Investment and borrowing powers

Part

COLL New Collective Investment Schemes

Chapter

Investment and borrowing powers

Printed on: 14/10/2024

Rulebook at: 01/01/2007

COLL 5

Investment and borrowing powers

COLL 5.1

Introduction

01/12/2004

Application

COLL 5.1.1

(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) COLL 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) Paragraph (2) ceases to apply if a non-UCITS retail scheme converts to be authorised as a UCITS scheme.

01/04/2004

Purpose

COLL 5.1.2

(1) This chapter helps in achieving the regulatory objective of protecting consumers by laying down minimum standards for the investments that may be held by an authorised fund. In particular:

(a) the proportion of transferable securities and derivatives that may be held by an authorised fund is restricted if those transferable securities and derivatives are not listed on an eligible market; the intention of this is to restrict investment in transferable securities or derivatives that cannot be accurately valued and readily disposed of; and

(b) authorised funds are required to comply with a number of investment rules that require the spreading of risk.

(2) Table 5.1.4G gives an overview of the permissible investments and maximum investment limits for UCITS schemes and non-UCITS retail schemes.

01/04/2004

Treatment of obligations

COLL 5.1.3

(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) 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:

(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

(b) no element of cover must be used more than once.

01/04/2004

Indicative overview of investment and borrowing powers

COLL 5.1.4

This table belongs to COLL 5.1.2G (2).

Scheme investments and investment techniques

Limits for UCITS schemes

Limits for non-UCITS retail schemes

Permissible investment

Maximum limit

Permissible investment

Maximum limit

Approved securities

Yes

None

Yes

None

Transferable securities that are not approved securities

Yes

10%

Yes

20%

Government and public securities

Yes

None

Yes

None

Regulated schemes

Yes

None

Yes

None

Unregulated schemes

N/A

Yes

20%

Warrants

Yes

None

Yes

None

Investment trusts

Yes

None

Yes

None

Deposits

Yes

None

Yes

None

Derivatives

Yes

None

Yes

None

Immovables (i.e real property)

N/A

Yes

None

Gold

N/A

Yes

10%

Hedging

Yes

None

Yes

None

Stock lending

Yes

None

Yes

None

Underwriting

Yes

None

Yes

None

Borrowing

Yes

10% (T)

Yes

10%

Cash and near cash

Yes

None

Yes

None

Note:

Meaning of terms used:

A percentage

an upper limit (though there may be limits of other kinds).

"(T)"

temporary only- see COLL 5.5.4R(4)

"N/A"

Not applicable

01/04/2004

COLL 5.2

General investment powers and limits for UCITS schemes

01/12/2004

Application

COLL 5.2.1

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).

01/04/2004

Table of application

COLL 5.2.2

This table belongs to COLL 5.2.1 R.

Rule

ICVC

ACD

Manager of an AUT

Depositary of an ICVC

Trustee of an AUT

5.2.3R to 5.2.9R

5.2.10R(1)

5.2.10R(2)(a)&(b)

5.2.10R(2)(c)

5.2.10R(3)

5.2.11R to 5.2.21R

5.2.22R

5.2.23R(1)

5.2.23R(2)

5.2.23R(3)

5.2.24R

5.2.25G

5.2.26R

5.2.27R

5.2.28R

5.2.29R to 5.2.33R

Note: x means "applies"

01/04/2004

Prudent spread of risk

COLL 5.2.3

(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) 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.

01/04/2004

Investment powers: general

COLL 5.2.4

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

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

(3) the descriptions of transactions permitted; and

(4) the borrowing powers of the UCITS scheme.

01/04/2004

Valuation

COLL 5.2.5

(1) In this chapter, the value of the scheme property of a UCITS scheme means 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) When valuing the scheme property for the purposes of this chapter:

(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);

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

(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) When 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.

06/10/2006

Valuation guidance

COLL 5.2.6

It should be noted that for the purpose of COLL 5.2.5 R, COLL 6.3 may be affected by specific provisions in this chapter such as, for example, COLL 5.4.6 R (Treatment of collateral).

01/04/2004

Transferable securities

COLL 5.2.7

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

(a) a share;

(b) a debenture;

(d) a warrant; or

(e) a certificate representing certain securities.

(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) 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) 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.

