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Corporations (Passport) Rules 2018

Authoritative Version
Rules/Other as made
These rules incorporate the Corporations (Passport) Rules 2018 (the Rules) agreed by the participating economies in Annex 3 to the MOC into Australian law. Other amendments give effect to the Asia Region Funds Passport are in the Act and the Corporations Amendment (Asia Region Funds Passport) Regulations 2018.
Administered by: Treasury
Registered 07 Sep 2018
Tabling HistoryDate
Tabled HR10-Sep-2018
Tabled Senate11-Sep-2018

Commonwealth Coat of Arms of Australia

 

Corporations (Passport) Rules 2018

I, Stuart Robert, Assistant Treasurer, make the following rules.

Dated   5 September 2018

Stuart Robert

Assistant Treasurer

 

 

  

  

  


Contents

Part 1—Preliminary                                                                                                                                        1

1............ Name............................................................................................................................. 1

2............ Commencement............................................................................................................. 1

2A......... Authority....................................................................................................................... 1

3............ Interpretation—the Dictionary....................................................................................... 1

Part 2—Constituent documents                                                                                                               3

4............ Constituent document for a regulated CIS..................................................................... 3

Part 3—The operator of a passport fund                                                                                          5

5............ Responsibility of operator for compliance..................................................................... 5

6............ Qualifications of officers............................................................................................... 5

7............ Financial resources of the operator................................................................................ 5

8............ Organisational arrangements of the operator................................................................. 7

9............ Track record of operator................................................................................................ 8

10.......... Good standing of operator............................................................................................. 9

11.......... Delegation of functions by operator............................................................................ 10

Part 4—Accountability                                                                                                                                12

12.......... Reporting of breaches and changes............................................................................. 12

13.......... Custody of passport fund assets.................................................................................. 14

14.......... Independent oversight entity of a passport fund.......................................................... 16

15.......... Annual implementation review.................................................................................... 18

16.......... Financial reporting and auditing.................................................................................. 20

Part 5—Offers in home economy                                                                                                         23

17.......... Requirement of offer in the home economy................................................................. 23

Part 6—Passport fund investments                                                                                                     24

Division 6.1—Operational goods and services                                                                        24

18.......... Part does not apply to operational goods and services................................................. 24

Division 6.2—Permitted investments                                                                                            25

19.......... Permitted assets and arrangements.............................................................................. 25

20.......... Jurisdiction requirement for assets.............................................................................. 25

21.......... Requirements for deposits........................................................................................... 25

22.......... Meaning of depository receipts over gold................................................................... 25

23.......... Requirements for transferable securities...................................................................... 26

24.......... Requirements for money market instruments.............................................................. 26

25.......... Requirements for derivatives....................................................................................... 27

26.......... Requirements for embedded derivatives...................................................................... 28

27.......... Counterparties to derivatives....................................................................................... 28

28.......... Counterparties and collateral for securities lending arrangements................................ 29

Division 6.3—Restrictions on portfolio allocation                                                                31

29.......... Exceeding limits in this Part........................................................................................ 31

30.......... Single entity limit......................................................................................................... 31

31.......... Group limit.................................................................................................................. 34

32.......... Valuation of derivatives and securities lending arrangements...................................... 35

33.......... Application of certain restrictions to index funds and benchmark funds..................... 36

34.......... Restrictions on portfolio allocation—financial asset regulated CISs............................ 36

35.......... Restrictions on portfolio allocation—limit on unquoted transferable securities........... 37

36.......... Restrictions on portfolio allocation—limit on investments conferring significant management influence 37

37.......... Limit on share of transferable securities or money market instruments on issue......... 37

38.......... Limit on depository receipts over gold........................................................................ 38

Division 6.4—Limits on exposures                                                                                                 39

39.......... Derivatives and securities lending arrangements—global exposure limit.................... 39

40.......... Netting and hedging arrangements.............................................................................. 39

41.......... Securities lending limit................................................................................................ 40

42.......... Derivative—covering exposures................................................................................. 40

Division 6.5—Other restrictions                                                                                                     41

43.......... Prohibition on provision of loans, guarantees and underwriting................................. 41

44.......... Borrowing................................................................................................................... 41

45.......... Short‑selling prohibited............................................................................................... 42

46.......... Liability of members.................................................................................................... 42

47.......... Performance fees......................................................................................................... 42

Part 7—Redemption and valuation for pricing                                                                           44

Division 7.1—Redemption                                                                                                                  44

48.......... Rights to redemptions—exchange traded passport funds............................................ 44

49.......... Rights to redemptions—other passport funds............................................................. 44

50.......... Processing redemption requests.................................................................................. 44

51.......... Suspension of redemptions......................................................................................... 45

52.......... Deferral of redemptions............................................................................................... 46

Division 7.2—Valuation of assets                                                                                                   47

53.......... Valuation of passport fund assets................................................................................ 47

Part 8—Effect of deregistration                                                                                                            48

54.......... Effect of deregistration................................................................................................ 48

Part 9—Dictionary                                                                                                                                         49

55.......... Definitions................................................................................................................... 49

56.......... Meaning of regulated CIS and operator..................................................................... 53

57.......... Meaning of control and related party.......................................................................... 54

Appendix A                                                                                                                                                        55

Appendix B                                                                                                                                                         56

 


Part 1Preliminary

  

1  Name

                   This instrument is the Corporations (Passport) Rules 2018.

2  Commencement

             (1)  Each provision of this instrument specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

 

Commencement information

Column 1

Column 2

Column 3

Provisions

Commencement

Date/Details

1.  Sections 1 to 2A and anything in this instrument not elsewhere covered by this table

The day after this instrument is registered.

8 September 2018

2.  Sections 3 to 57, Appendix A and Appendix B

The later of:

(a) the day after this instrument is registered; and

(b) the day on which Schedule 1 to the Corporations Amendment (Asia Region Funds Passport) Act 2018 commences.

However, the provisions do not commence at all if the event mentioned in paragraph (b) does not occur.

18 September 2018

(paragraph (b) applies)

Note:          This table relates only to the provisions of this instrument as originally made. It will not be amended to deal with any later amendments of this instrument.

             (2)  Any information in column 3 of the table is not part of this instrument. Information may be inserted in this column, or information in it may be edited, in any published version of this instrument.

2A  Authority

                   This instrument is made under subsection 1211(1) of the Corporations Act 2001.

3  Interpretation—the Dictionary

             (1)  The Dictionary at the end of these rules defines certain words and expressions, and includes references to words and expressions that are defined elsewhere in these rules.

             (2)  A definition in the Dictionary applies to each use of the word or expression in these rules unless the contrary intention appears.

             (3)  A number of a unit of time refers to calendar days, to be counted so as to exclude the day from which the start of the count is stated to occur and include the day on which the end of the count is stated to occur.

Note:          For example, if a time limit is stated to be 7 days and the start of the count is on Monday, 10 May, the time limit is up at the end of Monday, 17 May.

Part 2Constituent documents

  

4  Constituent document for a regulated CIS

             (1)  The operator of a passport fund must ensure that the passport fund has a compliant constituent document at all times.

             (2)  For these rules, the constituent document of a regulated CIS is the document shown in the following table:

 

Item

Home economy for the passport fund

Constituent document

1

Australia

The constitution of the registered scheme required by the Corporations Act 2001.

2

Japan

The basic terms conditions of the investment trust (if it is an investment trust) or the certificate of incorporation (if it is an investment company) under the Act on Investment Trusts and Investment Corporations.

3

Korea

Constitutional documents of collective investment vehicles as required by the Financial Investment Services and Capital Markets Act of Korea.

4

New Zealand

The governing document for the managed investment scheme required by the Financial Markets Conduct Act 2013 of New Zealand.

5

Singapore

The trust deed or any other document of incorporation required in respect of the collective investment scheme to be authorised under the Securities and Futures Act of Singapore.

6

Thailand

In the case of a scheme established as a mutual fund, the commitment between the unit holders and the securities company required under the Securities and Exchange Act B.E. 2535 (1992). In the case of a scheme established as a trust, the trust deed as required by the Trust for Transactions in Capital Market Act B.E. 2550 (2007).

             (3)  For this section, the constituent document is compliant if the constituent document includes provisions that:

                     (a)  have the effect that:

                              (i)  each member of the passport fund is entitled to seek remedy against the fund, if it is a legal entity, and its operator, in the member’s choice of the home economy or a host economy for the fund, including through compensation, in relation to loss suffered by the member due to a breach by the fund or its operator of the laws of the home economy for the fund or of the Passport Rules for the home economy or any host economy for the fund, unless:

                                        (A)  the member and the fund or operator have agreed in writing that the member is not entitled to seek remedy in that place in relation to the particular proceedings; and

                                        (B)  the agreement is effected after the conduct that is or is to be subject to the proceedings has first occurred; or

                             (ii)  a specified person, on behalf of any member of a passport fund when it is in the best interests of members, is entitled to seek remedy against the fund, if it is a legal entity, or its operator in the specified person’s choice of the home economy or a host economy for the fund, including through compensation, in relation to loss suffered by the member due to a breach by the fund or its operator of the laws of the home economy for the fund or of the Passport Rules for the home economy or any host economy for the fund, unless:

                                        (A)  the specified person and the fund or operator have agreed in writing that the member is not entitled to seek remedy in that place in relation to the particular proceedings; and

                                        (B)  the agreement is effected after the conduct that is or is to be subject to the proceedings has first occurred; and

                     (b)  have the effect that the passport fund, if it is a legal entity, and its operator agree that where a member of the fund has commenced proceedings against the fund or its operator in a court in the member’s economy, that court will be a convenient forum to hear the proceedings, unless:

                              (i) a similar action has been commenced against the fund or its operator in another economy and it would be reasonable for the member to participate in that action; or

                             (ii)  the member and the fund or operator have agreed in writing that the court will not be a convenient forum in relation to that particular proceeding and the agreement is effected after the conduct that is or is to be subject to the proceedings has first occurred; and

                     (c)  have the effect that the passport fund, if it is a legal entity, and its operator agree that the convenient forum for the fund or its operator bringing an action against a member will be the member’s economy unless the member and the fund or operator have agreed in writing that the court will not be a convenient forum in relation to the particular proceedings and the agreement is effected after the conduct that is or is to be subject to the proceedings has first occurred.

