1. (1)

   COLL 5.1 to COLL 5.5 apply to the authorised fund manager and the depositary of an authorised fund, and to an ICVC, which is or ever has been a UCITS scheme.

2. (2)

   Subject to 2(A),1COLL 5.1, COLL 5.4 and COLL 5.6 apply to the authorised fund manager and depositary of an authorised fund, and to an ICVC, which is a non-UCITS retail scheme.

3. (2A)

   COLL 5.1, COLL 5.4 and COLL 5.7 apply to the authorised fund manager and the depositary of an authorised fund and to an ICVC which is a non-UCITS retail scheme operating as a fund of alternative investment funds.

   1
4. (3)

   Paragraphs1 (2) and (2A) cease1 to apply if a non-UCITS retail scheme converts to be authorised as a UCITS scheme.

   11

1. (1)

   Where a rule in this chapter allows a transaction to be entered into or an investment to be retained only if possible obligations arising out of the transaction or out of the retention would not cause the breach of any limits in this chapter, it must be assumed that the maximum possible liability of the authorised fund under any other of those rules has also to be provided for.

2. (2)

   Where a rule in this chapter permits a transaction to be entered into or an investment to be retained only if that transaction, or the retention, or other similar transactions, are covered:

   1. (a)

      it must be assumed that in applying any of those rules, the authorised fund must also simultaneously satisfy any other obligation relating to cover; and

   2. (b)

      no element of cover must be used more than once.

This section applies to an ICVC, an ACD, a manager of an AUT, a depositary of an ICVC and a trustee of an AUT, where such ICVC or AUT is a UCITS scheme, in accordance with COLL 5.2.2 R (Table of application).

1. (1)

   An authorised fund manager must ensure that, taking account of the investment objectives and policy of the UCITS scheme as stated in the most recently published prospectus, the scheme property of the UCITS scheme aims to provide a prudent spread of risk.

2. (2)

   The rules in this section relating to spread of investments do not apply until the expiry of a period of six months after the date of which the authorisation order, in respect of the UCITS scheme, takes effect or on which the initial offer commenced, if later, provided that (1) is complied with during such period.

The scheme property of each UCITS scheme must be invested only in accordance with the relevant provisions in sections COLL 5.2 to COLL 5.5 that are applicable to that UCITS scheme and up to any maximum limit so stated, but, the instrument constituting the scheme may further restrict:

1. (1)

   the kind of property in which the scheme property may be invested;

2. (2)

   the proportion of the capital property of the UCITS scheme be invested in assets of any description;

3. (3)

   the descriptions of transactions permitted; and

4. (4)

   the borrowing powers of the UCITS scheme.

1. (1)

   In this chapter, the value of the scheme property of a UCITS schememeans the net value determined in accordance with COLL 6.3 (Valuation and pricing), after deducting any outstanding borrowings, whether immediately due to be repaid or not.

2. (2)

   When valuing the scheme property for the purposes of this chapter:

   1. (a)

      the time as at which the valuation is being carried out ("the relevant time") is treated as if it were a valuation point, but the valuation and the relevant time do not count as a valuation or a valuation point for the purposes of COLL 6.3 (Valuation and pricing);

   2. (b)

      initial outlay is to be regarded as remaining part of the scheme property; and

   3. (c)

      if the authorised fund manager, having taken reasonable care, determines that the UCITS scheme will become entitled to any unrealised profit which has been made on account of a transaction in derivatives, that prospective entitlement is to be regarded as part of the scheme property.

3. (3)

   2When valuing the scheme property of a dual-priced authorised fund, the cancellation basis of valuation referred to in COLL 6.3.3 R (2) (Valuation) is to be applied.

7The scheme property of a UCITS scheme must, except where otherwise provided in the rules in this chapter, consist solely of any or all of:

1. (1)

   transferable securities;

2. (2)

   approved money-market instruments;

3. (3)

   units in collective investment schemes;

4. (4)

   derivatives and forward transactions;

5. (5)

   deposits; and

6. (6)

   (for an ICVC) movable and immovable property that is necessary for the direct pursuit of the ICVC's business;

in accordance with the rules in this section.

1. (1)

   A transferable security is an investment which is any of the following:

   1. (a)

      a share;

   2. (b)

      a debenture;

   3. (ba)

      an alternative debenture;11

   4. (c)

      a government and public security;

   5. (d)

      a warrant; or

   6. (e)

      a certificate representing certain securities.

2. (2)

   An investment is not a transferable security if the title to it cannot be transferred, or can be transferred only with the consent of a third party.

3. (3)

   In applying (2) to an investment which is issued by a body corporate, and which is a share or a debenture, the need for any consent on the part of the body corporate or any members or debenture holders of it may be ignored.

4. (4)

   An investment is not a transferable security unless the liability of the holder of it to contribute to the debts of the issuer is limited to any amount for the time being unpaid by the holder of it in respect of the investment.

1. (1)

   7A UCITS scheme may invest in a transferable security only to the extent that the transferable security fulfils the following criteria:

   1. (a)

      the potential loss which the UCITS scheme may incur with respect to holding the transferable security is limited to the amount paid for it;

   2. (b)

      its liquidity does not compromise the ability of the authorised fund manager to comply with its obligation to redeemunits at the request of any qualifying unitholder (see COLL 6.2.16 R (3) );

   3. (c)

      reliable valuation is available for it as follows:

      1. (i)

         in the case of a transferable security admitted to or dealt in on an eligible market, where there are accurate, reliable and regular prices which are either market prices or prices made available by valuation systems independent from issuers;

      2. (ii)

         in the case of a transferable security not admitted to or dealt in on an eligible market, where there is a valuation on a periodic basis which is derived from information from the issuer of the transferable security or from competent investment research;

   4. (d)

      appropriate information is available for it as follows:

      1. (i)

         in the case of a transferable security admitted to or dealt in on an eligible market, where there is regular, accurate and comprehensive information available to the market on the transferable security or, where relevant, on the portfolio of the transferable security;

      2. (ii)

         in the case of a transferable security not admitted to or dealt in on an eligible market, where there is regular and accurate information available to the authorised fund manager on the transferable security or, where relevant, on the portfolio of the transferable security;

   5. (e)

      it is negotiable; and

   6. (f)

      its risks are adequately captured by the risk management process of the authorised fund manager.

2. (2)

   Unless there is information available to the authorised fund manager that would lead to a different determination, a transferable security which is admitted to or dealt in on an eligible market shall be presumed:

   1. (a)

      not to compromise the ability of the authorised fund manager to comply with its obligation to redeemunits at the request of any qualifying unitholder; and

   2. (b)

      to be negotiable.

7A unit in a closed end fund shall be taken to be a transferable security for the purposes of investment by a UCITS scheme, provided it fulfils the criteria for transferable securities set out in COLL 5.2.7A R, and either:

1. (1)

   where the closed end fund is constituted as an investment company or a unit trust:

   1. (a)

      it is subject to corporate governance mechanisms applied to companies; and

   2. (b)

      where another person carries out asset management activity on its behalf, that person is subject to national regulation for the purpose of investor protection; or

2. (2)

   where the closed end fund is constituted under the law of contract:

   1. (a)

      it is subject to corporate governance mechanisms equivalent to those applied to companies; and

   2. (b)

      it is managed by a person who is subject to national regulation for the purpose of investor protection.

1. (1)

   7A UCITS scheme may invest in any other investment which shall be taken to be a transferable security for the purposes of investment by a UCITS scheme provided the investment:

   1. (a)

      fulfils the criteria for transferable securities set out in COLL 5.2.7A R; and

   2. (b)

      is backed by or linked to the performance of other assets, which may differ from those in which a UCITS scheme can invest.

2. (2)

   Where an investment in (1) contains an embedded derivative component (see COLL 5.2.19R (3A)), the requirements of this section with respect to derivatives and forwards will apply to that component.

7An approved money-market instrument is a money-market instrument which is normally dealt in on the money market, is liquid and has a value which can be accurately determined at any time.

7A money-market instrument shall be regarded as normally dealt in on the money market if it:

1. (1)

   has a maturity at issuance of up to and including 397 days;

2. (2)

   has a residual maturity of up to and including 397 days;

3. (3)

   undergoes regular yield adjustments in line with money market conditions at least every 397 days; or

4. (4)

   has a risk profile, including credit and interest rate risks, corresponding to that of an instrument which has a maturity as set out in (1) or (2) or is subject to yield adjustments as set out in (3).

