COLL 5.9 Investment powers and other provisions for money market funds

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

1A short-term money market fund must satisfy the following conditions:

1. (1)

   its primary investment objective must be to maintain the principal of the scheme and aim to provide a return in line with money market rates;

2. (2)

   it must invest only in approved money-market instruments and deposits with credit institutions;

3. (3)

   it must, on an ongoing basis, ensure the approved money-market instruments it invests in are of high quality, as determined by the authorised fund manager;

4. (4)

   it must:

   1. (a)

      provide daily net asset value and price calculation and daily subscription and redemption of units; or

   2. (b)

      where it is a non-UCITS retail scheme marketed solely through employee savings schemes and to a specific category of investor that is subject to divestment restrictions, provide weekly subscription and redemption opportunities to investors;

5. (5)

   it must limit its investment in securities to those with a residual maturity until the legal redemption date of less than or equal to 397 days;

6. (6)

   it must ensure that its scheme property has a weighted average maturity of no more than 60 days;

7. (7)

   it must ensure that its scheme property has a weighted average life of no more than 120 days;

8. (8)

   it must not take direct or indirect exposure to equity or commodities, including via derivatives;

9. (9)

   it must only use derivatives in line with the money market investment strategy of the scheme and where using derivatives that give exposure to foreign exchange must do so only for the purposes of hedging;

10. (10)

    it must only invest in non-base currency securities where its exposure is fully hedged;

11. (11)

    it must limit its investment in other collective investment schemes as follows:

    1. (a)

       if it is a UCITS scheme, collective investment schemes which satisfy the requirements of COLL 5.2.13 R; or

    2. (b)

       if it is a non-UCITS retail scheme, collective investment schemes which satisfy the requirements of COLL 5.6.10 R;

    which meet the definition of a “Short-Term Money Market Fund” in CESR's guidelines on a common definition of European money market funds; and

12. (12)

    it must aim to maintain a fluctuating net asset value or a constant net asset value.

In addition to satisfying the conditions in COLL 5.9.3R (1), (2), (3), (4), (8), (9) and (10), a money market fund must:

1. (1)

   limit investment in securities to those with a residual maturity until the legal redemption date of less than or equal to two years, provided that the time remaining until the next interest rate reset date is less than or equal to 397 days. Floating rate securities should reset to a money market rate or index;

2. (2)

   ensure its scheme property has a weighted average maturity of no more than 6 months;

3. (3)

   ensure its scheme property has a weighted average life of no more than 12 months;

4. (4)

   limit its investment in other collective investment schemes as follows:

   1. (a)

      if it is a UCITS scheme, collective investment schemes which satisfy the requirements of COLL 5.2.13 R (Investment in collective investment schemes); or

   2. (b)

      if it is a non-UCITS retail scheme, collective investment schemes which satisfy the requirements of COLL 5.6.10 R (Investment in collective investment schemes);

   which meet the definition of a “Money Market Fund” or a “Short-Term Money Market Fund” in CESR's guidelines on a common definition of European money market funds; and

5. (5)

   have a fluctuating net asset value.

In determining whether approved money-market instruments are high quality in accordance with COLL 5.9.3R (3), the authorised fund manager must take into account a range of factors including, but not limited to:

1. (1)

   the credit quality of the instrument; an instrument will be considered not to be high quality unless it is:

   1. (a)

      an approved money-market instrument which has been awarded one of the two highest available short-term credit ratings by each recognised credit rating agency that has rated the instrument or, if the instrument is not rated, it is of an equivalent quality as determined by the authorised fund manager's internal rating process; or

   2. (b)

      for a money market fund, an approved money-market instrument of investment grade quality which is issued or guaranteed by one of the following:

      1. (i)

         a central authority of an EEA State or, if the EEA State is a federal state, one of the members making up the federation; or

      2. (ii)

         a regional or local authority of an EEA State; or

      3. (iii)

         the European Central Bank or a central bank of an EEA State; or

      4. (iv)

         the European Union or the European Investment Bank;

2. (2)

   the nature of the asset class represented by the instrument;

3. (3)

   for structured financial instruments, the operational risk and counterparty risk inherent within the structured financial transaction; and

4. (4)

   the liquidity profile.

1. (1)

   When calculating the weighted average life for securities (including structured financial instruments) for the purposes of COLL 5.9.3R (7) and COLL 5.9.5R (3), the maturity calculation must be based on either:

   1. (a)

      the residual maturity of the instruments; or

   2. (b)

      if the financial instrument embeds a put option, the exercise date of the put option if the following conditions are fulfilled at all times;

      1. (i)

         the put option can be freely exercised by the authorised fund manager at its exercise date;

      2. (ii)

         the strike price of the put option remains close to the expected value of the instrument at the next exercise date; and

      3. (iii)

         the investment strategy of the scheme implies that there is a high probability that the option will be exercised at the next exercise date.

2. (2)

   Where calculating the weighted average life for floating rate securities and structured financial instruments, the security's stated final maturity should be used and not the interest rate reset dates.

3. (3)

   When calculating the weighted average life and weighted average maturity for the purposes of COLL 5.9.3R (6) and (7), and COLL 5.9.5R (2) and (3), an authorised fund manager must take into account the impact of derivatives, deposits and efficient portfolio management.