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COLL 5.4 Stock lending

Application

COLL 5.4.1RRP
  1. (1)

    This section applies to a depositary of an authorised fund which is a UCITS scheme or a non-UCITS retail scheme.

  2. (2)

    COLL 5.4.3 R (Stock lending: general) also applies to:

    1. (a)

      an ICVC which is a UCITS scheme or a non-UCITS retail scheme; and

    2. (b)

      a manager of an AUT which is a UCITS scheme or a non-UCITS retail scheme.

  3. (3)

    COLL 5.4.4 R (Stock lending: requirements) also applies to an ICVC which is a UCITS scheme or a non-UCITS retail scheme.

Permitted stock lending

COLL 5.4.2GRP

  1. (1)

    This section 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.

Stock lending: general

COLL 5.4.3RRP

The stock lending permitted by this section may be exercised by an authorised fund when it reasonably appears to the ICVC or to the manager to be appropriate to do so with a view to generating additional income for the authorised fund with an acceptable degree of risk.

Stock lending: requirements

COLL 5.4.4RRP

  1. (1)

    An 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 or a person authorised by a Home State regulator; 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 COLL 5.4.6 R (1); and

      3. (iii)

        sufficiently immediate within COLL 5.4.6 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

COLL 5.4.5GRP

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). COLL 5.4.6 R accordingly makes provision for the treatment of the collateral in that context.

Treatment of collateral

COLL 5.4.6RRP

  1. (1)

    Collateral is adequate for the purposes of this section only if it is:

    1. (a)

      transferred to the depositary or its agent;

    2. (b)

      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)

      in the form of one or more of:

      1. (i)

        cash; or

      2. (ii)

        government and public securities; or

      3. (iii)

        a certificate of deposit; or

      4. (iv)

        a letter of credit; or

      5. (v)

        a readily realisable security.

  2. (2)

    Collateral is sufficiently immediate for the purposes of this section 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 the time referred to in (a) 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 may be regarded, for the purposes of valuation under COLL 6.3 (Valuation and pricing) 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 COLL 6.3 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.

  7. (7)

    Paragraph (5) and (6)(a) do not apply to any valuation of collateral itself for the purposes of this section.

Limitation by value

COLL 5.4.7RRP

There is no limit on the value of the scheme property which may be the subject of stock lending transactions within this section.