1. (1)

   7A money-market instrument shall be regarded as liquid if it can be sold at limited cost in an adequately short time frame, taking into account the obligation of the authorised fund manager to redeemunits at the request of any qualifying unitholder (see COLL 6.2.16 R (3) ).

2. (2)

   A money-market instrument shall be regarded as having a value which can be accurately determined at any time if accurate and reliable valuations systems, which fulfil the following criteria, are available:

   1. (a)

      enabling the authorised fund manager to calculate a net asset value in accordance with the value at which the instrument held in the portfolio could be exchanged between knowledgeable willing parties in an arm's length transaction; and

   2. (b)

      based either on market data or on valuation models including systems based on amortised costs.

3. (3)

   A money-market instrument that is normally dealt in on the money market and is admitted to or dealt in on an eligible market shall be presumed to be liquid and have a value which can be accurately determined at any time unless there is information available to the authorised fund manager that would lead to a different determination.

1. (1)

   [deleted]7

   7
2. (2)

   [deleted]7

   7
3. (3)

   Transferable securities and approved money-market instruments7 held within a UCITS scheme must be:7

   77
   1. (a)

      admitted to or dealt in on an eligible market within COLL 5.2.10 R (1)(a) (Eligible markets: requirements); or

   2. (b)

      dealt in on an eligible market within COLL 5.2.10 R (1)(b); or

   3. (c)

      admitted to or dealt in on an eligible market within COLL 5.2.10 R (2); or

   4. (d)

      for an approved money-market instrument not admitted to or dealt in on an eligible market, 7within COLL 5.2.10AR (1); or7

      77
   5. (e)

      recently issued transferable securities, provided that:7

      1. (i)

         the terms of issue include an undertaking that application will be made to be admitted to an eligible market; and7

      2. (ii)

         such admission is secured within a year of issue.7

4. (4)

   However, a UCITS scheme may invest no more than 10% of the scheme property in transferable securities and approved money-market instruments other than those referred to in (3).7

   7

1. (1)

   A market is eligible for the purposes of the rules in this sourcebook if it is:

   1. (a)

      a regulated market;

   2. (b)

      a market in an EEA State which is regulated, operates regularly and is open to the public; or

   3. (c)

      any market within (2).

2. (2)

   A market not falling within (1)(a) and (b) is eligible for the purposes of the rules in this sourcebook if:

   1. (a)

      the authorised fund manager, after consultation with and notification to the depositary (and in the case of an ICVC, any other directors), decides that market is appropriate for investment of, or dealing in, the scheme property;

   2. (b)

      the market is included in a list in the prospectus; and

   3. (c)

      the depositary has taken reasonable care to determine that:

      1. (i)

         adequate custody arrangements can be provided for the investmentdealt in on that market; and

      2. (ii)

         all reasonable steps have been taken by the authorised fund manager in deciding whether that market is eligible.

3. (3)

   In (2)(a), a market must not be considered appropriate unless it:

   1. (a)

      is regulated;

   2. (b)

      operates regularly;

   3. (c)

      is recognised as a market or exchange or as a self-regulating organisation by an overseas regulator;

   4. (d)

      is open to the public;

   5. (e)

      is adequately liquid; and

   6. (f)

      has adequate arrangements for unimpeded transmission of income and capital to or to the order of investors.

1. (1)

   7(In addition to instruments admitted to or dealt in on an eligible market) a UCITS scheme may invest in an approved money-market instrument provided it fulfils the following requirements:

   1. (a)

      the issue or the issuer is regulated for the purpose of protecting investors and savings; and

   2. (b)

      the instrument is issued or guaranteed in accordance with COLL 5.2.10B R.

   [Note: article 19(1)(h), first to third indents of the UCITS Directive]

2. (2)

   The issue or the issuer of a money-market instrument, other than one dealt in on an eligible market, shall be regarded as regulated for the purpose of protecting investors and savings if:

   1. (a)

      the instrument is an approved money-market instrument;

   2. (b)

      appropriate information is available for the instrument (including information which allows an appropriate assessment of the credit risks related to investment in it), in accordance with COLL 5.2.10C R; and

   3. (c)

      the instrument is freely transferable.

1. (1)

   7A UCITS scheme may invest in an approved money-market instrument if it is:

   1. (a)

      issued or guaranteed by any 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;

      2. (ii)

         a regional or local authority of an EEA State;

      3. (iii)

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

      4. (iv)

         the European Union or the European Investment Bank;

      5. (v)

         a non-EEA State or, in the case of a federal state, one of the members making up the federation;

      6. (vi)

         a public international body to which one or more EEA States belong; or

   2. (b)

      issued by a body, any securities of which are dealt in on an eligible market; or

   3. (c)

      issued or guaranteed by an establishment which is:

      1. (i)

         subject to prudential supervision in accordance with criteria defined by EU9 law; or

         9
      2. (ii)

         subject to and complies with prudential rules considered by the FSA to be at least as stringent as those laid down by EU9 law.

         9
2. (2)

   An establishment shall be considered to satisfy the requirement in (1)(c)(ii) if it is subject to and complies with prudential rules, and fulfils one or more of the following criteria:

   1. (a)

      it is located in the European Economic Area;

   2. (b)

      it is located in an OECD country belonging to the Group of Ten;

   3. (c)

      it has at least investment grade rating;

   4. (d)

      on the basis of an in-depth analysis of the issuer, it can be demonstrated that the prudential rules applicable to that issuer are at least as stringent as those laid down by EU9 law.

      9

1. (1)

   7In the case of an approved money-market instrument within COLL 5.2.10BR (1)(b) or issued by a body of the type referred to in COLL 5.2.10E G; or which is issued by an authority within COLL 5.2.10BR (1)(a)(ii) or a public international body within COLL 5.2.10BR (1)(a)(vi) but is not guaranteed by a central authority within COLL 5.2.10BR (1)(a)(i), the following information must be available:

   1. (a)

      information on both the issue or the issuance programme, and the legal and financial situation of the issuer prior to the issue of the instrument, verified by appropriately qualified third parties not subject to instructions from the issuer;

   2. (b)

      updates of that information on a regular basis and whenever a significant event occurs; and

   3. (c)

      available and reliable statistics on the issue or the issuance programme.

2. (2)

   In the case of an approved money-market instrument issued or guaranteed by an establishment within COLL 5.2.10BR (1)(c), the following information must be available:

   1. (a)

      information on the issue or the issuance programme or on the legal and financial situation of the issuer prior to the issue of the instrument;

   2. (b)

      updates of that information on a regular basis and whenever a significant event occurs; and

   3. (c)

      available and reliable statistics on the issue or the issuance programme, or other data enabling an appropriate assessment of the credit risks related to investment in those instruments.

3. (3)

   In the case of an approved money-market instrument:

   1. (a)

      within COLL 5.2.10BR (1)(a)(i), (iv) or (v); or

   2. (b)

      which is issued by an authority within COLL 5.2.10BR (1)(a)(ii) or a public international body within COLL 5.2.10BR (1)(a)(vi) and is guaranteed by a central authority within COLL 5.2.10BR (1)(a)(i);

   information must be available on the issue or the issuance programme, or on the legal and financial situation of the issuer prior to the issue of the instrument.

1. (1)

   This rule does not apply to government and public securities.

2. (2)

   For the purposes of this rule companies included in the same group for the purposes of consolidated accounts as defined in accordance with the Seventh Council Directive 83/349/EEC of 13 June 1983 based on Article 54(3)(g) of the Treaty on consolidated accounts or, in the same group in accordance with international accounting standards, are regarded as a single body.

3. (3)

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

4. (4)

   Not more than 5% in value of the scheme property is to consist of transferable securities or approved money-market instruments7issued by any single body.

   7
5. (5)

   The limit of 5% in (4) is raised to 10% in respect of up to 40% in value of the scheme property. Covered bonds need not be taken into account for the purpose of applying the limit of 40%. 7

6. (5A)

   The limit of 5% in (4) is raised to 25% in value of the scheme property in respect of covered bonds, provided that when a UCITS scheme invests more than 5% in covered bonds issued by a single body, the total value of covered bonds held must not exceed 80% in value of the scheme property.7

7. (6)

   In applying (4) and (5), certificates representing certain securities are to be treated as equivalent to the underlying security.

8. (7)

   The exposure to any one counterparty in an OTC derivative transaction must not exceed 5% in value of the scheme property; this limit being raised to 10% where the counterparty is an approved bank.

9. (8)

   Not more than 20% in value of the scheme property is to consist of transferable securities and approved money-market instruments7issued by the same group (as referred to in (2)).

   7
10. (9)

    Not more than 20% in value of the scheme is to consist of the units of any one collective investment scheme.