01/04/2004

UCITS schemes: general

COLL 5.2.8

(1) The scheme property of a UCITS scheme must, except where otherwise provided in the rules in this chapter, consist only of any or all of:

(a) transferable securities;

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

(d) derivatives and forward transactions permitted under COLL 5.2.20 R (Permitted transactions (derivatives and forwards)); and

(e) deposits permitted under COLL 5.2.26 R (Investment in deposits).

(2) For an ICVC the scheme property may also include movable and immovable property that is necessary for the direct pursuit of the ICVC's business.

(3) Transferable securities and money-market instruments held within a UCITS scheme must be;

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

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

(d) for a money-market instrument,within COLL 5.2.18 R (2).

(4) Not more than 10% in value of the scheme property of a UCITS scheme is to consist of transferable securities, which do not fall within (3) or of money-market instruments, which do not fall within COLL 5.2.18 R (2).

01/04/2004

Eligible markets regime: purpose

COLL 5.2.9

(1) This section specifies criteria based on those in article 19 of the UCITS Directive, as to the nature of the markets in which the property of a UCITS scheme may be invested.

(2) Where a market ceases to be eligible, investments on that market cease to be approved securities. The 10% restriction in COLL 5.2.8 R (4) applies, and exceeding this limit because a market ceases to be eligible will generally be regarded as a breach beyond the control of the authorised fund manager.

01/04/2004

Eligible markets: requirements

COLL 5.2.10

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

(a) a regulated market;

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

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

(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;

(b) the market is included in a list in the prospectus; and

(i) adequate custody arrangements can be provided for the investment dealt in on that market; and

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

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

(a) is regulated;

(b) operates regularly;

(d) is open to the public;

(e) is adequately liquid; and

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

01/04/2004

Spread: general

COLL 5.2.11

(1) This rule does not apply to government and public securities.

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

(4) Not more than 5% in value of the scheme property is to consist of transferable securities or money-market instruments issued by any single body.

(5) The limit of 5% in (4) is raised to 10% in respect of up to 40% in value of the scheme property.

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

(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.

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

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

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

(a) transferable securities or money-market instruments issued by; or

(b) deposits made with; or

(11) For 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).

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

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

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

(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

(d) can be fully enforced by the UCITS scheme at any time.

(13) For 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:

(a) comply 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

(b) are based on legally binding agreements.

(14) 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:

(a) it is backed by an appropriate performance guarantee; and

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

01/03/2005

Guidance on spread: general

COLL 5.2.11A

(1) COLL 5.2.11R (11) to (14) reflect the provisions of Article 5 of the Commission Recommendation 2004/383/EC of 27 April 2004 on the use of financial derivative instruments for undertakings for collective investment in transferable securities (in this Section referred to as "the Commission Recommendation on the use of financial derivative instruments"). This Recommendation may be accessed via www.europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_199/l_19920040607en00240029.pdf.

(2) The attention of authorised fund managers is specifically drawn to condition (d) in COLL 5.2.11R (12) under which the collateral has to be legally enforceable at any time. It is the FSA's view that it is advisable for an authorised fund manager to undertake a legal due diligence exercise before entering into any financial collateral arrangement. This is particularly important where the collateral arrangements in question have a cross-border dimension. Depositaries will also need to exercise reasonable care to review the collateral arrangements in accordance with its duties under COLL 6.6.4 R (General duties of the depositary).

01/03/2005

Spread: government and public securities

COLL 5.2.12

(1) This rule applies to government and public securities ("such securities").

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

(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;

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

(d) the disclosures in (4) have been made.

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

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

(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) In this rule in relation to such securities:

(a) issue, issued and issuer include guarantee, guaranteed and guarantor; and

(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.

01/04/2004

Investment in collective investment schemes

COLL 5.2.13

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 (d):

(1) the second scheme must:

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

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

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

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

(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);

(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; and

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

06/11/2006

Qualifying non-UCITS collective investment schemes

COLL 5.2.14

(1) COLL 9.3 gives further detail as to the recognition of a scheme under section 270 of the Act.

(2) Article 19 of the UCITS Directive sets out the general investment limits. So, a non-UCITS retail scheme, or its equivalent EEA scheme which has the power to invest in gold or immovables would not meet the criteria set in COLL 5.2.13R (1)(c) and COLL 5.2.13R (1)(d).

01/04/2004

Investment in associated collective investment schemes

COLL 5.2.15

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

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

01/04/2004

Investment in other group schemes

COLL 5.2.16

(1) Where:

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

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

(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

(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) 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) In this rule:

(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 (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

(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.