             (4)  For this section, the member’s economy in relation to the passport fund is:

                     (a)  the economy in which the member was located when they applied to be accepted as a member of a passport fund if that economy is a participating economy; or

                     (b)  in all other cases, the home economy for the fund.

Part 3The operator of a passport fund

  

5  Responsibility of operator for compliance

                   Unless these rules provide otherwise, the operator is responsible for compliance with a provision that is expressed to impose obligations on a passport fund.

6  Qualifications of officers

             (1)  The operator of a passport fund must ensure that at all times it has officers with the relevant qualifications.

             (2)  For this section, the operator has officers with the relevant qualifications only if it has the following officers or employees with the qualifications or experience indicated:

                     (a)  a chief executive officer (or the equivalent) with at least 10 years’ relevant experience within the previous 15 years as an officer or employee in an IOSCO financial services related business, with 5 of the 10 years in a managerial or supervisory role;

                     (b)  at least 2 executive directors (or the equivalent), which may include the chief executive officer, each with at least 5 years’ relevant experience within the previous 7 years as an officer or employee in a managerial or supervisory role in an IOSCO financial services related business;

                     (c)  one or more officers or employees, who are when considered together responsible, whether jointly with others or not, for making or supervising all the discretionary investment decisions of the passport fund, each with either:

                              (i)  a bachelor degree, or equivalent, or higher qualification in a relevant discipline, together with at least 3 years’ experience within the previous 5 years as an officer or employee with responsibility for making or supervising discretionary investment decisions in an IOSCO financial services related business; or

                             (ii)  at least 5 years’ experience within the previous 7 years as an officer or employee with responsibility for making or supervising discretionary investment decisions in an IOSCO financial services related business.

             (3)  For this section and section 9, a reference to supervising discretionary investment decisions includes monitoring and evaluating on behalf of an entity the performance of another entity that makes discretionary investment decisions as a delegate of the first entity, and being significantly involved in decisions about whether the second entity should remain as a delegate in light of its performance.

7  Financial resources of the operator

             (1)  The operator of a passport fund must at all times meet the financial resources test.

             (2)  For this section, the operator meets the financial resources test if its equity (converted at the relevant exchange rate, where not denominated in USD) is greater than USD 1,000,000 plus additional capital amount.

             (3)  In calculating the operator’s equity:

                     (a)  a guarantee or undertaking held by the operator may be counted as if it were an asset if, and only if, it:

                              (i)  is unconditional; and

                             (ii)  does not give rise to any liability for the operator; and

                            (iii)  is payable on demand; and

                            (iv)  is provided by a body that is subject to prudential supervision by a financial supervisory authority in the place of its incorporation which is, in the written opinion of the home regulator for the passport fund, generally largely compliant with the guidelines of the Basel Committee on Banking Supervision; and

                     (b)  the maximum amount of cover from time to time provided under an approved personal indemnity insurance policy may be counted but only up to 80% of the additional capital amount.

             (4)  For this section:

additional capital amount means 0.001 × (total assets under management in USD converted at the relevant exchange rate minus USD 500,000,000) and is capped at USD 20,000,000 converted at the relevant exchange rate where the operator’s equity is not denominated in USD.

approved personal indemnity insurance policy means a professional indemnity insurance policy that has been approved for this section by the home regulator for the passport fund.

equity of the operator means the net equity being assets less liabilities after taking into account losses and includes any net assets reflected in adjustments for valuation or translation, as it would appear on a balance sheet prepared in accordance with the relevant accounting standards.

relevant accounting standards, for a home economy listed in the following table, has the meaning given in the following table:

 

Item

Home economy for the passport fund

Relevant accounting standard

1

Australia

The accounting standards made by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001.

2

Japan

The accounting standards under the Financial Instruments and Exchange Act and other relevant regulations.

3

Korea

General accounting principles of financial investment under Article 32 of The Financial Investment Services and Capital Market Act of Korea, and standards for accounting under Article 13 of the Act on External Audit of Stock Companies.

4

New Zealand

The accounting standards issued by the External Reporting Board under Part 2 of the Financial Reporting Act 2013.

5

Singapore

The accounting standards made by the Accounting Standards Council under the Accounting Standards Act (Cap. 2B) and the Recommended Accounting Practices (or its equivalent) issued by the Council of the Institute of Singapore Chartered Accountants (or its successors).

6

Thailand

The Accounting Guideline for Investment Management business issued by the Association of Investment Management Companies and approved by the Securities and Exchange Commission.

relevant exchange rate means the average of the rates of currency exchange on the first business day in the capital city of the home economy for the passport fund for the year in which the calculation is made, and the first business day in the capital city of the home economy for the passport fund in each of the preceding 4 years.

total assets under management, in relation to an operator, means the sum of the value of:

                     (a)  the assets of each CIS for the operations of which it is responsible; and

                     (b)  any other assets for which it performs discretionary investment management on behalf of another person, whether or not on a collective basis;

as those assets would appear on a balance sheet prepared in accordance with the relevant accounting standards for the operator if they were assets of the operator.

8  Organisational arrangements of the operator

             (1)  The operator of a passport fund must at all times meet the organisational arrangements test.

             (2)  For this section, the operator of the passport fund meets the organisational arrangements test if it has:

                     (a)  a well‑documented organisational structure that clearly assigns responsibilities and specifies reporting lines; and

                     (b)  adequate internal control mechanisms including procedures and systems that ensure that:

                              (i) assets are managed in accordance with the current constituent documents and disclosure documents of the passport fund as well as the laws of the home economy for the fund and the Passport Rules for the home economy and each host economy for the fund; and

                             (ii) records are kept to sufficiently explain the transactions of the passport fund, and all transactions in the interests of the fund; and

                            (iii) registers of members are duly kept except for any part of the register of members that is kept by a person identified in registers of the operator as the person keeping a register in respect of particular interests identified in registers of the operator where the keeping of that part of the register by the person is regulated or acceptable under the laws of the home economy for the fund and, for interests held by a member who acquired them in a host economy for the fund, the person keeping the register is regulated by or acceptable to the host regulator; and

                     (c)  an adequate risk monitoring and management process including a risk management framework for the passport fund assets, based on the size, complexity and risk of the assets; and

                     (d)  a compliance framework that ensures ongoing compliance with relevant laws and regulations; and

                     (e)  adequate procedures to manage conflicts of interest.

9  Track record of operator

             (1)  The operator of a passport fund must at all times meet the track record test.

Track record—experience of the operator

             (2)  For this section, the operator meets the track record test if the home regulator for the passport fund is satisfied that:

                     (a)  for the past 5 years the operator has been responsible for the operation of financial asset CIS that have been regulated in a way that enables interests in the CIS to be offered to the general public in:

                              (i)  a participating economy; or

                             (ii)  an economy that has a regulatory framework applying to financial asset CIS that is broadly similar in effectiveness to that of the home economy for the fund in the opinion of the home regulator for the fund, having regard where relevant to the IOSCO principles and IOSCO assessment methodology relating to CIS; and

                     (b)  if the operator has undergone a relevant change of control in the past 5 years:

                              (i)  there has been substantial continuity among the officers and employees of the operator responsible for making or supervising discretionary investment decisions for financial asset CIS; and

                             (ii)  the operator has made decisions in relation to the operation of financial asset CIS without substantial influence by any person who controls the operator unless in exceptional circumstances.

Track record—experience of a related party of the operator

             (3)  For this section, an operator is also taken to meet the track record test if the home regulator for the passport fund is satisfied that:

                     (a)  the operator is able to rely on the experience and expertise of a related party in the operation of financial asset CIS having regard to the degree of commonality between the operator and the related party concerning:

                              (i)  decision‑making processes; and

                             (ii)  business processes; and

                            (iii)  staff; and

                     (b)  the related party meets the track record test in accordance with subsection (2).

             (4)  For this section, an operator undergoes a relevant change of control if during the past 5 years:

                     (a)  another entity has commenced to control the operator; or

                     (b)  another entity has ceased to control the operator.

Note:          The reference to supervising discretionary investment decisions in this section is defined in subsection 6(3).

10  Good standing of operator

             (1)  The operator of a passport fund must at all times meet the good standing test.

             (2)  For this section, the operator meets the good standing test if:

                     (a)  the home regulator for the passport fund has not notified the operator that it is of the opinion that there is reason to believe that there is a material risk that a relevant party does not have the integrity or competence required to operate or be involved in the operation of a passport fund honestly and competently, and to act in good faith in the interests of the members of the passport fund; or

                     (b)  where a notification has been issued to the operator, the home regulator for the passport fund has revoked the notification or, if more than one, all of them in writing.

             (3)  For this section, relevant party means any of the following:

                     (a)  the operator;

                     (b)  an officer of the operator;

                     (c)  an entity that controls the operator;

                     (d)  to the extent that the home regulator for the passport fund considers relevant, an officer of an entity that controls the operator.

             (4)  In assessing the matters mentioned in subsection (2), the home regulator for the passport fund may take into account any relevant information including:

                     (a)  any relevant finding about a relevant party made by a regulatory body or dispute resolution service; and

                     (b)  any relevant enforcement action taken by a regulatory body against a relevant party; and

                     (c)  any relevant judgement or decision in relation to a relevant party given by a court, tribunal, arbitrator, dispute resolution service or equivalent person or body; and

                     (d)  any relevant settlement reached by a relevant party with a regulatory body, or in relation to an action or proposed action before a court, tribunal, arbitrator, dispute resolution service or equivalent person or body; and

                     (e)  any relevant enforceable undertaking or equivalent given by a relevant party to a regulatory body, court, tribunal, arbitrator, dispute resolution service or equivalent person or body.