11. (10)

    In applying the limits in (3),(4),(5), (6) and (7), and subject to (5A),7 not more than 20% in value of the scheme property is to consist of any combination of two or more of the following:

    1. (a)

       transferable securities (including covered bonds) 7or approved money-market instruments7issued by; or

       7
    2. (b)

       deposits made with; or

    3. (c)

       exposures from OTC derivatives transactions made with a single body.

12. (11)

    1For the purpose of calculating the limits in (7) and (10), 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 (12).

13. (12)

    1The conditions referred to in (11) are that the collateral:

    1. (a)

       1is marked-to-market on a daily basis and exceeds the value of the amount at risk;

    2. (b)

       1is exposed only to negligible risks (e.g. government bonds of first credit rating or cash) and is liquid;

    3. (c)

       1is 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)

       1can be fully enforced by the UCITS scheme at any time.

14. (13)

    1For the purpose of calculating the limits in (7) and (10), OTC derivative positions with the same counterparty may be netted provided that the netting procedures:

    1. (a)

       1comply with the conditions set out in Section 3 (Contractual netting (Contracts for novation and other netting agreements)) of Annex III to the Banking Consolidation Directive; and

    2. (b)

       1are based on legally binding agreements.

15. (14)

    1In 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)

       1it is backed by an appropriate performance guarantee; and

    2. (b)

       1it is characterised by a daily mark-to-market valuation of the derivative positions and an at least daily margining.

1. (1)

   This rule applies

   to government and public securities ("such securities").

2. (2)

   Where no more than 35% in value of the scheme property is invested in such securities issued by any one body, there is no limit on the amount which may be invested in such securities or in any one issue.

3. (3)

   An authorised fund may invest more than 35% in value of the scheme property in such securities issued by any one body provided that:

   1. (a)

      the authorised fund manager has before any such investment is made consulted with the depositary and as a result considers that the issuer of such securities is one which is appropriate in accordance with the investment objectives of the authorised fund;

   2. (b)

      no more than 30% in value of the scheme property consists of such securities of any one issue;

   3. (c)

      the scheme property includes such securities issued by that or another issuer, of at least six different issues; and

   4. (d)

      the disclosures in (4) have been made.

4. (4)

   Where it is intended that (3) may apply, the instrument constituting the scheme, and the most recently published prospectus, must prominently state:

   1. (a)

      the fact that more than 35% of the scheme property is or may be invested in such securities issued by one issuer; and

   2. (b)

      the names of the individual states, the local authorities or public international bodies issuing such securities in which the authorised fund may invest over 35% of its assets.

5. (5)

   In this rule in relation to such securities:

   1. (a)

      issue, issued and issuer include guarantee, guaranteed and guarantor; and

   2. (b)

      an issue differs from another if there is a difference as to repayment date, rate of interest, guarantor or other material terms of the issue.

6. (6)

   Notwithstanding COLL 5.2.11R (1) and subject to (2) and (3), in applying the 20% limit in COLL 5.2.11R (10) with respect to a single body, government and public securities issued by that body shall be taken into account.7

A UCITS scheme must not invest in units in a collective investment scheme ("second scheme") unless the second scheme satisfies all of the following conditions, and provided that no more than 30% of the value of the UCITS scheme is invested in second schemes within (1)(b) to (e):8

1. (1)

   the second scheme must:

   1. (a)

      satisfy the conditions necessary for it to enjoy the rights conferred by the UCITS Directive; or

   2. (b)

      be recognised under the provisions of section 270 of the Act (Schemes authorised in designated countries or territories); or

   3. (c)

      be authorised as a non-UCITS retail scheme (provided the requirements of article 19(1)(e) of the UCITS Directive are met); or

   4. (d)

      be authorised in another EEA State (provided the requirements of article 19(1)(e) of the UCITS Directive are met); or8

   5. (e)

      be authorised by the competent authority of an OECD member country (other than another EEA State) which has:8

      1. (i)

         signed the IOSCO Multilateral Memorandum of Understanding; and8

      2. (ii)

         approved the scheme's management company, rules and depositary/custody arrangements;

      (provided the requirements of article 19(1)(e) of the UCITS Directive are met);8

2. (2)

   the second scheme must comply, where relevant, with COLL 5.2.15 R (Investment in associated collective investment schemes) and COLL 5.2.16 R (Investment in other group schemes);

   4
3. (3)

   the second scheme must have terms which prohibit more than 10% in value of the scheme property consisting of units in collective investment schemes; and4

   4
4. (4)

   where the second scheme is an umbrella, the provisions in (2) and (3) and COLL 5.2.11 R (Spread: general) 3apply to each sub-fund as if it were a separate scheme.4

A UCITS scheme must not invest in or dispose of units in another collective investment scheme (the second scheme) if the second scheme is managed or operated by (or, for an ICVC, whose ACD is) the authorised fund manager of the investing UCITS scheme or an associate of that authorised fund manager, unless:

1. (1)

   the prospectus of the investing UCITS scheme clearly states that the property of that investing scheme may include such units; and

2. (2)

   COLL 5.2.16 R (Investment in other group schemes) is complied with.

1. (1)

   Where:

   1. (a)

      an investment or disposal is made under COLL 5.2.15 R; and

   2. (b)

      there is a charge in respect of such investment or disposal;

   the authorised fund manager of the UCITS scheme making the investment or disposal must pay the UCITS scheme the amounts referred to in (2) or (3) within four business days following the date of the agreement to invest or dispose.

2. (2)

   When an investment is made, the amount referred to in (1)(a) is either:

   1. (a)

      any amount by which the consideration paid by the UCITS scheme for the units in the second scheme exceeds the price that would have been paid for the benefit of the second scheme had the units been newly issued or sold by it; or

   2. (b)

      if such price cannot be ascertained by the authorised fund manager of the authorised fund, the maximum amount of any charge permitted to be made by the seller of units in the second scheme.

3. (3)

   When a disposal is made, the amount referred to in (1)(a) is any charge made for the account of the authorised fund manager or operator of the second scheme or an associate of any of them in respect of the disposal.

4. (4)

   In this rule:

   1. (a)

      any addition to or deduction from the consideration paid on the acquisition or disposal of units in the second scheme, which is applied for the benefit of the second scheme and is, or is like, a dilution levy made in accordance with COLL 6.3.8 R (Dilution) or SDRT provision made in accordance with COLL 6.3.7 (SDRT provision) is to be treated as part of the price of the units and not as part of any charge; and

   2. (b)

      any charge made in respect of an exchange of units in one sub-fund or separate part of the second scheme for units in another sub-fund or separate part of that scheme is to be included as part of the consideration paid for the units.

1. (1)

   [deleted]7

   7
2. (2)

   A transferable security or an approved money-market instrument7on which any sum is unpaid falls within a power of investment only if it is reasonably foreseeable that the amount of any existing and potential call for any sum unpaid could be paid by the UCITS scheme, at the time when payment is required, without contravening the rules in this chapter.

   7

1. (1)

   A transaction in derivatives or a forward transaction must not be effected for a UCITS scheme unless:

   1. (a)

      the transaction is of a kind specified in COLL 5.2.20 R (Permitted transactions (derivatives and forwards)); and

   2. (b)

      the transaction is covered, as required by COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions).

2. (2)

   Where a UCITS scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in COLL 5.2.11 R (Spread: general) and COLL 5.2.12 R (Spread: government and public securities) save as provided in (4).

3. (3)

   Where a transferable security or approved money-market instrument7embeds a derivative, this must be taken into account for the purposes of complying with this section.

   7
4. (3A)
   1. (a)

      7A transferable security or an approved money-market instrument will embed a derivative if it contains a component which fulfils the following criteria:

      1. (i)

         by virtue of that component some or all of the cash flows that otherwise would be required by the transferable security or approved money-market instrument which functions as host contract can be modified according to a specified interest rate, financial instrument price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, and therefore vary in a way similar to a stand-alone derivative;

      2. (ii)

         its economic characteristics and risks are not closely related to the economic characteristics and risks of the host contract; and

      3. (iii)

         it has a significant impact on the risk profile and pricing of the transferable security or approved money-market instrument.

   2. (b)

      A transferable security or an approved money-market instrument does not embed a derivative where it contains a component which is contractually transferable independently of the transferable security or the approved money-market instrument. That component shall be deemed to be a separate instrument.

   [Note: article 10 of the UCITS eligible assets Directive]7

5. (4)

   Where a scheme invests in an index based derivative, provided the relevant index falls within COLL 5.2.33 R (Relevant indices) the underlying constituents of the index do not have to be taken into account for the purposes of COLL 5.2.11 R and COLL 5.2.12 R.

