PRU A6.7 PRU A6.7 Collective Investment Fund Risk Capital Requirement
This Section presents the method for the calculation of Collective Investment Fund Risk Capital Requirement for the purpose of Rule 5.9.1(b).
An Authorised Person which calculates its Collective Investment Fund Risk Capital Requirement in accordance with Rule 5.9.1(b) must apply the Rules in this Section.
An Authorised Person must calculate its Collective Investment Fund Risk Capital Requirement by:(a) identifying all applicable positions in Funds within the scope of the requirement, including notional positions derived from certain instruments;(b) identifying the positions in Funds which will be subject to the risk Capital Requirements specified under this Section;(c) converting on a daily basis net positions in every Fund to the Authorised Person's base currency at the prevailing spot foreign exchange rate;(d) calculating a Collective Investment Fund Risk Capital Requirement for each individual position in a Fund; and(e) summing the resultant Capital Requirements calculated in (d).
PRU A6.7.3(1) For the purposes of Rule A6.7.2, an Authorised Person must calculate its Collective Investment Fund Risk Capital Requirement for all Trading Book positions in Funds, unless they are covered under one of the Fund look through methods and included in the risk Capital Requirement calculations for the relevant underlying Investments or subject to an Option Risk Capital Requirement.(2) An Authorised Person must also calculate its Collective Investment Fund Risk Capital Requirement for notional positions arising from Trading Book positions in Options or Warrants on Funds.
Calculation of the Collective Investment Fund Risk Capital Requirement
There are two main approaches for calculating the Collective Investment Fund Risk Capital Requirement. The first approach involves directly calculating a risk Capital Requirement for any position in any Fund. The second approach involves using a look-though method which involves calculating the risk Capital Requirements for the positions or Exposures in underlying assets or Investments of the Fund, using the relevant or applicable risk Capital Requirement calculation methods. As the name suggests, a look-through method involves looking through the Fund to identify the underlying positions and trying to calculate the capital required to address the risk of loss arising from volatility in market prices of such underlying positions.
Look through methods
An Authorised Person may determine the Collective Investment Fund Risk Capital Requirement for positions in Funds, using the standard Collective Investment Fund look-through method, provided the relevant positions meet the criteria set out in Rule A6.7.6.
An Authorised Person may use the standard Fund look-through method, only if the positions are in Funds which meet the following eligibility criteria:(a) the Fund's prospectus or equivalent document must include:(i) the categories of assets the Fund is authorised to invest in;(ii) if investment limits apply, the relative limits and the methodologies to calculate them;(iii) if leverage is allowed, the maximum level of leverage; and(iv) if investment in OTC financial Derivatives or repo-style transactions are allowed, a policy to limit Counterparty Risk arising from these transactions;(b) the Fund must publish half-yearly accounts and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period;(c) the Units of the Fund are redeemable in cash, out of the Fund's assets, on a daily basis at the request of the Unitholder;(d) Investments in the Fund must be segregated from the assets of the Fund Manager; and(e) there must be adequate risk assessment, by the investing firm, of the Fund.
Standard Collective Investment Fund look through method: General
In the case of an Authorised Person being aware of the underlying assets or Investments of the Fund on a daily basis, the Authorised Person may look through to those underlying Investments in order to calculate the Market Risk Capital Requirement (General Market Risk and Specific Risk) for those positions in accordance with the methods set out in the relevant Section of Chapter 5 for calculating the relevant Market Risk Capital Requirement.
In this method, positions in Funds must be treated as positions in the underlying Investments of the Fund. Netting is permitted between positions in the underlying Investments of the Fund and other positions held by the Authorised Person, as long as the Authorised Person holds a sufficient quantity of Units to allow for redemption/creation in exchange for the underlying Investments.
Standard Collective Investment Fund look through method: Index or Basket Funds
PRU A6.7.10(1) An Authorised Person may calculate the risk Capital Requirements for positions in Funds in accordance with the methods set out in various Sections of Chapter 5 applicable to various underlying assets or Investments, on assumed positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities or debt Securities, subject to the following conditions:(a) the Fund's mandate is to replicate the composition and performance of an externally generated index or fixed basket of equities or debt Securities; and(b) a minimum correlation of 0.9 between daily price movements of the Fund and the index or basket of equities or debt Securities it tracks, exists over the previous six month period.(2) Correlation as referred to in (1)(b) means the correlation coefficient between daily returns on the Fund and that on the index or basket of equities or debt Securities it tracks.