11  Delegation of functions by operator

             (1)  Subject to any limitations in the laws of the home economy for a passport fund, a function of the operator of the passport fund may be delegated by the operator or further sub‑delegated only if the operator:

                     (a)  remains responsible to members of the passport fund for the delegated function; and

                     (b)  has in place suitable processes to ensure that the delegate or sub‑delegate employs an appropriate standard of care when performing the delegated function; and

                     (c)  has in place suitable processes to:

                              (i)  ensure that the activities of the delegate and any sub‑delegate in relation to the delegated function are duly monitored and controlled; and

                             (ii)  evaluate the performance of the delegate and any sub‑delegate in relation to the delegated function; and

                     (d)  has in place suitable processes to ensure that the home regulator for the passport fund is at all times able to access information about the delegated or sub‑delegated functions from the operator, directly from a delegate or from any person that was a delegate for a reasonable time after they have ceased to be a delegate; and

                     (e)  has in place suitable processes to ensure that the performance of the function by the delegate and any sub‑delegate can be effectively monitored and reviewed to ensure compliance with these rules as if done by the operator.

Limitation on delegation of investment management function

             (2)  The operator must ensure that the function of making investment decisions (the investment management function) for the passport fund may only be delegated or sub‑delegated to an entity (a qualifying delegate) that is licensed, authorised or otherwise regulated to carry out or make investment decisions by a regulator that is a signatory to Appendix A of the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information.

             (3)  The investment management business of every qualifying delegate must be regulated in a participating economy or in an economy that has a regulatory framework applying to investment management functions for financial asset CISs that may be offered to the general public in that economy that is broadly similar in effectiveness to that of the home economy for the fund in the opinion of the home regulator for the fund. This subsection does not apply to one or more delegations which together do not account for more than 20% of the value of the passport fund’s assets.

             (4)  If the operator of a passport fund delegates the investment management function, the operator must have in place suitable processes to ensure that at all times each of the qualifying delegates has one or more officers or employees who when considered together are responsible, whether jointly with others or not, in making or supervising all the investment decisions of the passport fund, each with at least either:

                     (a)  a bachelor degree, or equivalent, or higher qualification in a relevant discipline, together with at least 3 years’ experience within the previous 5 years as an officer or employee of an IOSCO financial services related business with responsibility or joint responsibility, for making or supervising discretionary investment decisions; or

                     (b)  at least 5 years’ experience within the previous 7 years as an officer or employee of an IOSCO financial services related business with responsibility or joint responsibility, for making or supervising discretionary investment decisions.

             (5)  For this section, a reference to supervising discretionary investment decisions includes monitoring and evaluating on behalf of an entity, the performance of another entity that makes discretionary investment decisions as a delegate of the first entity, and being significantly involved in decisions about whether the second entity should remain as a delegate in light of its performance.

Part 4Accountability

  

12  Reporting of breaches and changes

Reporting breaches and changes to home regulator

             (1)  The operator of a passport fund must notify the home regulator for the fund in writing within 7 days after it becomes aware that, without there being a breach of the Passport Rules for the home economy or any host economy for the fund, a limit set in the following rules has been exceeded for a period of 7 days without being remedied:

                     (a)  the rules in Division 6.3 (portfolio allocation);

                     (b)  the rules in Division 6.4 (limits on exposure).

Note:          Under subregulation 1.0.03A(2) of the Corporations Regulations 2001, documents that must be lodged with ASIC under the Passport Rules for this jurisdiction must be lodged in the prescribed form.

             (2)  The operator of a passport fund must notify the home regulator for the fund in writing as soon as practicable and in any event within 7 days after it becomes aware that a breach of the Passport Rules for the home economy or any host economy for the fund has occurred, or will occur in relation to the fund, and that breach:

                     (a)  might reasonably be regarded as significant including having regard to any other breaches; or

                     (b)  when considered on its own or together with any related breach, adversely affects the value of the assets of the fund by more than 1%.

Reporting breaches to host regulator

             (3)  Subsection (4) applies to the operator of a passport fund where the laws of a particular host economy for the fund (the relevant host economy) apply to the fund.

             (4)  The operator of a passport fund must notify the home regulator for the fund and the relevant host regulator as soon as practicable and in any event within 7 days after it becomes aware of a breach of the laws of the relevant host economy in relation to the fund, and that breach:

                     (a)  might reasonably be regarded as significant including having regard to any other breaches; or

                     (b)  when considered on its own or together with any related breach, adversely affects as much of the value of the assets of the fund as is attributable to members of the fund in the relevant host economy by more than 1%.

Reporting other changes

             (5)  If an event listed in the table in subsection (6) occurs, the event must be notified to the home regulator, and each host regulator, for the passport fund by the entity listed in the table as soon as practicable and in any case not later than 7 days after it became aware of the event having occurred.

             (6)  In the following table, an associate means a related party except for a person or entity under paragraphs 57(5)(g) to 57(5)(i) in relation to the definition for a related party.

 

Item

Event

Entity who must notify of the event

1

Interests in a passport fund are permitted to be lawfully offered as a passport fund in a host economy.

The operator of the passport fund

2

The operator of a passport fund has first disclosed to any person, other than an associate of the passport fund or its operator, or by way of a lawful disclosure on a confidential basis in relation to incomplete negotiations relating to a transaction, that it intends to propose a change in the operator.

The operator of the passport fund

3

The operator of a passport fund is changed in accordance with the laws of the home economy for the fund.

The operator of the passport fund

4

The operator of a passport fund has first disclosed to any person, other than an associate of the passport fund or its operator, or by way of a lawful disclosure on a confidential basis in relation to incomplete negotiations relating to a transaction, that it intends to propose the passport fund be wound up.

The operator of the passport fund

5

A passport fund commences being wound up in accordance with the laws of the home economy for the fund.

The operator of the passport fund

6

A passport fund completes being wound up in accordance with the laws of the home economy for the fund.

The operator of the passport fund

7

The operator of a passport fund has first disclosed to any person, other than an associate of the passport fund or its operator, that it intends to apply for the deregistration of the passport fund as a passport fund, or as a regulated CIS.

The operator of the passport fund

8

The operator of a passport fund applies for the deregistration of the passport fund as a passport fund, or as a regulated CIS if the intention to apply has not been notified.

The operator of the passport fund

9

A regulated CIS or a sub‑fund of a regulated CIS is deregistered as a passport fund.

The operator of the regulated CIS

10

A regulated CIS that has been deregistered as a passport fund and will no longer be required to be operated in compliance with these rules.

The operator of the regulated CIS

11

Redemption of interests in a passport fund in accordance with these rules is suspended or ceases to be suspended.

The operator of the passport fund

             (7)  Despite subsection (5), the operator of an Australian passport fund is not required to give notice of an event mentioned in item 9 of the table in subsection (6) to each host regulator for the fund.

Note:          ASIC is required to give such a notice under subsection 601PBD(3) or 1216D(4) of the Corporations Act 2001.

13  Custody of passport fund assets

Legal responsibility for holding passport fund assets

             (1)  For this section, the responsible holding party of the assets of a passport fund under the laws of a participating economy is the entity who is responsible for the safekeeping of the assets of the passport fund, as shown in the following table:

 

Item

Home economy for the passport fund

Responsible holding party

1

Australia

The operator of the passport fund.

2

Japan

The trust company or a financial institution engaged in trust business designated by the Act on Investment Trusts and Investment Corporations.

3

Korea

The trust business entity for the collective investment scheme under the Financial Investment Services and Capital Markets Act of Korea.

4

New Zealand

The supervisor of the registered managed investment scheme who is licensed under the Financial Markets Supervisors Act 2011.

5

Singapore

An approved trustee under the Securities and Futures Act of Singapore of an authorised scheme.

6

Thailand

In the case of a scheme established as a mutual fund, the mutual fund supervisor appointed for the mutual fund under the Securities and Exchange Act B.E. 2535 (1992). In the case of a scheme established as a trust, the entity approved by the Securities and Exchange Commission under the Trust for Transactions in Capital Market Act B.E. 2550 (2007) to perform the custodial function of assets of the authorised scheme.

             (2)  The function of holding passport fund assets may, subject to any limitation in the laws of the home economy for the fund, be delegated, or sub‑delegated, only if the responsible holding party remains legally responsible for the safekeeping of the fund’s assets as if it held the assets itself.

Entities that hold passport fund assets

             (3)  For this section, a custodian for a passport fund is an entity that holds assets of the passport fund.

             (4)  The responsible holding party of a passport fund must ensure that:

                     (a)  each custodian meets one of the following criteria:

                              (i)  the custodian is authorised in its place of business to carry on a business of holding assets on behalf of others;

                             (ii) the asset holding activity of the custodian is subject to regulatory requirements in the home economy for the fund or the custodian’s place of business; and

                     (b)  the operator is not the custodian.

Note:          The effect of paragraph (b) in Australia is that, subject to subsection (10), the operator must delegate the function of holding the assets of a passport fund to another entity.

Assets must be accounted for

             (5)  A custodian of the passport fund must ensure that the assets of the passport fund which it holds are properly accounted for as the passport fund’s assets and identifiable as such in the custodian’s records.

Assets must be held separately or in a permitted omnibus account

             (6)  The custodian of a passport fund must hold the passport fund assets:

                     (a)  separately from assets that are not assets of the passport fund; or

                     (b)  in an omnibus account with the following characteristics:

                              (i)  it is managed in accordance with good custodial practice where the account is held and in accordance with reasonable standards;

                             (ii)  it is reconciled each business day in the place where the account is held;

                            (iii)  it does not also hold any assets of the custodian other than contingent amounts;

                            (iv)  the custodian recovers any contingent amount as soon as practicable.