6. (5)

   The relaxation in (4) is subject to the authorised fund manager taking account of COLL 5.2.3 R (Prudent spread of risk).

1. (1)

   A transaction in a derivative must:

   1. (a)

      be in an approved derivative; or

   2. (b)

      be one which complies with COLL 5.2.23 R (OTC transactions in derivatives).

2. (2)

   The underlying of a transaction in a derivative must consist of any one or more of the following to which the scheme is dedicated:

   1. (a)

      transferable securities permitted under COLL 5.2.8 R (3)(a) to (c) and COLL 5.2.8 R (3)(e)7;

   2. (b)

      approved money-market instruments7 permitted underCOLL 5.2.8 R (3)(a) to COLL 5.2.8 R (3)(d)7;

      77
   3. (c)

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

   4. (d)

      derivatives permitted under this rule;

   5. (e)

      collective investment scheme units permitted under COLL 5.2.13 R (Investment in collective investment schemes);

   6. (f)

      financial indices which satisfy the criteria set out in COLL 5.2.20A R7;

   7. (g)

      interest rates;

   8. (h)

      foreign exchange rates; and

   9. (i)

      currencies.

   [Note: article 8(1)(a) of the UCITS eligible assets Directive]7

3. (3)

   A transaction in an approved derivative must be effected on or under the rules of an eligible derivatives market.

4. (4)

   A transaction in a derivative must not cause a scheme to diverge from its investment objectives as stated in the instrument constituting the scheme and the most recently published prospectus.

5. (5)

   A transaction in a derivative must not be entered into if the intended effect is to create the potential for an uncovered sale of one or more transferable securities, approved money-market instruments,7units in collective investment schemes or derivatives provided that a sale is not to be considered as uncovered if the conditions in COLL 5.2.22R (3) (Requirement to cover sales) are satisfied1.

   7
6. (6)

   Any forward transaction must be made with an eligible institution or an approved bank.

7. (7)

   7A derivative includes an instrument which fulfils the following criteria:

   1. (a)

      it allows the transfer of the credit risk of the underlying independently from the other risks associated with that underlying;

   2. (b)

      it does not result in the delivery or the transfer of assets other than those referred to in COLL 5.2.6A R (UCITS schemes: permitted types of scheme property) including cash;

   3. (c)

      in the case of an OTC derivative, it complies with the requirements in COLL 5.2.23 R (OTC transactions in derivatives);

   4. (d)

      its risks are adequately captured by the risk management process of the authorised fund manager, and by its internal control mechanisms in the case of risks of asymmetry of information between the authorised fund manager and the counterparty to the derivative, resulting from potential access of the counterparty to non-public information on persons whose assets are used as the underlying by that derivative.

   [Note: article 8(2) of the UCITS eligible assets Directive]7

8. (8)

   A UCITS scheme may not undertake transactions in derivatives on commodities.

   [Note: article 8(5) of the UCITS eligible assets Directive]7

1. (1)

   7The financial indices referred to in COLL 5.2.20R (2)(f) are those which satisfy the following criteria:

   1. (a)

      the index is sufficiently diversified;

   2. (b)

      the index represents an adequate benchmark for the market to which it refers; and

   3. (c)

      the index is published in an appropriate manner.

2. (2)

   A financial index is sufficiently diversified if:

   1. (a)

      it is composed in such a way that price movements or trading activities regarding one component do not unduly influence the performance of the whole index;

   2. (b)

      where it is composed of assets in which a UCITS scheme is permitted to invest, its composition is at least diversified in accordance with the requirements with respect to spread and concentration set out in this section; and

   3. (c)

      where it is composed of assets in which a UCITS scheme cannot invest, it is diversified in a way which is equivalent to the diversification achieved by the requirements with respect to spread and concentration set out in this section.

3. (3)

   A financial index represents an adequate benchmark for the market to which it refers if:

   1. (a)

      it measures the performance of a representative group of underlyings in a relevant and appropriate way;

   2. (b)

      it is revised or rebalanced periodically to ensure that it continues to reflect the markets to which it refers, following criteria which are publicly available; and

   3. (c)

      the underlyings are sufficiently liquid, allowing users to replicate it if necessary.

4. (4)

   A financial index is published in an appropriate manner if:

   1. (a)

      its publication process relies on sound procedures to collect prices, and calculate and subsequently publish the index value, including pricing procedures for components where a market price is not available; and

   2. (b)

      material information on matters such as index calculation, rebalancing methodologies, index changes or any operational difficulties in providing timely or accurate information is provided on a wide and timely basis.

5. (5)

   Where the composition of underlyings of a transaction in a derivative does not satisfy the requirements for a financial index, the underlyings for that transaction shall where they satisfy the requirements with respect to other underlyings pursuant to COLL 5.2.20R (2), be regarded as a combination of those underlyings.

A derivative or forward transaction which will or could lead to the delivery of property for the account of the UCITS scheme may be entered into only if:

1. (1)

   that property can be held for the account of the UCITS scheme; and

2. (2)

   the authorised fund manager having taken reasonable care determines that delivery of the property under the transaction will not occur or will not lead to a breach of the rules in this sourcebook.

1. (1)

   No agreement by or on behalf of a UCITS scheme to dispose of property or rights may be made unless:

   1. (a)

      the obligation to make the disposal and any other similar obligation could immediately be honoured by the UCITS scheme by delivery of property or the assignment (or, in Scotland, assignation) of rights; and

   2. (b)

      the property and rights at (a) are owned by the UCITS scheme at the time of the agreement.

2. (2)

   Paragraph (1) does not apply to a deposit.

3. (3)

   Paragraph (1) does not apply where:

   1. (a)

      the risks of the underlying financial instrument of a derivative can be appropriately represented by another financial instrument and the underlying financial instrument is highly liquid; or

   2. (b)

      the authorised fund manager or the depositary has the right to settle the derivative in cash, and cover exists within the scheme property which falls within one of the following asset classes:

      1. (i)

         cash;

      2. (ii)

         liquid debt instruments (e.g. government bonds of first credit rating) with appropriate safeguards (in particular, haircuts); or

      3. (iii)

         other highly liquid assets having regard to their correlation with the underlying of the financial derivative instruments, subject to appropriate safeguards (e.g. haircuts where relevant).

4. (4)

   1In the asset classes referred to in (3), an asset may be considered as liquid where the instrument can be converted into cash in no more than seven business days at a price closely corresponding to the current valuation of the financial instrument on its own market.

A transaction in an OTC derivative under COLL 5.2.20 R (1) (b) must be:

1. (1)

   with an approved counterparty; a counterparty to a transaction in derivatives is approved only if the counterparty is:

   1. (a)

      an eligible institution or an approved bank; or

   2. (b)

      a person whose permission (including any requirements or limitations), as published in the FSA Register, or whose Home State authorisation, permits it to enter into the transaction as principal off-exchange;

2. (2)

   on approved terms; the terms of the transaction in derivatives are approved only if the authorised fund manager:

   10
   1. (a)

      carries out, at least daily ,7 a reliable and verifiable valuation in respect of that transaction corresponding to its fair value and which does not rely only on market quotations by the counterparty;7 and

      1010710
   2. (b)

      3can10 enter into one or more 10further transactions10 to sell, liquidate or 3close out that transactions 10at any time, at its 10fair value 7;

      1010101010101010107107
3. (3)

   capable of reliable7 valuation; a transaction in derivatives is capable of reliable7 valuation only if the authorised fund manager having taken reasonable care determines that, throughout the life of the derivative (if the transaction is entered into), it will be able to value the investment concerned with reasonable accuracy:

   1. (a)

      on the basis of an up-to-date market value which the authorised fund manager and the depositary have agreed is reliable;7 or

   2. (b)

      if the value referred to in (a) is not available, on the basis of a pricing model which the authorised fund manager and the depositary have agreed uses an adequate recognised methodology; and7

      7
4. (4)

   subject to verifiable valuation; a transaction in derivatives is subject to verifiable valuation only if, throughout the life of the derivative (if the transaction is entered into) verification of the valuation is carried out by:7

   1. (a)

      an appropriate third party which is independent from the counterparty of the derivative, at an adequate frequency and in such a way that the authorised fund manager is able to check it; or7

   2. (b)

      a department within the authorised fund manager which is independent from the department in charge of managing the scheme property and which is adequately equipped for such a purpose.7

10For the purposes of COLL 5.2.23 R (2), “fair value” is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

10In respect of its obligations under COLL 6.6.4 R (1) (a) , the depositary must take reasonable care to ensure that the authorised fund manager has systems and controls that are adequate to ensure compliance with COLL 5.2.23 R (1) to (4).

