• COLL Part 7.3 COLL Part 7.3 Investment Diversification—QFC Retail Schemes

    • COLL 7.3.1 Prudent Spread of Risk—QFC Retail Schemes

      The operator of a QFC retail scheme must ensure that the scheme property provides a prudent spread of risk, taking into account the scheme's investment objectives, strategies and policy as stated in the constitutional document and latest filed prospectus.

      Note Constitutional document is defined in r 3.1.1 and latest filed prospectus is defined in the glossary.

      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.2 Spread for Certain Transferable Securities and Money-Market Instruments—QFC Retail Schemes

      (1) This rule applies to a transferable security if—
      (a) the transferable security is not an approved security; and
      (b) either—
      (i) the transferable security has been issued for 1 year or longer; or
      (ii) the transferable security has been issued for less than 1 year and the terms of issue did not include an undertaking that application would be made for it to be admitted to an eligible market.

      Note 1 Transferable security is defined in r 7.1.6. Approved security is defined in r 7.1.9. Eligible market is defined in r 7.1.7.

      Note 2 For investments that are treated as transferable securities, see the following provisions:
      •   r 7.4.2 (Investments in closed-ended schemes as transferable securities—QFC retail schemes)
      •   r 7.4.3 (Investments linked etc to other assets as transferable securities—QFC retail schemes).
      (2) This rule applies to a money-market instrument if—
      (a) the instrument is not an approved money-market instrument; or
      (b) the instrument is an approved money-market instrument but the scheme could not invest in it under rule 7.4.4 (Investments in approved money-market instruments not admitted to eligible markets etc—QFC retail schemes).

      Note Approved money-market instrument is defined in r 7.1.5.
      (3) The operator of a QFC retail scheme must ensure that not more than 10% in value of the scheme property consists of transferable securities and money-market instruments to which this rule applies.
      Amended by QFCRA RM/2016-1 (as from 19th September 2016)

    • COLL 7.3.3 Spread for Transferable Securities and Money-Market Instruments Issued by Single Issuer or Group—QFC Retail Schemes

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

      Note 1 Government or public security is defined in the glossary.

      Note 2 See r 7.3.5 (Spread for government or public securities issued by single issuer—QFC retail schemes).
      (2) The operator of a QFC retail scheme must ensure that not more than 5% in value of the scheme property consists of transferable securities or money-market instruments (or both) issued by a single person.

      Note 1 Transferable security is defined in r 7.1.6.

      Note 2 For investments that are treated as transferable securities, see the following provisions:
      •   r 7.4.2 (Investments in closed-ended schemes as transferable securities—QFC retail schemes)
      •   r 7.4.3 (Investments linked etc to other assets as transferable securities—QFC retail schemes).
      (3) However, the 5% limit under subrule (2) is raised to 10% in relation to not more than 40% in value of the scheme property.
      (4) Covered bonds need not be taken into account for the purpose of applying the raised limit of 10% in relation to 40% in value of the scheme property.

      Note Covered bond is defined in the glossary.
      (5) Also, the 5% limit under subrule (2) is raised to 25% in relation to covered bonds if the total value of the covered bonds held does not exceed 80% in value of the scheme property.
      (6) In addition, the 5% limit under subrule (2) may be increased to no more than 20% (or 35%) under rule 7.3.4 (Spread exception for schemes replicating indices—QFC retail schemes).
      (7) In applying subrules (2) to (6), securities receipts must be treated as equivalent to the underlying security.

      Note Securities receipt is defined in the glossary.
      (8) The operator of a QFC retail scheme must also ensure that not more than 20% in value of the scheme property consists of transferable securities or money-market instruments (or both) issued by members of a single group.

      Note Group is defined in the glossary.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.4 COLL 7.3.4 Spread Exception for Schemes Replicating Indices—QFC Retail Schemes

      (1) Despite rule 7.3.3 (2) (Spread for transferable securities and money-market instruments issued by single issuer or group—QFC retail schemes), a QFC retail scheme may invest up to 20% in value of the scheme property in shares and debt instruments that are issued by a single person if the aim of the scheme's investment objectives, strategies and policy as stated in its constitutional document and latest filed prospectus is to replicate the performance or composition of an index that is a permitted index under subrule (3).