             (7)  For subsection (6), an amount paid into an omnibus account by the custodian is a contingent amount if:

                     (a)  it is paid solely to prevent the continuation of a shortfall that occurred because of circumstances that were beyond the custodian’s control or that was not intended by the custodian to arise; and

                     (b)  the custodian will be entitled to recover the amount when the circumstances are rectified or addressed.

             (8)  The custodian of a passport fund must ensure that there is separation between the functions of asset holding and investment such that activities that relate to asset holding are being performed by persons who are separate from, and able to act independently from, investment officers, including by ensuring that:

                     (a)  no investment officer of the custodian is involved in or responsible for ensuring the holding of the assets of the passport fund; and

                     (b)  no investment officer of the custodian directly supervises any other officer of the custodian who is involved in or responsible for ensuring the holding of the assets of the passport fund; and

                     (c)  each officer of the custodian that is involved in or responsible for ensuring the holding the assets of the passport fund is independent from each investment officer of the custodian.

             (9)  For subsection (8), an investment officer of a custodian is an officer or employee of the custodian whose responsibilities include investment decisions or trading decisions, whether in relation to the passport fund or otherwise, other than decisions that relate to:

                     (a)  deposit accounts; or

                     (b)  currency transactions that are conducted for the purposes of facilitating purchase and sale of assets of the passport fund, or other payment obligations of the passport fund, or the redemption, issue, subscriptions, cancellation or repurchase of interests in the passport fund.

           (10)  Paragraph (4)(b) does not apply to a custodian in relation to the following assets held on trust for the members of the passport fund, or, if the passport fund is a body corporate, as an asset of the passport fund, if the operator is subject to regulatory requirements in the home economy for the passport fund in relation to holding those assets:

                     (a)  deposits with an entity which is subject to prudential regulation by a financial supervisory authority in an economy where the entity was incorporated which is, in the written opinion of the home regulator for the passport fund, generally largely compliant with the guidelines of the Basel Committee on Banking Supervision if:

                              (i)  the entity holds other assets of the passport fund under subsection (4); or

                             (ii)  the operator reasonably considers that holding the deposit taking facility by another person would raise unreasonable operational difficulties or be impracticable;

                     (b)  assets held for operational purposes that it would not be reasonably practicable for an entity other than the operator to hold;

                     (c)  a derivative and any contractual right for the payment of any balance owing to the operator in relation to dealings in derivatives including margining those dealings through transactions in a deposit taking facility.

14  Independent oversight entity of a passport fund

             (1)  For these rules, the independent oversight entity of a passport fund in a participating economy is the body shown in the following table:

 

Item

Home economy for the passport fund

Independent oversight entity

1

Australia

Each of the external directors of the operator or, if there is a compliance committee of the registered scheme under the Corporations Act 2001, the compliance committee.

2

Japan

Each external member of the board of company auditors, audit committee, or audit and supervisory committee designated by the Companies Act, or the trust company or a financial institution engaged in trust business designated by the Act on Investment Trusts and Investment Corporations.

3

Korea

The trust business entity for the collective investment scheme under the Financial Investment Business and Capital Markets Act of Korea.

4

New Zealand

The supervisor of the registered managed investment scheme who is licensed under the Financial Markets Supervisors Act 2011.

5

Singapore

An approved trustee under the Securities and Futures Act of Singapore of an authorised scheme.

6

Thailand

In the case of a scheme established as a mutual fund, the mutual fund supervisor appointed for the mutual fund under the Securities and Exchange Act B.E. 2535 (1992). In the case of a scheme established as a trust, the entity approved by the Securities and Exchange Commission under the Trust for Transactions in Capital Market Act B.E. 2550 (2007) to perform such oversight function over the trust.

             (2)  The independent oversight entity must:

                     (a)  monitor the operator for compliance with the constituent documents of the passport fund, the laws of the home economy for the passport fund relating to the operation of the passport fund and Divisions 6.2 to 6.5 of the Passport Rules for the home economy for the passport fund; and

                     (b)  if, in the reasonable opinion of the independent oversight entity, the operator is required by section 12 of the Passport Rules for the home economy for the passport fund to report non‑compliance with the constituent documents of the passport fund or the laws of the home economy for the passport fund relating to the operation of the passport fund including the Passport Rules for the home economy to the home regulator or a host regulator for the passport fund but fails to do so, notify its opinion including particulars of the non‑compliance to the regulator as soon as practicable but no later than 7 days after forming the opinion.

             (3)  The independent oversight entity must exercise reasonable care and diligence in performing the functions listed in subsection (2) considering the interests of the members of the passport fund.

             (4) The operator must provide any assistance required by the independent oversight entity to perform its functions.

15  Annual implementation review

Annual implementation reviews must be conducted

             (1)  The operator of a passport fund must ensure that an implementation review of the operation of the fund that complies with this section is conducted in relation to each period for which it prepares, or is required to prepare, a financial statement for the fund under the Passport Rules for the home economy for the fund (the review period).

             (2)  If the home regulator for a passport fund has notified the operator of the fund and each host regulator for the fund that this section does not apply, because the home regulator for the fund is satisfied non‑application is appropriate having regard to actions taken or to be taken by the home regulator to check compliance during the review period or on an ongoing basis, and, if applicable, reports to be provided by the independent oversight entity during the review period or on an ongoing basis, then this section does not apply to the passport fund or its operator for the review period or until revoked as the case may be, as set out in the notice.

Requirements for the implementation reviewer

             (3)  Subject to subsection (4), the implementation review for a passport fund registered in a participating economy listed in the following table must be conducted by a reviewer that is an entity of the kind shown in the table:

 

Item

Home economy for the passport fund

Entity that can conduct implementation reviews (the implementation reviewer)

1

Australia

A registered company auditor, audit firm or authorised audit company under the Corporations Act 2001.

2

Japan

An external member of the board of company auditors, audit committee, or audit and supervisory committee designated by the Companies Act, the trust company or a financial institution engaged in trust business designated by the Act on Investment Trusts and Investment Corporations or a Certified Public Accountant or an Auditing Corporation designated by the Certified Public Accountants Act.

3

Korea

A trustee under the Financial Investment Services and Capital Markets Act of Korea.

4

New Zealand

A licensed auditor under the Auditor Regulation Act 2011 or the supervisor of the registered managed investment scheme who is licensed under the Financial Markets Supervisors Act 2011.

5

Singapore

A public accountant who is registered or deemed to be registered under the Accountants Act of Singapore or a trustee approved under the Securities and Futures Act.

6

Thailand

An auditor as defined by the Securities and Exchange Commission or the mutual fund supervisor appointed for the mutual fund under the Securities and Exchange Act B.E. 2535 (1992).

             (4)  The implementation review must not be conducted by:

                     (a)  the operator; or

                     (b)  a related party of the operator.

Assistance must be given to the reviewer

             (5)  Each of the following entities must do all things reasonably necessary to assist the conduct of the implementation review:

                     (a)  the operator;

                     (b)  any delegate of the operator;

                     (c)  any custodian of the passport fund;

                     (d)  the responsible holding party;

                     (e)  the independent oversight entity.

Requirements applying where the review must be conducted

             (6)  The operator of a passport fund must ensure that an implementation reviewer is engaged for the passport fund for the purposes of this section at all times.

             (7)  The implementation review must be conducted independently in accordance with standards acceptable to the home regulator for the passport fund.

Report of the implementation review

             (8)  The report of the implementation review must be addressed to the operator, the independent oversight entity (where applicable), the home regulator, and each host regulator, for the fund.

             (9)  The report must state:

                     (a)  whether any matter has come to the attention of the implementation reviewer that causes the reviewer to believe that, or to believe that it is likely that, the passport fund was not operated in accordance with the Passport Rules for the home economy, or any host economy, for the fund during the review period in all respects that may be material to the persons to whom it is addressed; and

                     (b)  if so, particulars of each matter including details explaining the reasons why the reviewer has reason to believe that the passport fund was not operated in accordance with, or was likely not to have been operated in accordance with, the Passport Rules for the home economy, and any host economy, for the fund during that period; and

                     (c)  information on the basis for the statements made in paragraphs (a) and (b).

           (10)  The operator of a passport fund must, within 3 months after the end of the review period, provide a copy of the report to:

                     (a)  the home regulator for the passport fund; and

                     (b)  each host regulator for an economy in which the passport fund had, during the review period, members who became members of the passport fund following an application made in that economy; and

                     (c)  each host regulator for an economy in which interests in the passport fund were offered during the period from the beginning of the review period to the time the reports are provided to the home regulator for the passport fund; and

                     (d)  the independent oversight entity for the passport fund.

16  Financial reporting and auditing

             (1)  The operator of a passport fund must, in accordance with this section:

                     (a)  prepare reports containing financial statements for the passport fund; and

                     (b)  ensure that those financial statements are audited, and that an audit report is prepared; and

                     (c)  lodge those reports with the home regulator, and each host regulator, for the fund.

Note:          In addition to complying with this section, the operator of a passport fund may be required by the laws of the host economy to prepare financial reports and ensure they are audited and an audit report is prepared in accordance with the laws of the host economy, and lodge those reports with the host regulator. See, for example, section 343A of the Corporations Act 2001.

Financial statements of a passport fund

             (2)  The operator must, at least each financial year, in accordance with the prevailing practice for the preparation of audited financial statements for a regulated CIS in the home economy for the passport fund, prepare a report containing the financial statements for the fund for the period covered by the report (the review period).

             (3)  The financial statements of a passport fund must be prepared in accordance with the financial reporting requirements applying to the passport fund.

             (4)  For this section, the financial reporting requirements applying to a passport fund registered in a participating economy are those shown in the following table:

 

Item

Home economy for the passport fund

Financial reporting requirements

1

Australia

Requirements imposed under Chapter 2M of the Corporations Act 2001 and the accounting standards made by the Australian Accounting Standards Board under that Act.

