COLL 7.4.10 Permitted Financial Indices—QFC Retail Schemes

(1) For rule 7.4.9 (2) (b) (i) (Permitted transactions in derivatives and forward transactions—QFC retail schemes), a permitted financial index is a financial index that meets all the following requirements:
(a) the index is sufficiently diversified (see subrule (2));
(b) the index represents an adequate benchmark for the market to which it refers (see subrule (3));
(c) the index is published in an appropriate way (see subrule (4)).
(2) For subrule (1) (a), a financial index is sufficiently diversified if—
(a) it is composed in such a way that price movements or trading activities for a component do not unduly influence the performance of the whole index; and
(b) its components are at least as diverse as the investments of a QFC retail scheme are required to be under part 7.3 (Investment diversification—QFC retail schemes).
(3) For subrule (1) (b), a financial index represents an adequate benchmark for the markets to which it refers if—
(a) it measures the performance of a representative group of underlyings in a relevant and appropriate way; and
(b) it is revised and rebalanced periodically, following criteria that are publicly available, to ensure that it continues to reflect the markets to which it refers; and
(c) the underlyings are sufficiently liquid, allowing users to replicate it if necessary.
(4) For subrule (1) (c), a financial index is published in an appropriate way if—
(a) its publication process relies on sound procedures to collect prices, and calculate and subsequently publish the index value, including pricing procedures for components for which a market price is not available; and
(b) material information is provided on a wide and timely basis on matters such as index calculation, rebalancing methodologies, index changes, and any operational difficulties in providing timely or accurate information.
(5) If the composition of underlyings of a transaction in a derivative does not satisfy the requirements mentioned in subrule (1) for a permitted financial index, the underlyings for that transaction may be regarded as a combination of the underlyings if they satisfy the requirements of rule 7.4.9 (2) (Permitted transactions in derivatives and forward transactions—QFC retail schemes).

Guidance on financial indices underlying derivatives
1 An index based on derivatives on commodities or an index on property may be regarded as a permitted financial index under rule 7.4.10 if it meets all the requirements of the rule.
2 If the composition of an index is not sufficiently diversified to avoid undue concentration, its underlying assets should be combined with the other assets of the scheme in assessing compliance with the requirements of rule 7.5.1 (Cover for transactions in derivatives and forward transactions—QFC retail schemes) and part 7.3 (Investment diversification—QFC retail schemes).
3 To avoid undue concentration, if derivatives on an index composed of assets in which a QFC retail scheme cannot invest are used to track or gain high exposure to the index, the index should be at least diversified in a way that is equivalent to the diversification achieved for the scheme by part 7.3.
4 If derivatives on that index are used for risk-diversification purposes and the exposure of the scheme to the index complies with part 7.3, there is no need to look at the underlying components of the index to ensure that it is sufficiently diversified.
Derived from QFCRA RM/2010-05 (as from 1st January 2011)