01/04/2004

Investment in warrants and nil and partly paid securities

COLL 5.2.17

(1) Where a UCITS scheme invests in a warrant, the exposure created by the exercise of the right conferred by that warrant must not exceed the limits in COLL 5.2.11 R (Spread: general) and COLL 5.2.12 R (Spread: government and public securities).

(2) A transferable security or a money-market instrumenton 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.

01/04/2004

Investment in money-market instruments

COLL 5.2.18

A UCITS scheme may invest in money-market instruments which are normally dealt in on the money market, are liquid and whose value can be accurately determined at any time, provided the money-market instrument is:

(1) within COLL 5.2.8 R (3)(UCITS schemes: general); or

(2) a money-market instrument issued or guaranteed by:

(a) a central, regional or local authority or central bank of an EEA State, the European Central Bank, the European Union or the European Investment Bank, a non-EEA State or, in the case of a federal state, by one of the members making up the federation, or by a public international body to which one or more EEA States belong; or

(b) an establishment subject to prudential supervision in accordance with criteria defined by Community law or an establishment which is subject to and complies with prudential rules considered by the FSA to be at least as stringent as those laid down by Community law; or

(3) issued by a body, any securities of which are dealt in on an eligible market.

01/04/2004

Derivatives: general

COLL 5.2.19

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

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

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

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

(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.

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

01/04/2004

Permitted transactions (derivatives and forwards)

COLL 5.2.20

(1) A transaction in a derivative must:

(a) be in an approved derivative; or

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

(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:

(a) transferable securities ;

(b) money-market instruments permitted under COLL 5.2.18 R (Investment in money-market instruments);

(d) derivatives permitted under this rule;

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

(f) financial indices;

(g) interest rates;

(h) foreign exchange rates; and

(i) currencies.

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

(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) 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, money-market instruments, units 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 satisfied.

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

01/03/2005

Transactions for the purchase of property

COLL 5.2.21

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

(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.

01/04/2004

Requirement to cover sales

COLL 5.2.22

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

(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

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

(2) Paragraph (1) does not apply to a deposit.

(3) Paragraph (1) does not apply where:

(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

(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:

(i) cash;

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

(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) In 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.

01/03/2005

Guidance on requirement to cover sales

COLL 5.2.22A

COLL 5.2.22R (3) to (4) reflect the provisions of Article 7 of the Commission Recommendation on the use of financial derivative instruments.

01/03/2005

OTC transactions in derivatives

COLL 5.2.23

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

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

(a) an eligible institution or an approved bank; or

(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) on approved terms; the terms of the transaction in derivatives are approved only if, before the transaction is entered into, the depositary is satisfied that the counterparty has agreed with the ICVC or the authorised fund manager:

(a) to provide a reliable and verifiable valuation in respect of that transaction at least daily and at any other time at the request of the ICVC or authorised fund manager; and

(b) that it or an alternative counterparty will, at the request of the ICVC or authorised fund manager, enter into a further transaction to sell, liquidate or close out that transaction at any time, at a fair value arrived at under the pricing model or other reliable basis agreed under (3); and

(3) capable of valuation; a transaction in derivatives is capable of 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:

(a) on the basis of the pricing model which has been agreed between the authorised fund manager and the depositary; or

(b) on some other reliable basis reflecting an up-to-date market value which has been so agreed.

06/11/2006

Risk management: derivatives

COLL 5.2.24

(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 derivatives and forwards positions and their contribution to the overall risk profile of the scheme.

(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):

(a) the methods for estimating risks in derivative and forward transactions; and

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

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

01/04/2004

Risk management process

COLL 5.2.25

(1) The risk management process should take account of the investment objectives and policy of the scheme as stated in the most recent prospectus.

(2) The depositary should take reasonable care to review the appropriateness of the risk management process in line with its duties under COLL 6.6.4 R (General duties of the depositary) and COLL 6.6.14 R (Duties of the depositary and authorised fund manager: investment and borrowing powers), as appropriate.

(3) An authorised fund manager is expected to demonstrate more sophistication in its risk management process for a scheme with a complex risk profile than for one with a simple risk profile. In particular, the risk management process should take account of any characteristic of non-linear dependence in the value of a position to its underlying.