2

Japan

Requirement imposed under the Financial Instruments and Exchange Act and other relevant regulations.

3

Korea

The accounting standards under Article 240 of the Financial Investment Services and Capital Markets Act of Korea.

4

New Zealand

Requirements imposed under Part 7 of the Financial Markets Conduct Act 2013.

5

Singapore

The relevant accounting standards made by the Accounting Standards Council under the Accounting Standards Act (Cap. 2B) and the Recommended Accounting Practices (or its equivalent) issued by the Council of the Institute of Singapore Chartered Accountants (or its successors).

6

Thailand

The Accounting Guidelines for Investment Management business issued by the Association of Investment Management Companies and approved by the Securities and Exchange Commission.

Audit of financial statements

             (5)  The operator of a passport fund must ensure that the financial statements of the passport fund are audited by a person (the auditor) who is permitted to audit the financial statements of a regulated CIS in the home economy for the passport fund to satisfy the financial reporting requirements.

             (6)  The operator must:

                     (a)  ensure that the auditor prepares a report on the financial statements of the passport fund that states that the audit and the report were completed in accordance with the audit requirements applying to audits of financial statements of the passport fund in the following table; and

                     (b)  provide all reasonable assistance to the auditor in relation to the audit.

 

Item

Economy of the passport fund

Home audit requirements

1

Australia

Requirements imposed under Chapter 2M of the Corporations Act 2001 and the auditing standards made by the Auditing and Assurance Standards Board under that Act.

2

Japan

The Financial Instruments and Exchange Act, the Certified Public Accountants Act and other relevant regulations

3

Korea

The accounting standards under Article 240 of the Financial Investment Services and Capital Markets Act of Korea.

The guidelines for accounting audit of collective investment property under Article 265(2) of Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea.

4

New Zealand

Requirements imposed under Part 7 of the Financial Markets Conduct Act 2013.

5

Singapore

Singapore Standards on Auditing.

6

Thailand

Thai Standards on Auditing.

Lodgement of reports

             (7)  The operator of a passport fund must, within 3 months after the end of the review period, lodge a copy of both:

                     (a)  the report containing those financial statements; and

                     (b)  the audit report relating to those financial statements;

with:

                     (c)  the home regulator for the passport fund; and

                     (d)  each host regulator for an economy in which the passport fund had, during the review period, members who became members of the passport fund following an application made in the host regulator’s economy; and

                     (e)  each host regulator for an economy in which interests in the passport fund were offered during the period from the beginning of the review period to the time the reports are provided to the home regulator for the passport fund.

Note:          The operator of an Australian passport fund or a notified foreign passport fund is already obliged to lodge copies of the reports with ASIC under section 319 of the Corporations Act 2001.

Part 5Offers in home economy

  

17  Requirement of offer in the home economy

                   The operator of a passport fund must not offer interests in the fund as a passport fund in a participating economy other than the home economy for the fund unless:

                     (a)  all of the following are satisfied when the interests are offered:

                              (i)  there is an ongoing offer of interests in the passport fund in the home economy for the fund;

                             (ii)  the offer of interest in the passport fund is subject to the laws of the home economy for the fund that would normally apply to an offer of interests in a regulated CIS to the general public;

                            (iii)  the offer is bona fide and does not exclude general subscription by retail investors resident in the home economy for the fund; or

                     (b)  all of the following are satisfied when the interests are offered:

                              (i) there is an ongoing offer of interests in a sub‑fund which forms part of the same regulated CIS as the passport fund;

                             (ii)  the offer of interests in that sub‑fund is subject to the laws of the home economy for the fund that would normally apply to an offer of interests in a regulated CIS to the general public;

                            (iii)  the offer is bona fide and does not exclude general subscription by retail investors resident in the home economy for the fund; or

                     (c)  both of the following were satisfied at the time the operator initiated the entry process in relation to the passport fund that the participating economy has implemented under subsection 4(3) of Annex 2 of the Memorandum of Cooperation:

                              (i)  at least 30% of the value of interests in CISs for the operation of which the operator is responsible are held by members of those CISs who have provided an address in the home economy for the passport fund, unless the operator is aware the person is not a resident of the home economy for the fund;

                             (ii)  the operator has provided a disclosure document to the home regulator for the passport fund that meets the requirements for a disclosure document for an offer of interests in the passport fund that would normally apply to an offer of interests in a regulated CIS that is a passport fund to the general public in the home economy for the fund.

Part 6Passport fund investments

Division 6.1Operational goods and services

18  Part does not apply to operational goods and services

                   Goods and services acquired by a passport fund for operational reasons, rather than for investment purposes, are not considered assets of the passport fund for this Part. Nothing in this Part prevents a passport fund from acquiring and holding goods or services for operational reasons.

Division 6.2Permitted investments

19  Permitted assets and arrangements

             (1)  A passport fund must not acquire assets, or enter into a derivative or a securities lending arrangement, other than in accordance with this Part.

             (2)  Unless otherwise provided for in this Part, a passport fund may only acquire assets, in addition to entering into derivatives or securities lending arrangements, of the following kinds:

                     (a)  currency;

                     (b)  deposits;

                     (c)  depository receipts over gold;

                     (d)  transferable securities;

                     (e)  money market instruments.

20  Jurisdiction requirement for assets

                   A passport fund may hold an asset listed in subsection 19(2) only if it is issued in an IOSCO jurisdiction.

21  Requirements for deposits

             (1)  A passport fund may make a deposit only with a deposit‑taking institution that is regulated by a financial supervisory authority in its place of incorporation which is, in the written opinion of the home regulator for the fund, generally largely compliant with the guidelines of the Basel Committee on Banking Supervision.

             (2)  A passport fund may make a deposit only if:

                     (a)  the amount deposited can be withdrawn under the terms of the deposit on no more than 31 days’ notice; and

                     (b)  it is not subject to loss of interest or to penalty if the amount is withdrawn more than 12 months after it was deposited.

22  Meaning of depository receipts over gold

                   For these rules, a depository receipt over gold means an enforceable and documented obligation:

                     (a)  from an entity that is authorised in its principal place of business to carry on banking business (the issuer), to make available a specified amount of gold at the direction of the holder of the depository receipt over gold (the holder); and

                     (b)  under which the issuer has an obligation enforceable by the holder that the issuer will at all times until performance hold sufficient gold:

                              (i)  of a specified amount that is allocated to the holder and that will be made available at the holder’s direction; or

                             (ii)  which is sufficient in amount and available to enable performance of the obligation to the holder and any other obligations of the issuer in relation to gold held by the issuer.

23  Requirements for transferable securities

             (1)  For these rules, each of the following is a transferable security only if title to it can be transferred from one party to another or redeemed from the issuer:

                     (a)  a share or stock in a body corporate;

                     (b)  a bond or other form of debt security (other than a money market instrument);

                     (c)  an interest in a CIS;

                     (d)  any interest in an asset covered by paragraph (a), (b) or (c);

                     (e)  a right to be issued an asset covered by paragraph (a), (b), (c) or (d) on payment of a specified amount for that asset that is granted by the issuer of that asset.

             (2)  A passport fund must not acquire a transferable security if liability could arise from holding it under the terms of the security, whether on the basis that the security is partly paid or otherwise, other than in the case of:

                     (a)  a partly‑paid share or stock in a body corporate or interest in a CIS that is quoted on a financial market and in relation to which no holders have an ongoing right to redeem their membership for payment of an amount reflecting the value of their share, stock or interest; or

                     (b)  a share or stock in a body corporate or interest in a CIS which is intended to be quoted on a financial market within 7 days of acquisition and in relation to which no holders have an ongoing right to redeem their membership for payment of an amount reflecting the value of their share, stock or interest.

             (3)  A passport fund must not acquire a transferrable security mentioned in paragraph (2)(a) or (b) unless:

                     (a)  the passport fund holds assets that the operator of the passport fund reasonably believes will be available and able to be converted into sufficient assets to meet the liability; and

                     (b)  in the case of a partly‑paid share or stock in a body corporate or interest in a CIS that is quoted on a financial market, the operator must reasonably believe that the share or stock in a body corporate or interest in a CIS can be reliably valued and while held will be able to be closed out or sold for that value on any business day in the place in which the security is acquired by the passport fund.

24  Requirements for money market instruments

                   A passport fund must not acquire a money market instrument unless the operator reasonably believes the following conditions are satisfied:

                     (a)  the instrument:

                              (i)  has maturity at issuance or a residual maturity of not more than 397 days; or

                             (ii)  may be reasonably expected to undergo regular yield adjustments that are in line with money market conditions at least once every 397 days; and

                     (b)  on any business day in the place in which it is acquired by the passport fund, the instrument:

                              (i)  can be reliably valued; and

                             (ii)  can be closed out or sold for that value.

25  Requirements for derivatives

             (1)  A passport fund may enter into a derivative only if:

                     (a)  the underlying asset or index from which the value of the derivative is determined is one or more of the following:

                              (i)  an asset that the passport fund may hold under subsection 19(2);

                             (ii)  a rate of interest;

                            (iii)  a rate of inflation that is calculated, endorsed or determined by a government or government agency;

                            (iv)  an eligible index; and

                     (b)  the fair value of the derivative in the economy in which it is acquired by the passport fund can readily be determined, in accordance with Division 7.2; and

                     (c)  other than in exceptional circumstances, the derivative can be closed out or sold for that value, in that economy, on any business day in the place of the relevant office of the counterparty or if the derivative is traded on a financial market, when the financial market is open for trading of derivatives.

