COLL 7.4.13 OTC Transactions in Derivatives—QFC Retail Schemes

(1) A transaction in an OTC derivative under rule 7.4.9 (1) (b) (Permitted transactions in derivatives and forward transactions— QFC retail schemes) must be—
(a) with an approved counterparty (see subrule (2)); and
(b) on approved terms (see subrule (3)); and
(c) capable of valuation (see subrule (5)); and
(d) subject to verifiable valuation (see subrule (6)).

Note OTC derivative is defined in the glossary.
(2) For subrule (1) (a), a counterparty is an approved counterparty only if the counterparty is an eligible bank.

Note Eligible bank is defined in the glossary.
(3) For subrule (1) (b), the terms of a transaction are approved terms if, before the transaction is entered into, the independent entity is satisfied that the counterparty has agreed with the operator—
(a) to provide a reliable and verifiable valuation in relation to the transaction corresponding to its fair value at least daily and at any other time at the operator's request; or
(b) that it or an alternative counterparty will, at the operator's request, enter into a further transaction to sell, liquidate or close out the transaction at a fair value at any time.

Note Close out is defined in the glossary.
(4) For subrule (3) (b), fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
(5) For subrule (1) (c), a transaction in a derivative is capable of valuation if the operator, having taken reasonable care, decides that, if the transaction were entered into, it would be able to value the investment throughout the life of the derivative with reasonable accuracy on a basis of—
(a) an up-to-date market value that the operator and independent entity have agreed is reliable; and
(b) if paragraph (a) does not apply—a pricing model that the operator and independent entity have agreed uses an adequate recognised methodology.
(6) For subrule (1) (d), a transaction in a derivative is subject to verifiable valuation if the operator, having taken reasonable care, decides that, if the transaction were entered into, the valuation of the investment would be verified throughout the life of the derivative by—
(a) an appropriate third party independent of the derivative's counterparty, at an adequate frequency and in such a way that the operator can check it; or
(b) a department within the operator that is independent of the department in charge of managing the scheme property and is adequately equipped to verify the valuation.
(7) Without limiting rule 4.2.3 (Oversight functions of independent entity—all QFC schemes), the independent entity must take reasonable care to ensure that the operator has systems and controls that are adequate to ensure compliance with this rule.
Derived from QFCRA RM/2010-05 (as from 1st January 2011)