(4) An authorised fund manager should take reasonable care to establish and maintain such systems and controls as are appropriate to its business as required by SYSC 3.1 (Systems and controls).

(5) The risk management process should enable the analysis required by COLL 5.2.24 R to be undertaken at least daily or at each valuation point whichever is the more frequent.

(6) Firms carrying out the risk management process should note the methodologies set out in Article 3 (Appropriately calibrated standards to measure market risk) of the Commission Recommendation on the use of financial derivative instruments.

(7) In assessing the risk of OTC derivatives, firms should note the methodologies set out in Article 5.3 (Invitation to use the standards laid down in Directive 2000/12/EC as a first reference) of the Commission Recommendation on the use of financial derivative instruments.

06/11/2006

Investment in deposits

COLL 5.2.26

A UCITS scheme may invest in deposits only if it:

(1) is with an approved bank;

(2) is:

(a) repayable on demand; or

(b) has the right to be withdrawn; and

(3) matures in no more than 12 months.

01/04/2004

Significant influence for ICVCs

COLL 5.2.27

(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:

(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

(b) the acquisition gives the ICVC that power.

(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).

01/04/2004

Significant influence for managers of AUTs

COLL 5.2.28

(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:

(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

(b) the acquisition gives the manager that power.

(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).

01/04/2004

Concentration

COLL 5.2.29

A UCITS scheme:

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

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

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

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

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

(4) must not acquire more than 10% of the money-market instruments issued by any single body; and

(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.

01/04/2004

UCITS schemes that are umbrellas

COLL 5.2.30

(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:

(a) COLL 5.2.27 R (Significant influence for ICVCs);

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

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

01/04/2004

Schemes replicating an index

COLL 5.2.31

(1) A UCITS 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).

(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.

01/04/2004

Index replication

COLL 5.2.32

In the case of a UCITS scheme replicating an index under COLL 5.2.31 R (Schemes replicating an index) the scheme property need not consist of the exact composition and weighting of the underlying in the relevant index where deviation from this is expedient for reasons of poor liquidity or excessive cost to the scheme in trading in an underlying investment.

01/04/2004

Relevant indices

COLL 5.2.33

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

(1) the composition is sufficiently diversified;

(2) the index is a representative benchmark for the market to which it refers; and

(3) the index is published in an appropriate manner.

01/04/2004

COLL 5.3

Derivative exposure

01/12/2004

Application

COLL 5.3.1

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

01/04/2004

Introduction

COLL 5.3.2

(1) A scheme may invest in derivatives and forward transactions as long as the exposure to which the scheme is committed by that transaction itself is suitably covered from within its scheme property. Exposure will include any initial outlay in respect of that transaction.

(2) Cover ensures that a scheme is not exposed to the risk of loss of property, including money, to an extent greater than the net value of the scheme property. Therefore, a scheme is required to hold scheme property sufficient in value or amount to match the exposure arising from a derivative obligation to which the scheme is committed. COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions) sets out detailed requirements for cover of a scheme.

(3) In accordance with COLL 5.1.3 R (2)(b) (Treatment of obligations), cover used in respect of one transaction in derivatives or forward transaction should not be used for cover in respect of another transaction in derivatives or a forward transaction.

01/04/2004

Cover for transactions in derivatives and forward transactions

COLL 5.3.3

(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) 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) 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) 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) The global exposure 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).

01/03/2005

Guidance on cover

COLL 5.3.4

An authorised fund manager should note that the scope of COLL 5.3.3 R is extended in relation to underwriting commitments by COLL 5.5.8 R (4) (General power to accept or underwrite placings).

01/04/2004

Borrowing

COLL 5.3.5

(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) Where, for the purposes of this section, the ICVC or the trustee for the account of the AUT on the instructions of the manager :

(a) borrows an amount of currency from an eligible institution or an approved bank; and

(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.

01/04/2004

Continuing nature of limits and requirements

COLL 5.3.6

(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) 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.

01/04/2004

COLL 5.4

Stock lending

01/12/2004

Application

COLL 5.4.1

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

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

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

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

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

01/04/2004

Permitted stock lending

COLL 5.4.2

(1) This section permits the generation of additional income for the benefit of the authorised fund, and hence for its investors, by entry into stock lending transactions for the account of the authorised fund.

