COLL 5.3 Derivative exposure

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

2The authorised fund manager of a UCITS scheme must ensure that its global exposure relating to derivatives and forward transactions held in the UCITS scheme does not exceed the net value of the scheme property.

2An authorised fund manager of a UCITS scheme must calculate its global exposure on at least a daily basis.

2For the purposes of this section, exposure must be calculated taking into account the current value of the underlying assets, the counterparty risk, future market movements and the time available to liquidate the positions.

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.

2An authorised fund manager must calculate the global exposure of any UCITS scheme it manages either as:

1. (1)

   the incremental exposure and leverage generated through the use of derivatives and forward transactions (including embedded derivatives as referred to in COLL 5.2.19R (3A) (Derivatives: general)), which may not exceed 100% of the net value of the scheme property; or

2. (2)

   the market risk of the scheme property.

1. (1)

   2An authorised fund manager must calculate the global exposure of a UCITS scheme by using:

   1. (a)

      the commitment approach; or

   2. (b)

      the value at risk approach.

2. (2)

   An authorised fund manager must ensure that the method selected in (1) is appropriate, taking into account:

   1. (a)

      the investment strategy pursued by the UCITS scheme;

   2. (b)

      the types and complexities of the derivatives and forward transactions used; and

   3. (c)

      the proportion of the scheme property comprising derivatives and forward transactions.

3. (3)

   Where a UCITS scheme employs techniques and instruments including repo contracts or stock lending transactions in accordance with COLL 5.4 (Stock lending) in order to generate additional leverage or exposure to market risk, the authorised fund manager must take those transactions into consideration when calculating global exposure.

4. (4)

   For the purposes of (1), value at risk means a measure of the maximum expected loss at a given confidence level over the specific time period.

2Where an authorised fund manager of a UCITS scheme uses the commitment approach for the calculation of global exposure, it must:

1. (1)

   ensure that it applies this approach to all derivative and forward transactions (including embedded derivatives as referred to in COLL 5.2.19R (3A) (Derivatives: general)), whether used as part of the scheme's general investment policy, for the purposes of risk reduction or for the purposes of efficient portfolio management in accordance with the rules of this chapter; and

2. (2)

   convert each derivative or forward transaction into the market value of an equivalent position in the underlying asset of that derivative or forward (standard commitment approach).

1. (1)

   2An authorised fund manager of a UCITS scheme may apply other calculation methods which are equivalent to the standard commitment approach.

2. (2)

   An authorised fund manager may take account of netting and hedging arrangements when calculating global exposure of a UCITS scheme, where those arrangements do not disregard obvious and material risks and result in a clear reduction in risk exposure.

3. (3)

   Where the use of derivatives or forward transactions does not generate incremental exposure for the UCITS scheme, the underlying exposure need not be included in the commitment calculation.

4. (4)

   Where the commitment approach is used, temporary borrowing arrangements entered into on behalf of the UCITS scheme in accordance with COLL 5.5.4 R (General power to borrow) need not form part of the global exposure calculation.