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CIS 5A.14 Stock lending

Application

CIS 5A.14.1R

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.14.2G
  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.14.3R

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.14.4R
  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.14.5G

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.14.6R
  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.14.7R

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).