail scheme operating as a FAIF and to an ICVC which is a non-UCITS retail scheme operating as a FAIF.

2. (2)

   Where this section refers to:

   1. (a)

      a rule or guidance in COLL 5.1 to COLL 5.6, these rules and guidance, and any rules and guidance to which they refer, must be read as if a reference to a UCITS scheme or non-UCITS retail scheme were a reference to a non-UCITS retail scheme operating as a FAIF;

   2. (b)

      a second scheme, and the second scheme is a feeder scheme which (in respect of investment in units in collective investment schemes) is dedicated to units in a single collective investment scheme, the reference in this section to the second scheme must be read as if it were a reference to any scheme into which the feeder scheme's master scheme invests; and

   3. (c)

      a second scheme, and the second scheme is a master scheme to which (in respect of investment in units in collective investment schemes) the relevant non-UCITS retail scheme operating as a FAIF is dedicated, the reference in this section to the second scheme must be read as if it were a reference to any scheme into which that master scheme invests.

The following rules and guidance in COLL 5.6 (Investment powers and borrowing limits for non-UCITS retail schemes) apply to the authorised fund manager and the depositary of a non-UCITS retail scheme operating as a FAIF and to an ICVC which is a non-UCITS retail scheme operating as a FAIF:

1. (1)

   COLL 5.6.3 R;

2. (2)

   COLL 5.6.5 R to 5.6.6 R;

3. (3)

   COLL 5.6.8 R to 5.6.9 R; and

4. (4)

   COLL 5.6.11 R to 5.6.24 R.

1. (1)

   The scheme property of a non-UCITS retail scheme operating as a FAIF may, subject to the rules in this section, comprise any assets or investments to which it is dedicated.

2. (2)

   For an ICVC, 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.

3. (3)

   The scheme property must be invested only in accordance with the relevant provisions in this section that are applicable to that non-UCITS retail scheme operating as a FAIF and within any upper limit specified in this section.

4. (4)

   The instrument constituting the fund4 may restrict the investment powers of a scheme further than the relevant restrictions in this section.

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5. (5)

   The scheme property may only, except where otherwise provided in the rules in this section, consist of any one or more of:

   1. (a)

      transferable securities;

   2. (b)

      money market instruments;

   3. (c)

      units in collective investment schemes permitted under COLL 5.7.7 R (Investment in collective investment schemes);

   4. (d)

      derivatives and forward transactions permitted under COLL 5.6.13 R (Permitted transactions (derivatives and forwards));

   5. (e)

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

   6. (f)

      immovables permitted under COLL 5.6.18 R (Investment in property) to COLL 5.6.19 R (Investment limits for immovables); and

   7. (g)

      gold up to a limit of 10% in value of the scheme property.

1. (1)

   This rule does not apply in respect of a transferable security or an approved money-market instrument to which COLL 5.6.8R (Spread: government and public securities) applies5.

2. (2)

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

3. (3)

   Not more than 10% in value of the scheme property is to consist of transferable securities or approved money-market instruments issued by any single body subject to COLL 5.6.23 R (Schemes replicating an index).

4. (4)

   The limit of 10% in (3) is raised to 25% in value of the scheme property in respect of covered bonds.

5. (5)

   In applying (3) certificates representing certain securities are to be treated as equivalent to the underlying security.

6. (6)

   The exposure to any one counterparty in an OTC derivative transaction must not exceed 10% in value of the scheme.

7. (7)

   Except for a feeder scheme which (in respect of investment in units in collective investment schemes) is dedicated to the units of a master scheme, not more than 35% in value of the scheme is to consist of the units of any one scheme.

8. (8)

   For the purpose of calculating the limit in (6), 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 (9).

9. (9)

   The conditions referred to in (8) are that the collateral:

   1. (a)

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

   2. (b)

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

   3. (c)

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

   4. (d)

      can be fully enforced by the non-UCITS retail scheme operating as a FAIF at any time.