Meaning of derivative

             (2)  For these rules, a derivative is an arrangement between an entity and another party (the counterparty for the derivative):

                     (a)  where the arrangement is not:

                              (i)  currency; or

                             (ii)  a deposit; or

                            (iii)  a loan of moneys or securities; or

                            (iv)  a transferable security; or

                             (v)  a money market instrument; or

                            (vi)  a depository receipt over gold; and

                     (b)  under the arrangement:

                              (i)  one party must, or may be required to, provide consideration of a particular kind to the other on a future day; and

                             (ii)  the consideration or, if arrangements of that kind are commonly sold or closed out before performance, the value of the arrangement on sale or close out, is ultimately determined by or modified by reference (wholly or in part) to a variable; and

                            (iii)  no substantial part of the consideration provided by either party under the contract is the provision of services; and

                            (iv)  the consideration is not the provision of goods that the fund is to use for operational purposes; and

                             (v)  no party will be under an obligation to deliver an asset that is not a permitted asset under subsection 19(2).

26  Requirements for embedded derivatives

             (1)  A passport fund may acquire a transferable security or money market instrument that embeds a derivative only if the embedded derivative satisfies:

                     (a)  section 25; and

                     (b)  section 27 where the counterparty risk of the embedded derivative is or may be transferred to the passport fund;

as if the embedded derivative were a derivative and the passport fund were a direct party to that derivative.

Meaning of embeds a derivative and embedded derivative

             (2)  For these rules, a transferable security or money market instrument in question embeds a derivative:

                     (a)  if it includes a component (the embedded derivative) that:

                              (i)  results in some or all of the cash flows that would otherwise be payable under the transferable security or money market instrument which functions as the host contract to be modified by reference (wholly or in part) to a variable other than, for shares or stock of a body corporate, the discretion of the body corporate as to payment of dividends or repayment of capital or amounts payable on its winding up; and

                             (ii)  has benefits and risks that are not closely related to economic characteristics of the transferable security or money market instrument which functions as the host contract; and

                            (iii)  has a significant impact on the risks in holding, and the price of, the transferable security or money market instrument in question; and

                            (iv)  is not transferable independently of the transferable security or money market instrument or is not treated by the passport fund as a separate asset; or

                     (b)  if it would be a derivative but for being a transferable security or a money market instrument, and the terms were designed to meet the specific needs of a passport fund.

27  Counterparties to derivatives

             (1)  A passport fund must not enter into a derivative that is to be cleared through a central clearing counterparty unless it is an assessed central clearing counterparty.

             (2)  A passport fund must not enter into a derivative that is not cleared through a central clearing counterparty unless:

                     (a)  the counterparty to the derivative:

                              (i)  is subject to prudential supervision broadly under the guidelines of the Basel Committee on Banking Supervision by a financial supervisory authority in a principal place of business of the counterparty; or

                             (ii)  is both:

                                        (A)  regulated by a regulatory authority that is a member or associate member of IOSCO; and

                                        (B)  subject to obligations in relation to holding financial resources and having adequate arrangements to manage risk; and

                     (b)  where the counterparty to the derivative is a related party to the operator—there are adequate arrangements in place to manage conflicts of interest.

             (3)  For these rules, a central clearing counterparty to a derivative is an assessed central clearing counterparty if:

                     (a)  it is regulated as a central clearing counterparty in an economy that is:

                              (i)  a participating economy; or

                             (ii)  a member of the Organisation for Economic Cooperation or Development; or

                     (b)  all of the following conditions are satisfied:

                              (i)  it is regulated as a central clearing counterparty in an IOSCO jurisdiction;

                             (ii)  the operator of the passport fund believes on reasonable grounds, having regard to independent sources of information, that there is very low risk of the central clearing counterparty defaulting in any of its obligations over the subsequent 5 year period;

                            (iii)  the operator of the passport fund has recorded in writing its reasons for holding that belief.

28  Counterparties and collateral for securities lending arrangements

             (1)  For these rules, a securities lending arrangement is an arrangement under which an asset of the passport fund is transferred to another party and there is an obligation on that party to transfer that asset, or an equivalent asset, back to the passport fund.

             (2)  A passport fund may enter into a securities lending arrangement only if:

                     (a)  the counterparty to the transaction:

                              (i)  is subject to prudential supervision broadly by a financial supervisory authority under the guidelines of the Basel Committee on Banking Supervision in an economy where the counterparty has a principal place of business; or

                             (ii)  is both:

                                        (A)  regulated by a regulatory authority that is a member or associate member of IOSCO; and

                                        (B)  subject to obligations relating to holding financial resources and having adequate arrangements to manage risk; and

                     (b)  there is an agreement between the passport fund and the counterparty to the transaction that provides that:

                              (i)  the counterparty will provide to the passport fund collateral by way of a transfer of asset to the passport fund free of any encumbrance, that exceeds the value of the asset transferred by the passport fund under the agreement; and

                             (ii)  if the current value on any business day of the collateral provided to meet the requirement under subparagraph (i) where all the collateral was tendered in cash does not exceed the fair value of the asset transferred by the passport fund under the agreement, or if the collateral tendered included money market instruments, is less than 103% of the fair value of the asset on that business day, the counterparty must provide additional collateral to the passport fund:

                                        (A)  no later than the close of business on the next business day (shortfall payment day) in the place of the relevant office of the counterparty for the shortfall amount below 100%; and

                                        (B)  if the collateral includes money market instruments, no later than the close of business on the business day in the place of the relevant office of the counterparty after the shortfall payment day for the excess 3%; and

                     (c)  where the counterparty to the transaction is a related party to the operator—there are adequate arrangements in place to manage potential conflicts of interest; and

                     (d)  the operator has assessed that the risk of loss from the counterparty not meeting its obligations to the passport fund under the arrangement or arrangements with the counterparty that include the arrangement, having regard to the counterparty, the collateral, the terms of the arrangement and any other relevant matter, is very low and recorded this assessment in writing.

             (3)  Any collateral relied on by the passport fund to satisfy subsection (2) must be:

                     (a)  cash; or

                     (b)  money market instruments:

                              (i)  that do not embed derivatives; and

                             (ii)  that have been assessed by the operator of the passport fund as having acceptable risk; and

                            (iii) whose fair value exceeds 103% of the amount of cash collateral that would otherwise be required to satisfy subsection (2).

             (4)  The passport fund must not sell, reinvest, or encumber securities lending collateral other than as permitted by this section or following default in compliance by the counterparty to the securities lending arrangement.

             (5)  The passport fund may reinvest securities lending collateral that is cash if:

                     (a)  the reinvestment is in money market instruments that have been assessed by the operator of the passport fund as having acceptable risk; and

                     (b)  the value of the assets that the passport fund will receive from the reinvestment excluding cash exceeds 103% of the fair value of the securities transferred under the securities lending arrangement less any cash collateral that will be held.

             (6)  Collateral accepted in relation to a derivative or securities lending arrangement is to be treated as assets acquired by the passport fund for the requirements under Division 6.3 whether or not the collateral is provided by way of transfer.

Division 6.3Restrictions on portfolio allocation

29  Exceeding limits in this Part

             (1)  A passport fund must not acquire an asset or enter into a derivative or securities lending arrangement if it would result in a limit in this Part being exceeded or exceeded to a greater extent.

             (2)  A passport fund that exceeds a limit in this Part must cease to exceed the limit as soon as practicable but no later than 3 months from the date the limit was exceeded.

             (3)  The period in subsection (2) may be extended for a period or further period of no more than 1 month by notice in writing to the operator by the independent oversight entity if the operator satisfies the independent oversight entity that it is in the best interests of the members of the passport fund for extension.

             (4)  A passport fund does not breach a rule in this Part if it exceeds a limit otherwise than by the acquisition of an asset or the entry into a derivative or securities lending arrangement and it complies with this section.

Note:          See also the reporting requirements under section 12.

30  Single entity limit

             (1)  The value of a holding for the purpose of this section and sections 31 and 33 is the higher of:

                     (a)  the amount of the holding after considering any reduction in risk due to offsetting exposures; and

                     (b)  the value of the holding disregarding the offsetting effects of derivatives.

             (2)  Subject to subsection (3) and section 33, no more than 5% of the value of the assets of a passport fund may be held in assets or arrangements that:

                     (a)  relate to the same entity, that is not an entity that:

                              (i)  is an assessed central clearing party; or

                             (ii)  is subject to prudential supervision by a financial supervisory authority in its place of incorporation which is, in the written opinion of the home regulator for the passport fund, generally compliant with the guidelines of the Basel Committee on Banking Supervision in an economy where the counterparty has a principal place of business and in the reasonable opinion of the operator is of low risk; and

                     (b)  are of any one or more of the following types:

                              (i)  transferable securities other than:

                                        (A)  interests in financial asset regulated CISs; and

                                        (B)  risk‑assessed government securities;

                             (ii)  money market instruments other than risk‑assessed government securities;

                            (iii)  derivatives;

                            (iv)  securities lending arrangements.

             (3)  Subject to section 33, the single entity limit set out in subsection (2) may be raised to 10% in relation to assets or arrangements that:

                     (a)  have been assessed by the operator as having an acceptable risk; or

                     (b)  having considered a written opinion of a credit rating agency that is regulated in providing credit ratings in an IOSCO jurisdiction and any other information of which it is aware under its risk assessment and risk management procedures, the operator has no reason to doubt have an acceptable risk; or

                     (c)  excluding assets and arrangements referred to in paragraph (a) or (b) do not, in aggregate, exceed 40% of the value of the assets of the passport fund.

             (4)  Subject to section 33, no more than 15% of the value of the assets of a passport fund may be held in assets or arrangements that:

                     (a)  relate to the same entity that is subject to prudential supervision by a financial supervisory authority in its place of incorporation which is, in the written opinion of the home regulator for the passport fund, generally compliant with the guidelines of the Basel Committee on Banking Supervision in an economy where the counterparty has a principal place of business and in the reasonable opinion of the operator is of low risk; and

                     (b)  are of any one or more of the types mentioned in paragraph (2)(b).

