• COLL Part 7.6 COLL Part 7.6 Stock Lending and Repos—QFC Retail Schemes

    Notes for pt 7.6

    1 This part covers techniques relating to transferable securities and money-market instruments that are used for the purpose of efficient portfolio management. It permits the generation of additional income for the benefit of the QFC retail scheme (and its investors) by entry into stock lending arrangements and repo agreements for the scheme.
    2 The particular method of stock lending permitted in this part is in fact not a transaction that is a loan in the normal sense. Rather it is an arrangement under which the lender transfers securities to the borrower otherwise than by way of sale and the borrower is to transfer the 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 in stock lending arrangements to provide collateral to cover the 'lender' against the risk that the future transfer back of the securities may not be satisfactorily completed.
    Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.6.1 Stock Lending and Repos Generally—QFC Retail Schemes

      A QFC retail scheme may, or the independent entity of a QFC retail scheme may on the operator's instructions, enter into a stock lending arrangement or repo agreement if it reasonably appears to the operator to be appropriate to be entered into with a view to generating additional income for the scheme with an acceptable degree of risk.

      Note Stock lending arrangement and repo agreement are defined in the glossary.

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

    • COLL 7.6.2 Stock Lending Requirements—QFC Retail Schemes

      (1) A stock lending arrangement may be entered into by or for a QFC retail scheme only if all the following requirements are met:
      (a) all the terms of the agreement under which securities are to be reacquired by the independent entity for the scheme are in a form that is acceptable to the independent entity and are in accordance with good market practice;
      (b) the counterparty is—
      (i) an authorised firm; or
      (ii) a person authorised (however described) under the law of the State or a zone 1 country to deal in investments as principal in relation to OTC derivatives and the person is principally regulated by a regulatory or governmental entity in that jurisdiction;

      Note Authorised firm and OTC derivative are defined in the glossary. Zone 1 country is defined in INAP.
      (c) collateral is obtained to secure the obligation of the counterparty under the terms mentioned in paragraph (a) and the collateral is—
      (i) acceptable to the independent entity; and
      (ii) adequate under rule 7.6.3 (1) (Treatment of collateral for stock lending—QFC retail schemes); and
      (iii) sufficiently immediate under rule 7.6.3 (2).

      Note Collateral is defined in the glossary.
      (2) For subrule (1), the counterparty is the person who is obliged under the agreement mentioned in subrule (1) (a) to transfer to the independent entity—
      (a) the securities transferred by the independent entity under the stock lending arrangement; or
      (b) securities of the same type and amount.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.6.3 Treatment of Collateral for Stock Lending—QFC Retail Schemes

      Guidance on stock lending—treatment of collateral

      If a stock lending arrangement is entered into for a QFC retail scheme, the value of scheme property remains unchanged. The securities transferred cease to be part of the scheme property, but there is an obligation by the counterparty to transfer back the securities or equivalent securities. The independent entity will also receive collateral to set against the risk of default in transfer. The 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). This rule accordingly makes provision for the treatment of collateral in that context.

      (1) For rule 7.6.2 (1) (c) (ii) (Stock lending requirements—QFC retail schemes), collateral is adequate only if it is—
      (a) transferred to the independent entity or its nominee or delegate, as appropriate; and
      (b) at the time of the transfer to the independent entity, at least equal in value to the value of the securities transferred by the independent entity; and
      (c) in the form of 1 or more of the following:
      (i) cash;
      (ii) a certificate of deposit;
      (iii) a letter of credit;
      (iv) a readily realisable investment;
      (v) commercial paper with no embedded derivative content.
      (vi) units in an eligible money-market fund.

      Note Collateral, readily realisable investment and eligible money-market fund are defined in the glossary.
      (2) For rule 7.6.2 (1) (c) (iii), collateral is sufficiently immediate if—
      (a) it is transferred before or at the time of the transfer of the securities by the independent entity; or
      (b) the independent entity takes reasonable care to decide at the time mentioned in paragraph (a) that it will be transferred at the latest by the close of business on the day of the transfer.
      (3) The independent entity must ensure that the value of the collateral is, at all times, at least equal to the value of the securities transferred by the independent entity.
      (4) If the validity of any collateral expires or is about to expire, the independent entity's duty under subrule (3) is satisfied if the independent entity takes reasonable care to ensure that sufficient collateral will be transferred by close of business on the day of the expiry.
      (5) Any agreement for transfer at a future date of securities, collateral, or the equivalent of either, under this rule may be regarded, for the purposes of valuation under division 8.2.B (Valuation and pricing— QFC retail schemes), 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 scheme.
      (6) Collateral transferred to the independent entity is part of the scheme property for these rules, except in the following respects:
      (a) it must not be included in any valuation for division 8.2.B or this chapter, because it is offset under subrule (5) by an obligation to transfer;
      (b) it does not count as scheme property for any purpose of this chapter other than this rule.
      (7) Subrules (5) and (6) (a) do not apply to any valuation of collateral itself for this rule.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)

    • COLL 7.6.4 No Limits on Stock Lending and Repos—QFC Retail Schemes

      (1) There is no limit on the value of the scheme property of a QFC retail scheme that may be the subject of stock lending arrangements or repo agreements under this part.
      (2) However, the use of stock lending arrangements or repo agreements, or the reinvestment of cash collateral, must not—
      (a) result in a change of the scheme's investment objectives, strategies and policy; or
      (b) add substantial supplementary risks to the scheme's risk profile.
      (3) Collateral in the form of cash may only be invested in 1 or more of the following:
      (a) certificates of deposit;
      (b) letters of credit;
      (c) readily realisable investments;
      (d) commercial paper with no embedded derivative component;
      (e) units in an eligible money-market fund;
      (f) deposits, but only if the deposits—
      (i) are with an eligible bank; and
      (ii) can be withdrawn within 5 business days or any shorter period required under the stock lending arrangement.

      Note Readily realisable investment, eligible money-market fund, deposit and eligible bank are defined in the glossary.
      (4) If a QFC retail scheme generates leverage through the reinvestment of collateral, this must be taken into account in calculating the scheme's global exposure.
      Derived from QFCRA RM/2010-05 (as from 1st January 2011)