1. (1)

   An authorised fund manager must use a risk management process enabling it to monitor and measure as frequently as appropriate the risk of a scheme's positions and their contribution to the overall risk profile of the scheme.

   7
2. (2)

   The following details of the risk management process must be notified by the authorised fund manager to the FSA in advance of the use of the process as required by (1):

   1. (a)

      the methods for estimating risks in derivative and forward transactions; and

   2. (b)

      the types of derivatives and forwards to be used within the scheme together with their underlying risks and any relevant quantitative limits.

3. (3)

   The authorised fund manager must notify the FSA in advance of any material alteration to the details in (2)(a) or (b).

A UCITS scheme may invest in deposits only if it:

1. (1)

   is with an approved bank;

2. (2)

   is:

   1. (a)

      repayable on demand; or

   2. (b)

      has the right to be withdrawn; and

3. (3)

   matures in no more than 12 months.

1. (1)

   An ICVC must not acquire transferable securities issued by a body corporate and carrying rights to vote (whether or not on substantially all matters) at a general meeting of that body corporate if:

   1. (a)

      immediately before the acquisition, the aggregate of any such securities held by the ICVC gives the ICVC power to influence significantly the conduct of business of that body corporate; or

   2. (b)

      the acquisition gives the ICVC that power.

2. (2)

   For the purpose of (1), an ICVC is to be taken to have power significantly to influence the conduct of business of a body corporate if it can, because of the transferable securities held by it, exercise or control the exercise of 20% or more of the voting rights in that body corporate (disregarding for this purpose any temporary suspension of voting rights in respect of the transferable securities of that body corporate).

1. (1)

   A manager must not acquire, or cause to be acquired for an AUT of which it is the manager, transferable securities issued by a body corporate and carrying rights to vote (whether or not on substantially all matters) at a general meeting of the body corporate if:

   1. (a)

      immediately before the acquisition, the aggregate of any such securities held for that AUT, taken together with any such securities already held for other AUTs of which it is also the manager, gives the manager power significantly to influence the conduct of business of that body corporate; or

   2. (b)

      the acquisition gives the manager that power.

2. (2)

   For the purpose of (1), a manager is to be taken to have power significantly to influence the conduct of business of a body corporate if it can, because of the transferable securities held for all the AUTs of which it is the manager, exercise or control the exercise of 20% or more of the voting rights in that body corporate (disregarding for this purpose any temporary suspension of voting rights in respect of the transferable securities of that body corporate).

A UCITS scheme:

1. (1)

   must not acquire transferable securities (other than debt securities) which:

   1. (a)

      do not carry a right to vote on any matter at a general meeting of the body corporate that issued them; and

   2. (b)

      represent more than 10% of those securities issued by that body corporate;

2. (2)

   must not acquire more than 10% of the debt securities issued by any single body;

3. (3)

   must not acquire more than 25% of the units in a collective investment scheme;

4. (4)

   must not acquire more than 10% of the approved money-market instruments7 issued by any single body; and

   7
5. (5)

   need not comply with the limits in (2), (3) and (4) if, at the time of acquisition, the net amount in issue of the relevant investment cannot be calculated.

1. (1)

   In relation to a UCITS scheme which is an umbrella, the provisions in COLL 5.2 to COLL 5.5 apply to each sub-fund as they would for an authorised fund, except the following rules which apply at the level of the umbrella only:

   1. (a)

      COLL 5.2.27 R (Significant influence for ICVCs);

   2. (b)

      COLL 5.2.28 R (Significant influence for managers of AUTs); and

   3. (c)

      COLL 5.2.29 R (Concentration).

2. (2)

   A sub-fund must not invest in another sub-fund of the same umbrella.

1. (1)

   Notwithstanding COLL 5.2.11 R (Spread: general), a7UCITS scheme may invest up to 20% in value of the scheme property in shares and debentures which are issued by the same body where the investment policy of that scheme as stated in the most recently published prospectus is to replicate the composition of a relevant index which satisfies the criteria specified in COLL 5.2.33 R (Relevant indices).

   7
2. (1A)

   Replication of the composition of a relevant index shall be understood to be a reference to replication of the composition of the underlying assets of that index, including the use of techniques and instruments permitted for the purpose of efficient portfolio management.7

   [Note: article 12(1) of the UCITS eligible assets Directive]7

3. (2)

   The limit in (1) can be raised for a particular UCITS scheme up to 35% in value of the scheme property, but only in respect of one body and where justified by exceptional market conditions.

1. (1)

   The indices referred to in COLL 5.2.31 R are those which satisfy the following criteria:

   7
   1. (a)

      the composition is sufficiently diversified;7

   2. (b)

      the index represents an adequate benchmark for the market to which it refers; and7

   3. (c)

      the index is published in an appropriate manner.7

2. (2)

   The composition of an index is sufficiently diversified if its components adhere to the spread and concentration requirements in this section.7

   7
3. (3)

   An index represents an adequate benchmark if its provider uses a recognised methodology which generally does not result in the exclusion of a major issuer of the market to which it refers.7

   7
4. (4)

   An index is published in an appropriate manner if:7

   1. (a)

      it is accessible to the public;7

   2. (b)

      the index provider is independent from the index-replicating UCITS scheme; this does not preclude index providers and the UCITS scheme from forming part of the same group, provided that effective arrangements for the management of conflicts of interest are in place.7

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

1. (1)

   A transaction in derivatives or forward transaction may be entered into only if the maximum exposure, in terms of the principal or notional principal created by the transaction to which the scheme is or may be committed by another person, is covered globally under (2).

2. (2)

   Exposure is covered globally if adequate cover from within the scheme property is available to meet the scheme's total exposure, taking into account the value of the underlying assets, any reasonably foreseeable market movement, counterparty risk, and the time available to liquidate any positions.

3. (3)

   Cash not yet received into the scheme property but due to be received within one month is available as cover for the purposes of (2).

4. (4)

   Property the subject of a transaction under COLL 5.4 (Stock lending) is only available for cover if the authorised fund manager has taken reasonable care to determine that it is obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.

5. (5)

   The global 1exposure relating to derivatives held in a UCITS scheme may not exceed the net value of the scheme property (Article 2(1) of the Commission Recommendation 2004/383/EC)1.

   1

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.

1. (1)

   An authorised fund manager must, (as frequently as necessary), re-calculate the amount of cover required in respect of derivatives and forward positions already in existence under this section.

2. (2)

   Derivatives and rights under forward transactions may be retained in the scheme property only so long as they remain covered globally under COLL 5.3.3 R.

1This section applies to an ICVC, the depositary of an authorised fund and an authorised fund manager in any case where the authorised fund is a UCITS scheme or a non-UCITS retail scheme.

An authorised fund may only enter into a stock lending arrangement or repo contract in accordance with the rules in this section if1 it reasonably appears to the ICVC or manager to be appropriate to do so with a view to generating additional income for the authorised fund with an acceptable degree of risk.

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 repo contract, or a1stock 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:1

      1
      1. (i)

         an authorised person; or1

      2. (ii)

         a person authorised by a Home State regulator; or1

      3. (iii)

         a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America; or1

      4. (iv)

         a bank, or a branch of a bank, supervised and authorised to deal in investments as principal, with respect to OTC derivatives by at least one of the following federal banking supervisory authorities of the United States of America:1

         1. (A)

            the Office of the Comptroller of the Currency;1

         2. (B)

            the Federal Deposit Insurance Corporation; 1

         3. (C)

            the Board of Governors of the Federal Reserve System; and1

         4. (D)

            the Office of Thrift Supervision; and1

   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; and

         1
      3. (iii)

         sufficiently immediate.

         1
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.

3. (3)

   (1)(c) does not apply to a stock lending transaction made through Euroclear Bank SA/NV's Securities Lending and Borrowing Programme.1

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)

         [deleted]1

         1
      3. (iii)

         a certificate of deposit; or

      4. (iv)

         a letter of credit; or

      5. (v)

         a readily realisable security; or1

         1
      6. (vi)

         1commercial paper with no embedded derivative content; or

      7. (vii)

         1a qualifying money market fund.

2. (1A)

   Where the collateral is invested in units in a qualifying money market fund managed or operated by (or, for an ICVC, whose ACD is) the authorised fund manager of the investing scheme or an associate of that authorised fund manager, the conditions in COLL 5.2.16 R (Investment in other group schemes) must be complied with whether or not the investing scheme is a UCITS scheme or a non-UCITS retail scheme.1

3. (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.