             (5)  Subject to section 33, no more than 20% may be held in assets that:

                     (a)  relate to the same entity other than an assessed central clearing party; and

                     (b)  are of any one or more of the following types:

                              (i)  the types mentioned in paragraph (2)(b);

                             (ii)  deposits.

             (6)  The limits under subsections (2) and (5) do not apply to deposits funded from:

                     (a)  money received from the issue or sale of interests in the passport fund before the commencement of investment by the passport fund; or

                     (b)  liquidation of investments in the process of winding up a passport fund, where the operator reasonably believes that complying with any of those subsections would not be in the interests of the members of the passport fund; or

                     (c)  money received from sales of assets of a passport fund to meet the redemption requests, where the operator reasonably believes that complying with any of those subsections would not be in the interests of the members of the passport fund.

             (7)  No more than 35% of the value of the assets of a passport fund may be held in assets that are risk‑assessed government securities relating to the same government entity.

             (8)  For this section, an asset or arrangement relates to an entity if the asset is of a type listed in the following table and has the connection with the entity shown:

 

Item

This type of asset or arrangement…

…relates to an entity if:

1

transferable security (including those transferred under a securities lending arrangement)

it is issued or guaranteed by the entity

2

money market instrument (including those transferred or which are collateral for an obligation to the passport fund under a securities lending arrangement)

it is issued or guaranteed by the entity

3a

derivative the price or value of which depends on the price of a transferable security or money market instrument as the reference asset; or

the reference asset is issued or guaranteed by the entity

3b

asset that embeds such a derivative

 

4a

derivative whose counterparty is not an assessed central clearing counterparty; or

the entity is the counterparty

4b

asset that embeds such a derivative, if the counterparty risk is, or may be, transferred to the fund

 

5

securities lending arrangement

the entity is the counterparty

6

deposit

it is with the entity

Note:          An asset may relate to more than one entity. It must be counted for the purposes of the application of subsections (1) to (4) to each of those entities.

Meaning of government security

             (9)  For this section and section 31, an asset is a government security only if:

                     (a)  the asset is:

                              (i)  a transferable security other than an interest in a financial asset regulated CIS; or

                             (ii)  a money market instrument; and

                     (b)  the entity to which it relates is:

                              (i)  the government of an economy; or

                             (ii)  a central bank; or

                            (iii)  a supranational organisation.

Meaning of risk‑assessed government security

           (10)  For these rules, a government security is a risk‑assessed government security only if the holding is assessed as having an acceptable risk.

           (11)  In this section and section 31, in a situation where an entity, other than the responsible holding party or its delegate, holds an asset referred to in paragraph 23(1)(a), 23(1)(b) or 23(1)(c) on behalf of a passport fund:

                     (a)  if the asset is segregated from the other assets of that entity such that the passport fund will have an enforceable legal claim to that asset that is distinct from and superior to the legal claims of general creditors of the entity holding the asset in the event of insolvency of that entity, then the issuer of a transferable security referred to in paragraph 23(1)(d) is taken to be the issuer of the asset referred to in paragraph 23(1)(a), (b) or (c) to which it relates and not the person holding the asset referred to in paragraph 23(1)(a), (b) or (c); and

                     (b)  in all other cases, the issuer of a transferable security under paragraph 23(1)(d) is taken to be both the issuer of the asset referred to in paragraph 23(1)(a), (b) or (c) to which it relates and the person holding or taking into custody the asset referred to in paragraph 23(1)(a), (b) or (c).

           (12)  In this section and section 31, where a transferable security is an interest in a CIS, the issuer is taken for this section and section 31 to be the CIS, even if the CIS is not a person, and not the operator of the CIS.

31  Group limit

             (1)  Subject to subsection 30(6) and section 33, no more than 20% of the value of the assets of a passport fund may be held in assets that:

                     (a)  relate to the same group of entities; and

                     (b)  are of any one or more the following types:

                              (i)  the types mentioned in paragraph 30(2)(b);

                             (ii)  deposits.

             (2)  The limits under subsection (1) do not apply to deposits funded from:

                     (a)  money received from the issue or sale of interests in the passport fund before the commencement of investment by the passport fund; or

                     (b)  liquidation of investments in the process of winding up a passport fund, where the operator reasonably believes that complying with that subsection would not be in the interests of the members of the passport fund; or

                     (c)  money received from sales of assets of a passport fund to meet the redemption requests, where the operator reasonably believes that complying with that subsection would not be in the interests of the members of the passport fund.

Meaning of group of entities and relates to a group of entities

             (3)  For this section:

                     (a)  2 entities are linked if one entity is the controller of the other; and

                     (b)  2 entities are also linked if both entities are linked to a third entity; and

                     (c)  a set of entities forms a group of entities if each entity in the set is linked to each other entity.

             (4)  For this section, an asset relates to a group of entities if:

                     (a)  the asset is not a government security; and

                     (b)  the asset is of a type listed in the following table and has the connection with a group of entities shown:

 

Item

This type of asset…

…relates to a group of entities if:

1

transferable security (including those transferred under a securities lending arrangement)

it is issued or guaranteed by an entity that is in the group of entities

2

money market instrument (including those transferred or received as collaterals under a securities lending arrangement)

it is issued or guaranteed by an entity that is in the group of entities

3a



 

3b

derivative the price or value of which depends on the price of a transferable security or money market instrument as the reference asset; or



asset that embeds such a derivative

the reference asset is issued or guaranteed by an entity that is in the group of entities

4a


4b

derivative whose counterparty is not an assessed central clearing counterparty; or


asset that embeds such a derivative, if the counterparty risk is, or may be, transferred to the fund

the counterparty is in the group of entities

5

securities lending arrangement

the counterparty is in the group of entities

6

deposit

it is with an entity that is in the group of entities

32  Valuation of derivatives and securities lending arrangements

                   For sections 30 and 31 the value of a derivative as it relates to an entity is assessed as follows:

                     (a)  if it relates to the entity in the manner described in items 3a and 3b of the tables in subsection 30(8) or 31(4), the value is assessed in accordance with Appendix B to these rules and may be a negative value in case of a permitted short exposure;

                     (b)  if it relates to the entity in the manner described in items 4a and 4b of the tables in subsection 30(8) or 31(4), the value is assessed as the maximum potential loss in accordance with Appendix A of these rules and may be determined:

                              (i)  after netting off any liability of the passport fund to the entity where:

                                        (A)  the passport fund has a netting arrangement with its counterparty which creates a single legal obligation, covering all included transactions, such that, in the event of the counterparty’s failure to perform owing to default, bankruptcy, liquidation or any other similar circumstance, the passport fund would have a claim to receive or an obligation to pay only the net sum of the transactions subject to the netting arrangement; and

                                        (B)  the operator is reasonably satisfied that the netting arrangement is legally effective under the law of the jurisdiction in which the counterparty is incorporated and, if a foreign branch of an entity is involved, also under the law of the jurisdiction in which the branch is located, the law that governs the individual included transactions and the law that governs the netting agreement; and

                             (ii)  after deducting the fair value of any collateral for an obligation of the passport fund under the arrangement, which is held by the passport fund as an asset of the fund and without encumbrance that is in the form of legal title to the asset, and that is:

                                        (A)  cash; or

                                        (B)  money market instruments that have been assessed by the operator of the passport fund as having acceptable risk.

33  Application of certain restrictions to index funds and benchmark funds

             (1)  This section applies to a passport fund that is an index fund or a benchmark fund.

             (2)  If the assets of the passport fund or the underlying assets of the derivatives of the passport fund are constituents of the index then the limitation on the exposure of the fund to the entity, or group of entities, to which the asset or assets relate relative to the value of the assets of the passport fund is instead the lower of:

                     (a)  the percentage of the index that the asset or assets represent as constituents plus 2%; and

                     (b)  25%, or, only for an index fund, 40% if the eligible index relates to an established market or market sector that is widely used by investors including in economies other than the economy to which the market or market sector relates and no other exposure of the passport fund to another entity or group of entities exceeds 25%.

             (3)  Paragraph (2)(b) applies only if the home regulator for the passport fund has given written notice to the operator that in the home regulator’s opinion there are exceptional market circumstances relevant to the fund and that the eligible index relates to an established market or market sector that is widely used by investors including in economies other than the economy to which the market or market sector relates and has not revoked that notice by written notice to the operator.

34  Restrictions on portfolio allocation—financial asset regulated CISs

             (1)  No more than 10% of the value of the assets of a passport fund may be held in:

                     (a)  interests in a single financial asset regulated CIS other than a passport fund or sub‑fund of a financial asset regulated CIS other than a passport fund; or

                     (b)  a derivative where the value is determined by or varied with respect to the price of the interests in a single financial asset regulated CIS other than a passport fund or, if the financial asset regulated CIS other than a passport fund has sub‑funds, a sub‑fund of the financial asset regulated CIS other than a passport fund.

             (2)  No more than 30% of the value of the assets of a passport fund may be held in:

                     (a)  interests in financial asset regulated CISs other than a passport fund and sub‑funds of financial asset regulated CISs other than passport funds; or

                     (b)  derivatives where the value is determined by or varied with respect to the price of the interest in, a financial asset regulated CIS other than a passport fund or, if the financial asset regulated CIS other than a passport fund has sub‑funds, a sub‑fund of a financial asset regulated CIS other than a passport fund.

             (3)  Subsections (1) and (2) do not apply to holdings of interests in a financial asset regulated CIS or sub‑fund of a financial asset regulated CIS that is a regulated CIS in the home economy, if:

                     (a)  the operator of the financial asset regulated CIS is the operator of the passport fund; and

                     (b)  the passport fund would comply with the requirements of sections 19 to 42 if the assets, liabilities, derivatives and securities lending arrangement attributable to the interests held in each financial asset regulated CIS or sub‑fund of a financial asset regulated CIS in which investment is permitted because of this subsection (3), were assets, liabilities, derivatives or securities lending arrangements of the passport fund instead of the financial assets regulated CIS or sub‑fund; and

                     (c)  the financial asset regulated CIS or sub‑fund does not hold more than 10% by value of its assets in a single financial asset regulated CIS or more than 30% by value of its assets in financial asset regulated CISs.