(2) The specific method of stock lending permitted in this section is in fact not a transaction which is a loan in the normal sense. Rather it is an arrangement of the kind described in section 263B of the Taxation of Chargeable Gains Act 1992, under which the lender transfers securities to the borrower otherwise than by way of sale and the borrower is to transfer those securities, or securities of the same type and amount, back to the lender at a later date. In accordance with good market practice, a separate transaction by way of transfer of assets is also involved for the purpose of providing collateral to the "lender" to cover him against the risk that the future transfer back of the securities may not be satisfactorily completed.

01/04/2004

Stock lending: general

COLL 5.4.3

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

01/04/2004

Stock lending: requirements

COLL 5.4.4

(1) An ICVC, or the depositary at the request of the ICVC, or the trustee at the request of the manager , may enter into a stock lending arrangement of the kind described in section 263B of the Taxation of Chargeable Gains Act 1992 (without extension by section 263C), but only if:

(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;

(b) the counterparty is an authorised person or a person authorised by a Home State regulator; and

(c) collateral is obtained to secure the obligation of the counterparty under the terms referred to in (a) and the collateral is:

(i) acceptable to the depositary;

(ii) adequate within COLL 5.4.6 R (1); and

(iii) sufficiently immediate within COLL 5.4.6 R (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.

01/04/2004

Stock lending: treatment of collateral

COLL 5.4.5

Where a stock lending arrangement is entered into, the scheme property remains unchanged in terms of value. The securities transferred cease to be part of the scheme property, but there is obtained in return an obligation on the part of the counterparty to transfer back equivalent securities. The depositary will also receive collateral to set against the risk of default in transfer, and that collateral is equally irrelevant to the valuation of the scheme property (because it is transferred against an obligation of equivalent value by way of re-transfer). COLL 5.4.6 R accordingly makes provision for the treatment of the collateral in that context.

01/04/2004

Treatment of collateral

COLL 5.4.6

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

(a) transferred to the depositary or its agent;

(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

(i) cash; or

(ii) government and public securities; or

(iii) a certificate of deposit; or

(iv) a letter of credit; or

(v) a readily realisable security.

(2) Collateral is sufficiently immediate for the purposes of this section if:

(a) it is transferred before or at the time of the transfer of the securities by the depositary; or

(b) the depositary takes reasonable care to determine at the time referred to in (a) that it will be transferred at the latest by the close of business on the day of the transfer.

(3) The depositary must ensure that the value of the collateral at all times is at least equal to the value of the securities transferred by the depositary.

(4) The duty in (3) may be regarded as satisfied in respect of collateral the validity of which is about to expire or has expired where the depositary takes reasonable care to determine that sufficient collateral will again be transferred at the latest by the close of business on the day of expiry.

(5) Any agreement for transfer at a future date of securities or of collateral (or of the equivalent of either) under this section may be regarded, for the purposes of valuation under COLL 6.3 (Valuation and pricing) or this chapter, as an unconditional agreement for the sale or transfer of property, whether or not the property is part of the property of the authorised fund.

(6) 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:

(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

(b) it does not count as scheme property for any purpose of this chapter other than this section.

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

01/04/2004

Limitation by value

COLL 5.4.7

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

01/04/2004

COLL 5.5

Cash, borrowing, lending and other provisions

01/12/2004

Application

COLL 5.5.1

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).

01/04/2004

Table of application

COLL 5.5.2

This table belongs to COLL 5.5.1 R.

Rule

ICVC

ACD

Manager of an AUT

Depositary of an ICVC

Trustee of an AUT

5.5.3R

5.5.4R(1) to (3)

5.5.4R(4)&(5)

5.5.4R(6)

5.5.4R(7)

5.5.4R(8)

5.5.5R(1) to (3)

5.5.6R(1)&(2)

5.5.6R(3)

5.5.7R(1)-(3)

5.5.7R(4)

5.5.8R

5.5.9R

5.5.10G

Note: x means "applies"

06/04/2006

Cash and near cash

COLL 5.5.3

(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:

(a) the pursuit of the scheme's investment objectives; or

(b) redemption of units; or

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

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

01/04/2004

General power to borrow

COLL 5.5.4

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

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

(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:

(a) the duration of any period of borrowing; and

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

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

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

01/04/2004

Borrowing limits

COLL 5.5.5

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

(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) [deleted]

06/04/2006

Restrictions on lending of money

COLL 5.5.6

(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) 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) 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.

01/04/2004

Restrictions on lending of property other than money

COLL 5.5.7

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

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

(3) The scheme property must not be mortgaged.