      Note Share, debt instrument and entity are defined in the glossary.
      (2) However, the limit in subrule (1) may be increased to no more than 35%, but only in relation to a single person and if—
      (a) justified by exceptional market conditions; and
      (b) the latest filed prospectus includes a prominent statement of the increased limit.
      (3) For subrule (1), a permitted index is an index that meets all the following requirements:
      (a) the index is sufficiently diversified (see subrule (5));
      (b) the index is a representative benchmark for the market to which it refers (see subrule (6));
      (c) the index is published in an appropriate way (see subrule (7)).
      (4) For subrule (1), replication of the composition of an index is replication of the composition of the underlying assets, including by way of efficient portfolio management.

      Note Efficient portfolio management is defined in the glossary.
      (5) For subrule (3) (a), an index is sufficiently diversified if its components comply with this part.
      (6) For subrule (3) (b), an index is a representative benchmark for the market to which it refers if its provider uses a recognised methodology that generally does not result in the exclusion of a major issuer of the market to which it refers.
      (7) For subrule (3) (c), an index is published in an appropriate way if—
      (a) it is accessible to the public; and
      (b) the index provider is independent of the QFC retail scheme.
      (8) Subrule (7) (b) does not prevent the index provider and the scheme or its operator from being part of the same group, if effective arrangements to manage conflicts of interest are in place.

      Note Group is defined in the glossary.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

      • COLL 7.3.4 Guidance

        The scheme property of a scheme replicating an index under this rule need not consist of the exact composition and weighting of the underlying assets if the scheme's investment objectives, strategies and policy are to achieve a result consistent with the replication of the index rather than an exact replication.

        Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.5 Spread for Government or Public Securities Issued by Single Issuer—QFC Retail Schemes

      (1) This rule applies to government or public securities.

      Note Government or public security is defined in the glossary.
      (2) If no more than 35% in value of the scheme property of a QFC retail scheme is invested in government or public securities issued by a single issuer, there is no limit on the amount that may be invested in government or public securities or in any single issue.
      (3) A QFC retail scheme may invest more than 35% in value of the scheme property in government or public securities issued by a single issuer only if all the following requirements are met:
      (a) the operator, after consultation with the independent entity before making the investment, is satisfied that the investment is in accordance with the investment objectives, strategies and policy of the scheme as stated in the constitutional document and latest filed prospectus;
      (b) no more than 30% in value of the scheme property consists of government or public securities of a single issue;
      (c) the scheme property includes government or public securities of at least 6 different issues, whether they are issued by that issuer or another issuer;
      (d) the constitutional document expressly authorises the scheme to invest more than 35% in value of the scheme property in government or public securities issued by a single issuer;
      (e) the disclosure required by subrule (4) has been made.
      (4) For subrule (3) (e), the latest filed prospectus must prominently state—
      (a) that more than 35% of the scheme property is or may be invested in government or public securities issued by a single issuer; and
      (b) the names of the jurisdictions, or the public or local authorities, issuing government or public securities in which the scheme may invest more than 35% of the scheme property.

      Note Jurisdiction is defined in the glossary.
      (5) For this rule, an issue of government or public securities differs from another issue if there is a difference in relation to repayment date, rate of interest, guarantor or other material terms of the issue.
      (6) In this rule:

      issue includes guarantee.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.6 Spread for Units in Schemes etc—QFC Retail Schemes

      (1) The operator of a QFC retail scheme must ensure that not more than 20% in value of the scheme property consists of units in any single collective investment scheme.

      Note See r 7.4.2 (Investments in closed-ended schemes as transferable securities—QFC retail schemes) for units in schemes that are treated as transferable securities and not as units in a scheme.
      (2) However, subrule (1) does not apply to units in a feeder fund.

      Note Feeder fund is defined in the glossary.
      (3) The operator of a QFC retail scheme must ensure that no more than 30% in value of the scheme property is invested under rule 7.4.6 (Investments in collective investment schemes generally—QFC retail schemes) in units in non-QFC retail customer schemes.

      Note Non-QFC retail customer scheme is defined in r 1.4.1.
      (4) However, subrule (3) does not apply to units in a feeder fund or fund of funds.

      Note Fund of funds is defined in the glossary.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.7 Spread for OTC Derivatives—QFC Retail Schemes

      (1) The operator of a QFC retail scheme must ensure that the exposure to a single counterparty in an OTC derivative transaction does not exceed 10% in value of the scheme property.

      Note OTC derivative is defined in the glossary.
      (2) In calculating a limit under this rule, the exposure in relation to an OTC derivative may be reduced to the extent that collateral is held in relation to it if the collateral meets all the following requirements:
      (a) it is marked-to-market on a daily basis and its value exceeds the amount at risk;
      (b) it is exposed only to negligible risks (for example, risks for government bonds of first credit rating or cash) and is liquid;
      (c) it 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;
      (d) it can be fully enforced by the QFC retail scheme at any time.