4. (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.

5. (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.

6. (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.

7. (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.

8. (7)

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

There is no limit on the value of the scheme property which may be the subject of repo contracts or1stock lending transactions within this section.

This section applies to an ICVC, an ACD, a manager of an AUT, a depositary of an ICVC and a trustee of an AUT, where such ICVC or AUT is a UCITS scheme as set out in COLL 5.5.2 R (Table of application).

1. (1)

   Cash and near cash must not be retained in the scheme property except to the extent that this may reasonably be regarded as necessary in order to enable:

   1. (a)

      the pursuit of the scheme's investment objectives; or

   2. (b)

      redemption of units; or

   3. (c)

      efficient management of the authorised fund in accordance with its investment objectives; or

   4. (d)

      other purposes which may reasonably be regarded as ancillary to the investment objectives of the authorised fund.

2. (2)

   During the period of the initial offer the scheme property may consist of cash and near cash without limitation.

1. (1)

   The ICVC or trustee (on the instructions of the manager) may, in accordance with this rule and COLL 5.5.5 R (Borrowing limits), borrow money for the use of the authorised fund on terms that the borrowing is to be repayable out of the scheme property.

2. (2)

   Paragraph (1) is subject to the obligation of the authorised fund to comply with any restriction in the instrument constituting the scheme.

3. (3)

   The ICVC or trustee may borrow under (1) only from an eligible institution or an approved bank.

4. (4)

   The authorised fund manager must ensure that any borrowing is on a temporary basis and that borrowings are not persistent, and for this purpose the authorised fund manager must have regard in particular to:

   1. (a)

      the duration of any period of borrowing; and

   2. (b)

      the number of occasions on which resort is had to borrowing in any period.

5. (5)

   In addition to complying with (4), the authorised fund manager must ensure that no period of borrowing exceeds three months, whether in respect of any specific sum or at all, without the prior consent of the depositary.

6. (6)

   The depositary may only give its consent as required under (5) on such conditions as appear to the depositary appropriate to ensure that the borrowing does not cease to be on a temporary basis only.

7. (7)

   This rule does not apply to "back to back" borrowing under COLL 5.3.5 R (2) (Borrowing).

8. (8)

   An ICVC must not issue any debenture unless it acknowledges or creates a borrowing that complies with (1) to (6)

1. (1)

   The authorised fund manager must ensure that the authorised fund's borrowing does not, on any day, exceed 10% of the value of the scheme property.

2. (2)

   This rule does not apply to "back to back" borrowing under COLL 5.3.5 R (2)(Borrowing).

3. (3)

   In this rule, borrowing includes, as well as borrowing in a conventional manner, any other arrangement (including a combination of derivatives) designed to achieve a temporary injection of money into the scheme property in the expectation that the sum will be repaid.

4. (4)

   [deleted]1

   1

1. (1)

   None of the money in the scheme property of an authorised fund may be lent and, for the purposes of this prohibition, money is lent by an authorised fund if it is paid to a person ("the payee") on the basis that it should be repaid, whether or not by the payee.

2. (2)

   Acquiring a debenture is not lending for the purposes of (1); nor is the placing of money on deposit or in a current account.

3. (3)

   Paragraph (1) does not prevent an ICVC from providing an officer of the ICVC with funds to meet expenditure to be incurred by him for the purposes of the ICVC (or for the purposes of enabling him properly to perform his duties as an officer of the ICVC) or from doing anything to enable an officer to avoid incurring such expenditure.

1. (1)

   The scheme property of an authorised fund other than money must not be lent by way of deposit or otherwise.

2. (2)

   Transactions permitted by COLL 5.4 (Stock lending) are not to be regarded as lending for the purposes of (1).

3. (3)

   The scheme property must not be mortgaged.

4. (4)

   Where transactions in derivatives or forward transactions are used for the account of the authorised fund in accordance with any of the rules in this chapter, nothing in this rule prevents the ICVC or the depositary at the request of the ICVC, or the trustee at the request of the manager, from2:

   2
   1. (a)

      lending, depositing, pledging or charging scheme property for margin requirements; or

   2. (b)

      transferring scheme property under the terms of an agreement in relation to margin requirements, provided that the authorised fund manager reasonably considers that both the agreement and the margin arrangements made under it (including in relation to the level of margin) provide appropriate protection to unitholders.

1. (1)

   Any power in this chapter to invest in transferable securities may be used for the purpose of entering into transactions to which this rule applies, subject to compliance with any restriction in the instrument constituting the scheme.

2. (2)

   This rule applies to any agreement or understanding which:

   1. (a)

      is an underwriting or sub-underwriting agreement; or

   2. (b)

      contemplates that securities will or may be issued or subscribed for or acquired for the account of the authorised fund.

3. (3)

   Paragraph (2) does not apply to:

   1. (a)

      an option; or

   2. (b)

      a purchase of a transferable security which confers a right to:

      1. (i)

         subscribe for or acquire a transferable security; or

      2. (ii)

         convert one transferable security into another.

4. (4)

   The exposure of an authorised fund to agreements and understandings within (2) must, on any day, be:

   1. (a)

      covered under COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions); and

   2. (b)

      such that, if all possible obligations arising under them had immediately to be met in full, there would be no breach of any limit in this chapter.

1. (1)

   An ICVC or a depositary for the account of an authorised fund must not provide any guarantee or indemnity in respect of the obligation of any person.

2. (2)

   None of the scheme property of an authorised fund may be used to discharge any obligation arising under a guarantee or indemnity with respect to the obligation of any person.

3. (3)

   Paragraphs (1) and (2) do not apply to:

   1. (a)

      any indemnity or guarantee given for margin requirements where the derivatives or forward transactions are being used in accordance with the rules in this chapter; and

   2. (b)

      for an ICVC:

      1. (i)

         an indemnity falling within the provisions of regulation 62(3) of the OEIC Regulations (Exemptions from liability to be void);

      2. (ii)

         an indemnity (other than any provision in it which is void under regulation 62 of the OEIC Regulations) given to the depositary against any liability incurred by it as a consequence of the safekeeping of any of the scheme property by it or by anyone retained by it to assist it to perform its function of the safekeeping of the scheme property; and

      3. (iii)

         an indemnity given to a person winding up a scheme if the indemnity is given for the purposes of arrangements by which the whole or part of the property of that scheme becomes the first property of the ICVC and the holders of units in that scheme become the first unitholders in the ICVC; and

   3. (c)

      for an AUT, an indemnity given to a person winding up a body corporate or other scheme in circumstances where those assets are becoming part of the scheme property by way of a unitisation.

1. (1)

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

2. (2)

   Where this section contains a reference to a rule in any of COLL 5.1 to COLL 5.5 , these rules and any rules to which they refer or any relevant guidance should be read as if any reference to a UCITS scheme is to a non-UCITS retail scheme.

1. (1)

   An authorised fund manager must ensure that, taking account of the investment objectives and policy of the non-UCITS retail scheme as stated in its most recently published prospectus, the scheme property of the non-UCITS retail scheme aims to provide a prudent spread of risk

2. (2)

   Subject to (3) and (4), the 10rules in this section relating to spread of investments, including immovables,10 do not apply until 12 months after the later of:

   1010
   1. (a)

      the date when the authorisation order in respect of the non-UCITS retail scheme takes effect; and

   2. (b)

      the date the initial offer commenced;10

   provided that (1) is complied with during such period.

3. (3)

   10Subject to (4), the limits in COLL 5.6.19 R do not apply until 24 months after the later of:

   1. (a)

      the date when the authorisation order in respect of the non-UCITS retail scheme takes effect; and

   2. (b)

      the date the initial offer commenced;

   provided that (1) is complied with during such period.

4. (4)

   The limit in COLL 5.6.19 R (7) relating to immovables which are unoccupied and non-income producing or are in the course of substantial development, redevelopment or refurbishment applies from the later of the date when the authorisation order in respect of the non-UCITS retail scheme takes effect and the date the initial offer period commenced.

1. (1)

   The scheme property of a non-UCITS retail scheme 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 and within any upper limit specified in this section.