(4) 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 , from lending, depositing, pledging or charging scheme property for margin requirements where transactions in derivatives or forward transactions are used for the account of the authorised fund in accordance with any other of the rules in this chapter.

01/04/2004

General power to accept or underwrite placings

COLL 5.5.8

(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) This rule applies to any agreement or understanding which:

(a) is an underwriting or sub-underwriting agreement; or

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

(3) Paragraph (2) does not apply to:

(a) an option; or

(b) a purchase of a transferable security which confers a right to:

(i) subscribe for or acquire a transferable security; or

(ii) convert one transferable security into another.

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

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

(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.

01/04/2004

Guarantees and indemnities

COLL 5.5.9

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

(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

(b) for an ICVC:

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

(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

(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

(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.

01/04/2004

Guidance on restricting payments

COLL 5.5.10

COLL 6.7.15 R (Payment of liabilities on transfer of assets) and COLL 6.4.7 R (Payments out of scheme property) contain provisions restricting payments out of scheme property.

01/04/2004

COLL 5.6

Investment powers and borrowing limits for non - UCITS retail schemes

01/12/2004

Application

COLL 5.6.1

(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) 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.

01/04/2004

Explanation of COLL 5.6

COLL 5.6.2

(1) This section contains rules on the types of permitted investments and any relevant limits with which non-UCITS retail schemes must comply. These rules allow for the relaxation of certain investment and borrowing powers from the requirements of the UCITS Directive. Consequently, a scheme authorised as a non-UCITS retail scheme will not qualify for the cross border passporting rights conferred by the UCITS Directive on a UCITS scheme .

(2) Some examples of the different investment and borrowing powers under the rules in this section for non-UCITS retail schemes are the power to:

(a) invest not more than 10% of the value of scheme property in transferable securities or money-market instruments issued by any single body;

(b) invest in up to 20% in aggregate of the value of the scheme property in transferable securities which are not approved securities and unregulated schemes;

(d) include gold in the scheme property (up to a limit of 10% of the value of the scheme property);

(e) include immovables in the scheme property; and

(f) borrow on a non-temporary basis without any specific time limit as to repayment of the borrowing.

01/04/2004

Prudent spread of risk

COLL 5.6.3

(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) The rules in this section relating to spread of investments do not apply during any period in which it is not reasonably practical to comply, provided that (1) is complied with during such period.

01/04/2004

Investment powers: general

COLL 5.6.4

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

(5) The scheme property may only, except where otherwise provided in the rules in this section, consist of any one or more of:

(a) transferable securities;

(b) money-market instruments;

(d) derivatives and forward transactions permitted under COLL 5.6.13 R (Permitted transactions (derivatives and forwards));

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

(f) immovables permitted under COLL 5.6.18 R (Investment in property) and COLL 5.6.19 R (Investment limits for immovables); and

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

01/04/2004

Transferable securities and money-market instruments

COLL 5.6.5

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

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

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

(a) transferable securities which are not approved securities; or

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

06/11/2006

Valuation

COLL 5.6.6

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).

01/04/2004

Spread: general

COLL 5.6.7

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

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

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

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

(6) Except for a feeder fund not more than 35% in value of the scheme is to consist of the units of any one scheme.

(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).

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

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

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

(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

(d) can be fully enforced by the non-UCITS retail scheme at any time.

(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:

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

(b) are based on legally binding agreements.

(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 house meets each of the following conditions:

(a) it is backed by an appropriate performance guarantee; and

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

06/11/2006

Guidance on spread: general

COLL 5.6.7A

(1) COLL 5.6.7 R (7) to (10) replicate the provisions of Article 5 of the Commission Recommendation 2004/383/EC of 27 April 2004 on the use of financial derivative instruments for undertakings for collective investment in transferable securities, so as to enable non-UCITS retail schemes to benefit from the same flexibility. This Recommendation may be accessed via http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_199/l_19920040607en00240029.pdf

(2) The attention of authorised fund managers is specifically drawn to condition (d) in COLL 5.6.7 R (8) under which the collateral has to be legally enforceable at any time. It is the FSA's view that it is advisable for an authorised fund manager to undertake a legal due diligence exercise before entering into any financial collateral arrangement. This is particularly important where the collateral arrangements in question have a cross-border dimension. The depositary will also need to exercise reasonable care to review the collateral arrangements in accordance with its duties under COLL 6.6.4 R (General duties of the depositary).