      Note Collateral is defined in the glossary.
      (3) In calculating a limit under this rule, OTC derivative positions with the same counterparty may be netted if the netting procedures—
      (a) correspond as closely as possible to—
      (i) the off-balance sheet netting procedures required to be used by an authorised firm under BANK, Division 4.5.E; or
      (ii) substantially equivalent provisions under the law of another jurisdiction; and
      (b) are based on legally binding agreements.

      Guidance for para (a) (ii)

      Substantially equivalent provisions would include the conditions in the Banking Consolidation Directive (the Directive of the European Parliament and Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (No 2006/48/EC)), annex III, part 7 (Contractual netting (Contracts for novation and other netting agreements)).
      (4) In applying this rule, a derivative transaction is taken to be free of counterparty risk if—
      (a) it is performed on an exchange; and
      (b) it is cleared through a clearing house that meets both of the following requirements:
      (i) the clearing house is backed by an appropriate performance guarantee;
      (ii) the clearing house is characterised by a daily mark-to-market valuation of the derivative position and at least daily margining.
      Guidance on spread generally

      The operator of a QFC retail scheme should particularly note rule 7.3.7 (2) (d) under which collateral has to be legally enforceable at any time. The Regulatory Authority, therefore, expects the operator to undertake legal due diligence before entering into any financial collateral arrangement. This is particularly important if the collateral arrangement has a cross-border dimension. The Regulatory Authority also expects the independent entity to exercise reasonable care to review collateral arrangements in accordance with its functions.
      Amended by QFCRA RM/2014-3 (as from 1st January 2015)

    • COLL 7.3.8 Spread for Deposits—QFC Retail Schemes

      (1) The operator of a QFC retail scheme must ensure that no more than 20% in value of the scheme property consists of deposits placed with any single eligible bank.

      Note Deposit and eligible bank are defined in the glossary.
      (2) For subrule (1), all uninvested cash that is capital property of the scheme is taken to be a deposit.

      Note Capital property is defined in the glossary.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.9 Spread for Certain Investments with Single Person-QFC Retail Schemes

      (1) The operator of a QFC retail scheme must ensure that no more than 20% in value of the scheme property consists of any combination of 2 or more of the following issued by or made with a single person:
      (a) transferable securities (including covered bonds) or money-market instruments;
      (b) deposits;
      (c) exposures to an OTC derivative transaction.

      Note For investments that are treated as transferable securities, see the following provisions:
      •   r 7.4.2 (Investments in closed-ended schemes as transferable securities—QFC retail schemes)
      •   r 7.4.3 (Investments linked etc to other assets as transferable securities—QFC retail schemes).
      (2) In calculating the limit under this rule, the provisions of rule 7.3.7 (2) to (4) (Spread for OTC derivatives-QFC retail schemes) apply with any necessary changes.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.10 Concentration-QFC Retail Schemes

      (1) The operator of a QFC retail scheme must ensure that the scheme does not acquire transferable securities (other than debt instruments) that—
      (a) do not give a right to vote on any matter at a general meeting of the issuer of the transferable securities; and
      (b) represent more than 10% of the transferable securities issued by the issuer.

      Note 1 Transferable security is defined in r 7.1.6. Debt instrument is defined in the glossary.

      Note 2 For investments that are treated as transferable securities, see the following provisions:
      •   r 7.4.2 (Investments in closed-ended schemes as transferable securities—QFC retail schemes)
      •   r 7.4.3 (Investments linked etc to other assets as transferable securities—QFC retail schemes).
      (2) The operator of a QFC retail scheme must ensure that the scheme does not acquire—
      (a) more than 10% of the debt instruments issued by a single issuer; or
      (b) more than 25% of the units in a collective investment scheme; or
      (c) more than 10% of the money-market instruments issued by a single issuer.
      (3) However, the operator need not comply with a limit under subrule (2) if, at the time of the acquisition, the net amount in issue of the debt instruments, units in the collective investment scheme or money-market instruments cannot be calculated.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.3.11 Application of pt 7.3—QFC Retail Schemes

      The provisions of this part do not apply to a QFC retail scheme until 6 months after the day the initial offer period starts if rule 7.3.1 (Prudent spread of risk—QFC retail schemes) is complied with during that period.

      Note Month and initial offer are defined in the glossary.

      Derived from QFCRA RM/2010-05 (as from 1st January 2011)