4. (4)

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

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 5.6.10 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) to5COLL 5.6.19 R (Investment limits for immovables); and

      5
   7. (g)

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

Transferable securities and money-market instruments held within a non-UCITS retail scheme must:

1. (1) 2
   1. (a)

      be admitted to or dealt in on an eligible market within COLL 5.2.10 R (Eligible markets: requirements); or9

   2. (b)

      be recently issued transferable securities which satisfy the requirements for investment by a UCITS scheme set out in COLL 5.2.8 R (3)(e); or9

   3. (c)

      be approved money-market instruments not admitted to or dealt in on an eligible market which satisfy the requirements for investment by a UCITS scheme set out in 10COLL 5.2.10A R to COLL 5.2.10C R10; or9

2. (2)

   subject to a limit of 20% in value of the scheme property be:

   1. (a)

      transferable securities which are not within (1)9; or

      9
   2. (b)

      money-market instruments which are liquid and have a value which can be determined accurately at any time.

10 Transferable securities held within a non-UCITS retail scheme must also satisfy the criteria in COLL 5.2.7A R, COLL 5.2.7C R and COLL 5.2.7E R for the purposes of investment by a UCITS scheme.

In this section the value of the scheme property means the value of the scheme property determined in accordance with COLL 5.2.5 R (Valuation).

1. (1)

   This rule does not apply in respect of government and public securities.

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 money-market instruments issued by any single body subject to COLL 5.6.23 R (Schemes replicating an index).

4. (3A)

   The limit of 10% in (3) is raised to 25% in value of the scheme property in respect of covered bonds.9

5. (4)

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

6. (5)

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

7. (6)

   Except for a feeder fund , or a scheme dedicated to units in a single property authorised investment fund,11 not more than 35% in value of the scheme is to consist of the units of any one scheme.

8. (6A)

   11Schemes which (in respect of investment in units in collective investment schemes) are dedicated to units in a single property authorised investment fund must, in addition to the investment in the property authorised investment fund, only hold cash or near cash to maintain sufficient liquidity to enable the scheme to meet its commitments, such as redemptions. 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.

9. (7)

   For the purpose of calculating the limit in (5), 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 (8).2

10. (8)

    The conditions referred to in (7) are that the collateral:2

    1. (a)

       is marked-to-market on a daily basis and exceeds the value of the amount at risk;2

    2. (b)

       is exposed only to negligible risks (e.g. government bonds of first credit rating or cash) and is liquid;2

    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; and2

    4. (d)

       can be fully enforced by the non-UCITS retail scheme at any time.2

11. (9)

    For the purpose of calculating the limit in (5), OTC derivative positions with the same counterparty may be netted provided that the netting procedures:2

    1. (a)

       comply with the conditions set out in Part 711(Contractual netting (Contracts for novation and other netting agreements)) of Annex III to the Banking Consolidation Directive; and2

    2. (b)

       are based on legally binding agreements.2

12. (10)

    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 house12 meets each of the following conditions:2

    12
    1. (a)

       it is backed by an appropriate performance guarantee; and2

    2. (b)

       it is characterised by a daily mark-to-market valuation of the derivative positions and an at least daily margining.2

13. (11)

    4For 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.

1. (1)

   This rule applies in respect of

   government and public securities.

2. (2)

   The requirements in COLL 5.2.12 R (Spread: government and public securities) apply to investment in government and public securities by a non-UCITS retail scheme, except for COLL 5.2.12R (4) which will apply to such a scheme only to the extent that it concerns the most recently published prospectus of the scheme1.

A non-UCITS retail scheme must not invest in nil and partly paid securities unless the investment complies with the conditions in COLL 5.2.17 R (Investment in nil and partly paid securities).

A non-UCITS retail scheme must not invest in units in a collective investment scheme (second scheme) unless the second scheme meets each of the requirements at (1) to (5)3:

1. (1)

   the second scheme:

   1. (a)

      satisfies the conditions necessary for it to enjoy the rights conferred by the UCITS Directive; or

   2. (b)

      is a non-UCITS retail scheme; or

   3. (c)

      is a recognised scheme; or

   4. (d)

      is constituted outside the United Kingdom and the investment and borrowing powers of which are the same or more restrictive than those of a non-UCITS retail scheme; or

   5. (e)

      is a scheme not falling within (a) to (d) and in respect of which no more than 20% in value of the scheme property (including any transferable securities which are not approved securities) is invested;

2. (2)

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

3. (3)

   the second scheme is prohibited from having more than 15% in value of the property of that scheme consisting of units in collective investment schemes;

   3
4. (4)

   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; and3

      3
5. (5)

   where the second scheme is an umbrella, the provisions in (2) to (4) and COLL 5.6.7 R (Spread: general) 2apply to each sub-fund as if it were a separate scheme.

Units in a scheme do not fall within COLL 5.6.10 R if that scheme is managed or operated by (or, if it is an ICVC, has as its ACD) the authorised fund manager of the investing non-UCITS retail scheme or by an associate of that authorised fund manager, unless:

1. (1)

   the prospectus of the investing authorised fund clearly states that the property of that investing fund may include such units; and

2. (2)

   the conditions in COLL 5.2.16 R (Investment in other group schemes) are complied with.

1. (1)

   A transaction in derivatives or a forward transaction must not be effected for a non-UCITS retail scheme unless the transaction is:

   1. (a)

      of a kind specified in COLL 5.6.13 R2 (Permitted transactions (derivatives and forwards)); and

      2
   2. (b)

      covered, as required by COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions).

2. (2)

   Where a scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in COLL 5.6.7 R (Spread: general) and COLL 5.6.8 R (Spread: government and public securities) except as provided in (4).

3. (3)

   Where a transferable security or money-market instrument embeds a derivative, this must be taken into account for the purposes of calculating any limit in this section.

4. (4)

   Where a scheme invests in an index-based derivative, provided the relevant index falls within COLL 5.6.23 R (Schemes replicating an index) the underlying constituents of the index do not have to be taken into account for the purposes of COLL 5.6.7 R and COLL 5.6.8 R.

5. (5)

   The relaxation in (4) is subject to the authorised fund manager taking account of COLL 5.6.3 R (Prudent spread of risk).

1. (1)

   A transaction in a derivative must be within COLL 5.2.20 R (1) (Permitted transactions (derivatives and forwards)) and:

   1. (a)

      the underlying must be within COLL 5.6.4 R (5) (Investment powers: general) or COLL 5.2.20R (2)(f) to (i)2; and

      2
   2. (b)

      the exposure to the underlying must not exceed the limits in COLL 5.6.7 R (Spread: general),9COLL 5.6.8 R (Spread: government and public securities) and COLL 5.6.5 R (2).9

      9
2. (2)

   A transaction in an approved derivative must be effected on or under the rules of an eligiblederivatives market.

3. (3)

   A transaction in a derivative must not cause a scheme to diverge from its investment objectives as stated in the instrument constituting the scheme and the most recently published prospectus.

4. (4)

   transaction in a derivative must not be effected if the intended effect is to create the potential for an uncovered sale of:

   1. (a)

      transferable securities;

   2. (b)

      money-market instruments;

   3. (c)

      units in collective investment schemes; or

   4. (d)

      derivatives.

5. (5)

   Any forward transaction must be made with an eligible institution or an approved bank.

6. (6)

   The authorised fund manager must ensure compliance with COLL 5.3.6 R (Continuing nature of limits and requirements).

The requirements of COLL 5.2.21 R (Transactions for the purchase of property) and COLL 5.2.22 R (Requirement to cover sales) apply to non-UCITS retail schemes in the same manner as to UCITS schemes.

Any transaction in an OTC derivative under COLL 5.6.13 R (Permitted transactions (derivatives and forwards)) must comply with the requirements of COLL 5.2.23 R (OTC transactions in derivatives).

An authorised fund manager must use a risk management process enabling it to monitor and measure as frequently as appropriate the risk associated with a non-UCITS retail scheme's positions and their contribution to the overall risk profile of the scheme.

1. (1)

   Any investment in land or a building held within the scheme property of a non-UCITS retail scheme must be an immovable within (2) to (5).

2. (2)

   An immovable must:

   1. (a)

      be situated in a country or territory identified in the prospectus for the purpose of this rule; and

   2. (b)

      if situated in:

      1. (i)

         England and Wales or Northern Ireland, be a freehold or leasehold interest; or

      2. (ii)

         Scotland, be any interest or estate in or over land or heritable right including a long lease; or

   3. (c)

      if not situated in the jurisdictions referred to in (b)(i) or (ii), be equivalent to any of the interests in (b)(i) or (ii) or, if no such equivalent interest is available in the jurisdiction, be an interest that grants beneficial ownership of the immovable to the scheme and provides as good a title as any of the interests in (b)(i) or (ii).5

3. (3)

   The authorised fund manager must have taken reasonable care to determine that the title to the immovable is a good marketable title.