10. (10)

    For the purpose of calculating the limit in (6), OTC derivative positions with the same counterparty may be netted provided that the netting procedures:

    1. (a)

       comply with the conditions set out in Part Three, Title II, Chapter 6, Section 73(Contractual netting (Contracts for novation and other netting agreements)) of the EU CRR;3 and

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    2. (b)

       are based on legally binding agreements.

11. (11)

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

    1. (a)

       it is backed by an appropriate performance guarantee; and

    2. (b)

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

12. (12)

    For the purposes of this rule a single body is:

    1. (a)

       in relation to transferable securities and money market instruments, the person by whom they are issued; and

    2. (b)

       in relation to deposits, the person with whom they are placed.

A non-UCITS retail scheme operating as a FAIF must not invest in units in a collective investment scheme (second scheme) unless the second scheme is a scheme which satisfies the criteria in COLL 5.6.10 R (1) (a) to (d) or meets each of the requirements at (1) to (4):

1. (1)

   the second scheme operates on the principle of the prudent spread of risk;

2. (2)

   the second scheme is prohibited from investing more than 15% in value of the property of that scheme in units in collective investment schemes or, if there is no such prohibition, the non-UCITS retail scheme's authorised fund manager is satisfied, on reasonable grounds and after making all reasonable enquiries, that no such investment will be made;

3. (3)

   the participants in the second scheme must be entitled to have their units redeemed in accordance with the scheme at a price:

   1. (a)

      related to the net value of the property to which the units relate; and

   2. (b)

      determined in accordance with the scheme; and

4. (4)

   where the second scheme is an umbrella, the provisions in (1) to (3) and COLL 5.7.5 R (Spread: general) apply to each sub-fund as if it were a separate scheme.

Feeder schemes which (in respect of investment in units in collective investment schemes) are dedicated to units in a single collective investment scheme must, in addition to the investment in the master scheme, only hold cash or near cash to maintain sufficient liquidity to enable the scheme to meet its commitments, such as redemptions. Feeder schemes may also use techniques and instruments for the purpose of efficient portfolio management, where appropriate, such as forward foreign exchange transactions entered into for the purpose of reducing the effect of fluctuations in the rate of exchange between relevant currencies.

1. (1)

   A non-UCITS retail scheme operating as a FAIF must not invest in units in schemes in COLL 5.7.7R (1) to (3) (‘second schemes’) unless the authorised fund manager has carried out appropriate due diligence on each of the second schemes and:

   1. (a)

      is satisfied, on reasonable grounds and after making all reasonable enquiries, that each of the second schemes complies with relevant legal and regulatory requirements;

   2. (b)

      has taken reasonable care to determine that:

      1. (i)

         the property of each of the second schemes is held in safekeeping by a third party, which is subject to prudential regulation and independent of the investment manager of the second scheme;

      2. (ii)

         the calculation of the net asset value of each of the second schemes and the maintenance of their accounting records is segregated from the investment management function; and

      3. (iii)

         each of the second schemes is regularly audited by an independent auditor in accordance with international standards on auditing.

2. (2)

   The authorised fund manager of a non-UCITS retail scheme operating as a FAIF invested in one or more second schemes must carry out appropriate due diligence as detailed in (1) on those schemes on an ongoing basis.

The authorised fund manager of a non-UCITS retail scheme operating as a FAIF which is a feeder scheme must ensure that:

1. (1)

   its master scheme; and

2. (2)

   where its master scheme is itself a feeder scheme, any scheme into which that master scheme invests;

operates on a basis that is consistent with the rules in this section notwithstanding any due diligence previously carried out which suggested that those schemes would so operate.

2In relation to a non-UCITS retail scheme which is an umbrella comprised of sub-funds which are:

1. (1)

   FAIFs; or

2. (2)

   a mixture of FAIFs and standard non-UCITS retail schemes;

the provisions in this section apply to each sub-fund operating as a FAIF as they would to a separate scheme.