06/11/2006

Spread: government and public securities

COLL 5.6.8

(1) This rule applies in respect of government and public securities.

(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 scheme.

06/08/2006

Investment in warrants and nil and partly paid securities

COLL 5.6.9

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

01/04/2004

Investment in collective investment schemes

COLL 5.6.10

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):

(1) the second scheme:

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

(b) is a non-UCITS retail scheme; or

(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

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

(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;

(4) the participants in the second scheme must be entitled to have their units redeemed in accordance with the scheme at a price:

(a) related to the net value of the property to which the units relate; and

(b) determined in accordance with the scheme; and

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

06/11/2006

Investment in associated collective investment schemes

COLL 5.6.11

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

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

01/04/2004

Derivatives: general

COLL 5.6.12

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

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

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

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

06/11/2006

Permitted transactions (derivatives and forwards)

COLL 5.6.13

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

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

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

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

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

(a) transferable securities;

(b) money-market instruments;

(d) derivatives.

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

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

06/11/2006

Transactions for the purchase or disposal of property

COLL 5.6.14

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.

01/04/2004

OTC transactions in derivatives

COLL 5.6.15

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).

01/04/2004

Risk management: derivatives and forwards

COLL 5.6.16

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 derivatives and forwards positions and their contribution to the overall risk profile of the scheme.

01/04/2004

Risk management process

COLL 5.6.17

(1) The risk management process should take account of the investment objectives and policy of the non-UCITS retail scheme as stated in its most recent prospectus.

(3) An authorised fund manager is expected to demonstrate more sophistication in its risk management process for a non-UCITS retail scheme with a complex risk profile than for one with a simple risk profile. In particular, the risk management process should take account of any characteristic of non-linear dependence in the value of a position to its underlying.

(4) An authorised fund manager should take reasonable care to establish and maintain such systems and controls as are appropriate to its business as required by SYSC 3.1 (Systems and controls).

(5) The risk management process should enable the analysis required by COLL 5.6.16 R (Risk management: derivatives and forwards) to be undertaken at least daily or at each valuation point whichever is the more frequent.

06/11/2006

Investment in property

COLL 5.6.18

(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) An immovable must:

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

(b) if situated in:

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

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

(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)

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

(4) The manager or the ICVC must:

(a) have received a report from an appropriate valuer which:

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

(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

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

(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

(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) An immovable must:

(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);

(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

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

(7) An appropriate valuer must be a person who:

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

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

(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

(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.

01/04/2004

Investment limits for immovables

COLL 5.6.19

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

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

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

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

(a) more than 25%; or

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

of the value of the scheme property;

(5) not more than 20% in value of the scheme property is to consist of immovables that are subject to a mortgage 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);

(6) the aggregate value of:

(a) mortgages secured on immovables under (5);

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

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

(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) 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:

(a) unregulated collective investment schemes; and

(b) any transferable securities which are not approved securities.

06/04/2006

Standing independent valuer and valuation

COLL 5.6.20

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

(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

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

(2) The standing independent valuer in (1) must be:

(a) for an AUT, independent of the manager and trustee; and

(b) for an ICVC, independent of the ICVC, the directors and the depositary.

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

(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;

(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;

(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;

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

(i) affect the outcome of a valuation of an immovable; or

(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;

(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

(f) any valuation by the standing independent valuer must be on the basis of an 'Open Market value' as defined in Practice Statement 3 in the Royal Institute of Chartered Surveyors' Appraisal and Valuation Manual (first edition published September 1995) but subject to COLL 6.3 (Valuation and pricing).

(4) In relation to an immovable:

(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

(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.

01/04/2004

Stock lending

COLL 5.6.21

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

01/04/2004

Cash, borrowing, lending and other provisions

COLL 5.6.22

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

(1) COLL 5.2.7 R (Transferable securities);

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

(3) COLL 5.5.3 R (Cash and near cash);

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

(6) COLL 5.5.6 R (Restrictions on lending of money) ;

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

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

(9) COLL 5.5.9 R (Guarantees and indemnities).

06/11/2006

Schemes replicating an index

COLL 5.6.23

(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) The index must:

(a) have a sufficiently diversified composition;

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

(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.

01/04/2004

Non-UCITS retail schemes that are umbrellas

COLL 5.6.24

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

01/04/2004