4. (4)

   The manager or the ICVC must:

   1. (a)

      have received a report from an appropriate valuer which:

      1. (i)

         contains a valuation of the immovable (with and without any relevant subsisting mortgage); and

      2. (ii)

         states that in the appropriate valuer's opinion the immovable would, if acquired by the scheme, be capable of being disposed of reasonably quickly at that valuation; or

   2. (b)

      have received a report from an appropriate valuer as required by (4)(a)(i) and stating that:

      1. (i)

         the immovable is adjacent to or in the vicinity of another immovable included in the scheme property or is another legal interest as defined in (2)(b) or (c) in an immovable which is already included in the scheme property; and

      2. (ii)

         in the opinion of the appropriate valuer, the total value of both immovables would at least equal the sum of the price payable for the immovable and the existing value of the other immovable.

5. (5)

   An immovable must:

   1. (a)

      be bought or be agreed by enforceable contract to be bought within six months after receipt of the report of the appropriate valuer under (4);

   2. (b)

      not be bought, if it is apparent to the authorised fund manager that the report in (a) could no longer reasonably be relied upon; and

   3. (c)

      not be bought at more than 105% of the valuation for the relevant immovable in the report in (4).

6. (6)

   Any furniture, fittings or other contents of any building may be regarded as part of the relevant immovable.

7. (7)

   An appropriate valuer must be a person who:

   1. (a)

      has knowledge of and experience in the valuation of immovables of the relevant kind in the relevant area;

   2. (b)

      is qualified to be a standing independent valuer of a non-UCITS retail scheme or is considered by the scheme'sstanding independent valuer to hold an equivalent qualification;

   3. (c)

      is independent of the ICVC, the depositary and each of the directors of the ICVC or of the manager and trustee of the AUT; and

   4. (d)

      has not engaged himself or any of his associates in relation to the finding of the immovable for the scheme or the finding of the scheme for the immovable.

1. (1)

   5An overseas6 immovable may be held by a scheme through an intermediate holding vehicle whose purpose is to enable the holding of immovables by the scheme or a series of such intermediate holding vehicles, provided that the interests of unitholders are adequately protected. Any investment in an intermediate holding vehicle for the purpose of holding an overseas6 immovable shall be treated for the purposes of this chapter as if it were a direct investment in that6 immovable.

   6
2. (2)

   An intermediate holding vehicle must be wholly owned by the scheme or another intermediate holding vehicle or series of intermediate holding vehicles wholly owned by the scheme, unless and to the extent that local legislation or regulation relating to the intermediate holding vehicle holding the immovable requires a proportion of local ownership.

The following limits apply in respect of immovables held as part of scheme property of a scheme:

1. (1)

   not more than 15% in value of the scheme property is to consist of any one immovable;

2. (2)

   in (1), immovables within COLL 5.6.18 R (4) (b) (Investment in property) must be regarded as one immovable;

3. (3)

   the figure of 15% in (1) may be increased to 25% once the immovable has been included in the scheme property in compliance with (1);

4. (4)

   the income receivable from any one group in any accounting period must not be attributable to immovables comprising;

   1. (a)

      more than 25%; or

   2. (b)

      in the case of a government or public body more than 35%;

   of the value of the scheme property;

5. (5)

   not more than 20% in value of the scheme property is to consist of immovables that are subject to a mortgage3 and any mortgage must not secure more than 100% of the value in COLL 5.6.18 R (4) (on the assumption the immovable is not mortgaged);

   3
6. (6)

   the aggregate value of:3

   3
   1. (a)

      mortgages secured on immovables under (5);3

   2. (b)

      borrowing of the scheme under COLL 5.6.22 R (5); and3

   3. (c)

      any transferable securities that are not approved securities;3

   must not at any time exceed 20% of the value of the scheme property;3

7. (7)

   not more than 50% in value of the scheme property is to consist of immovables which are unoccupied and non-income producing or in the course of substantial development, redevelopment or refurbishment; and

8. (8)

   no option may be granted to a third party to buy any immovable comprised in the scheme property unless the value of the relevant immovable does not exceed 20% of the value of the scheme property together with, where appropriate, the value of investments in:

   1. (a)

      unregulated collective investment schemes; and

   2. (b)

      any transferable securities which are not approved securities.

1. (1)

   The following requirements apply in relation to the appointment of a valuer:

   1. (a)

      the authorised fund manager must ensure that any immovables in the scheme property are valued by an appropriate valuer (standing independent valuer) appointed by the authorised fund manager; and

   2. (b)

      the appointment must be made with the approval of the trustee or depositary at the outset and upon any vacancy.

2. (2)

   The standing independent valuer in (1) must be:

   1. (a)

      for an AUT, independent of the manager and trustee; and

   2. (b)

      for an ICVC, independent of the ICVC, the directors and the depositary.

3. (3)

   The following requirements apply in relation to the functions of the standing independent valuer:

   1. (a)

      the authorised fund manager must ensure that the standing independent valuer values all the immovables held within the scheme property, on the basis of a full valuation with physical inspection (including, where the immovable is or includes a building, internal inspection), at least once a year;

   2. (b)

      for the purposes of (a) any inspection in relation to adjacent properties of a similar nature may be limited to that of only one such representative property;

   3. (c)

      the authorised fund manager must ensure that the standing independent valuer values the immovables, on the basis of a review of the last full valuation, at least once a month;

   4. (d)

      if either the authorised fund manager or the depositary becomes aware of any matters that appear likely to:

      1. (i)

         affect the outcome of a valuation of an immovable; or

      2. (ii)

         cause the valuer to decide to value under (a) instead of under (c);

      it must immediately inform the standing independent valuer of that matter;

   5. (e)

      the authorised fund manager must use its best endeavours to ensure that any other affected person reports to the standing independent valuer immediately upon that person becoming aware of any matter within (d); and

   6. (f)

      any valuation by the standing independent valuer must be undertaken in accordance with UKPS 2.3 of the RICS Valuation Standards (The Red Book) (6th edition published January 2008), or in the case of overseas immovables on an appropriate basis,8 but subject to COLL 6.3 (Valuation and pricing).

      8
4. (4)

   In relation to an immovable:

   1. (a)

      any valuation under COLL 6.3 (Valuation and pricing) has effect, until the next valuation under that rule, for the purposes of the value of immovables; and

   2. (b)

      an agreement to transfer an immovable or an interest in an immovable is to be disregarded for the purpose of the valuation of the scheme property unless it reasonably appears to the authorised fund manager to be legally enforceable.

A non-UCITS retail scheme may undertake stock lending in accordance with COLL 5.4 (Stock lending).

The following rules in Chapter 5 apply to a non-UCITS retail scheme:

1. (1)

   COLL 5.2.7 R (Transferable securities);

2. (2)

   COLL 5.5.1 R(Application) and COLL 5.5.2 R (Table of application)2;

3. (3)

   COLL 5.5.3 R (Cash and near cash);

4. (4)

   COLL 5.5.4 R (1), COLL 5.5.4 R (2), COLL 5.5.4 R (3) and COLL 5.5.4R (8) (General power to borrow);

5. (5)

   COLL 5.5.5 R (1) and3COLL 5.5.5 R (2) (Borrowing limits);

   33
6. (6)

   COLL 5.5.6 R (Restrictions on lending of money) ;

7. (7)

   COLL 5.5.7 R (1), (2) and (4)2 (Restrictions on lending of property other than money);

   2
8. (8)

   COLL 5.5.8 R (General power to accept or underwrite placings); and

9. (9)

   COLL 5.5.9 R (Guarantees and indemnities).

1. (1)

   A non-UCITS retail scheme may invest up to 20% in value of the scheme property in shares and debentures which are issued by the same body where the aim of the investment policy of that scheme as stated in its most recently published prospectus is to replicate the performance or composition of an index within (2).

2. (2)

   The index must:

   1. (a)

      have a sufficiently diversified composition;

   2. (b)

      be a representative benchmark for the market to which it refers; and

   3. (c)

      be published in an appropriate manner.

3. (3)

   The limit in (1) may be raised for a particular scheme up to 35% in value of the scheme property, but only in respect of one body and where justified by exceptional market conditions.

1. (1)

   In relation to a scheme which is an umbrella, the provisions in this section apply to each sub-fund as they would for a non-UCITS retail scheme.

2. (2)

   A sub-fund must not invest in another sub-fund of the same umbrella.

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

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 government and public securities.

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 7(Contractual netting (Contracts for novation and other netting agreements)) of Annex III to the Banking Consolidation Directive; and

    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.