35  Restrictions on portfolio allocation—limit on unquoted transferable securities

                   No more than 10% of the value of the assets of a passport fund may be held in unquoted transferable securities other than interests in financial asset regulated CISs or derivatives where the value is determined by or varied with respect to the price of unquoted transferable securities.

36  Restrictions on portfolio allocation—limit on investments conferring significant management influence

             (1)  A passport fund that is not an index fund or a benchmark fund must not hold a legal or equitable interest in votable transferable securities of an entity accounting for more than 20% of the voting rights in that entity when added to any voting rights held by any of the passport fund’s related parties of which it is aware or has reason to believe are held.

             (2)  A passport fund that is an index fund or a benchmark fund must not hold a legal or equitable interest in votable transferable securities such that the passport fund or its operator, together with its related parties, exert significant influence on the management of the business of the entity in which the votable transferable securities are held.

             (3)  For this section, votable transferable securities of an entity means transferable securities that:

                     (a)  relate to the entity; and

                     (b)  carry voting rights in the entity that may be cast on a resolution at a meeting of members of the entity generally or that are otherwise able to be voted in determining the directors of the entity.

37  Limit on share of transferable securities or money market instruments on issue

             (1)  A passport fund must not hold more than 10% of the non‑voting securities of an entity.

             (2)  A passport fund must not hold more than 10% of the debt securities of an entity.

             (3)  A passport fund must not hold more than 10% of the money market instruments for which an entity is, or may be, liable.

38  Limit on depository receipts over gold

                   No more than 25% of the value of the assets of a passport fund may be held in depository receipts over gold including its derivatives where the value of the derivatives is determined by or modified by reference to the price of depository receipts over gold.

Division 6.4Limits on exposures

39  Derivatives and securities lending arrangements—global exposure limit

             (1)  The global exposure of a passport fund to derivatives, securities referred to in paragraph 23(1)(e), securities permitted under subsection 23(2) under which liability could arise from holding of the securities under the terms of the securities as well as securities lending arrangements must not be more than:

                     (a)  100% of the value of the assets of a passport fund that:

                              (i)  is an index fund; and

                             (ii)  uses derivatives traded on a financial market for the purposes of index replication, where derivatives are used predominantly to reflect the returns on the index; or

                     (b)  20% of the value of the assets of the passport fund otherwise.

             (2)  For this section, the global exposure of a passport fund to derivatives, securities referred to in paragraph 23(1)(e), securities under which liability could arise from holding of the securities under the terms of the securities and securities lending arrangements is the sum of the following amounts:

                     (a)  the sum of the absolute values (calculated according to Appendix B to these rules) of the exposures of each derivative or transferable security referred to in paragraph 23(1)(e) held by the passport fund that is not involved in relevant netting arrangements or relevant hedging arrangements;

                     (b)  the sum of the absolute values (calculated according to Appendix B to these rules) of the net exposures of each derivative entered into by the passport fund that is involved in relevant netting arrangements or relevant hedging arrangements, after taking into account those arrangements;

                     (c)  the fair value of collateral for obligations to the passport fund under derivatives and securities lending arrangements which are reinvested other than in a deposit account that can be withdrawn without prior notice during business hours of the entity taking the deposit;

                     (d)  if the passport fund holds any transferable security or money market instrument that embeds a derivative, the sum of the values of the exposures of the embedded derivatives calculated as if the derivative were held as a separate asset;

                     (e)  for securities under which liability could arise from holding of the securities under the terms of the securities, the amount of the liability under the terms of the security.

40  Netting and hedging arrangements

             (1)  For these rules, a relevant netting arrangement is the netting of positions between:

                     (a)  derivatives with the same underlying assets or index (disregarding any difference in the maturity dates of the derivatives); or

                     (b)  derivatives and the assets to which the derivative relates; or

                     (c)  derivatives and all of the assets that are components of the relevant underlying index to which the derivatives relate that are held by the fund in the proportions that each of those assets are weighted in the index.

             (2)  For the rules, a relevant hedging arrangement is any holding of a derivative that the operator of the passport fund:

                     (a)  reasonably expects will reduce either:

                              (i)  both of the following types of risks:

                                        (A)  the general market risk for a class of assets held by the passport fund;

                                        (B)  specific risks arising from holding assets in that class; or

                             (ii)  the risk of receiving application moneys or having to pay redemption in a currency that differs from that for which the assets of the passport fund are or are likely to be required for the transactions of the passport fund; and

                     (b)  concludes with the sole purpose of offsetting those risks; and

                     (c)  reasonably expects does not provide an offsetting exposure that is greater than 105% of the exposure being offset at the time of entering into the arrangement.

             (3)  For these rules, the net exposure of a relevant netting or hedging arrangement is determined by calculating the net value of the derivatives and assets to which the arrangement applies, using where applicable Appendix B to these rules and the exposures under any holding of the assets to which the arrangement applies.

             (4)  The operator of a passport fund must document the reasons on which any expectations referred to in subsection (2) are based.

41  Securities lending limit

                   No more than 50% of the value of the assets of a passport fund may be held in assets that have been transferred to the passport fund under securities lending arrangements.

42  Derivative—covering exposures

                   If a passport fund enters into a derivative that gives rise, or may give rise, to a future commitment of the passport fund, the passport fund must hold at all times assets that the operator of the passport fund reasonably believes will be available and able to be converted into sufficient assets:

                     (a)  in the case of a derivative that will, or may, be cash‑settled—to enter an offsetting derivative so as to eliminate the exposure or have the counterparty to the derivative agree to terminate it; or

                     (b)  in the case of a derivative that requires, or may require, physical delivery of the underlying asset—to be delivered as required to meet the actual or potential delivery obligation.

Division 6.5Other restrictions

43  Prohibition on provision of loans, guarantees and underwriting

             (1)  A passport fund must not lend money.

             (2)  For subsection (1), a passport fund does not lend money if it holds a deposit as permitted under Division 6.2.

             (3)  A passport fund must not act as guarantor for another person or entity.

             (4)  A passport fund must not underwrite securities by agreeing to acquire securities if they are not acquired by another person under an offer or to ensure a certain amount is raised from an offer.

44  Borrowing

             (1)  A passport fund must not borrow unless all of the following conditions are satisfied:

                     (a)  the total amount of borrowings of the passport fund does not exceed 10% of the value of the passport fund assets at the time of borrowing;

                     (b)  the purpose of the borrowing is:

                              (i)  to enable payment of redemption requests that:

                                        (A)  have been made; or

                                        (B)  are reasonably expected to be made; or

                             (ii)  to enable payment of expenses properly payable by the passport fund other than:

                                        (A)  fees payable from the fund to an operator; or

                                        (B)  fees payable from the fund to the independent oversight entity; or

                                        (C)  expenses associated with making an additional investment; or

                            (iii)  to enable payment of dividends or distributions to members;

                     (c)  there is a material risk that, without the borrowing, the passport fund will be unable to:

                              (i)  meet redemption requests; or

                             (ii)  pay expenses of the kind mentioned in subparagraph (b)(ii);

                     (d)  the borrowing is in the form of a trade credit, loan or overdraft from a financial institution licensed or regulated in the institution’s principal place of business;

                     (e)  the passport fund intends to repay the amount:

                              (i)  in full in less than 31 days; and

                             (ii)  without relying on other borrowings or financed amount;

                      (f)  the operator of the passport fund has documented cash flow projections prepared on reasonable assumptions that show that the amount will be repaid within that period.

             (2) For the purposes of paragraph (1)(a), any amount payable to the passport fund by the lender is not taken to reduce the amount borrowed.

             (3)  A passport fund must not enter into a securities lending arrangement for the purpose of acquiring any collateral provided to the passport fund except to cover an unexpected shortfall of holdings in the collateral that is necessary to meet an obligation to another person.

45  Short‑selling prohibited

             (1)  A passport fund must not sell or be under an obligation to transfer a passport fund asset unless, at the time of the sale:

                     (a)  the passport fund has a presently exercisable and unconditional right to give title to the asset to the buyer (a transferable title); or

                     (b)  the passport fund has an agreement to buy the asset to be sold that:

                              (i)  will enable the passport fund to acquire a transferable title to the asset before it is to be transferred; and

                             (ii)  is conditional only on:

                                        (A)  payment of the consideration; or

                                        (B)  the exercise of an option on the part of the passport fund; or

                                        (C)  receipt of the proper instrument of transfer or receipt of the title documents.

             (2) For subsection (1), a transferable title to an asset, or an agreement to buy an asset that meets the conditions in paragraph (1)(b), may only support one agreement to transfer the asset or equivalent asset including by way of sale or under a securities lending arrangement.

46  Liability of members

                   A passport fund must ensure that no member of the passport fund has a monetary liability to the passport fund or creditor of the passport fund in that person’s capacity as a member of the passport fund.

47  Performance fees

                   A passport fund or its operator must not permit a fee to be paid by the passport fund whether to an operator or a delegate of the operator based on any returns of the passport fund or any increase in the value of any assets of the passport fund relative to a measure, unless:

                     (a)  taking into account the arrangements to manage risk of the passport fund, the basis for the fees charged has not resulted and is not likely to result in:

                              (i)  risks being taken by the operator in relation to the passport fund that are excessive, having regard to information made available to members or persons being offered an interest in the passport fund concerning the passport fund’s investment objectives and strategy and the risks that will apply to achieving it; or

                             (ii)  the passport fund’s investment objectives not being followed, to obtain or increase fees; and

                     (b)  the calculation of the fees is verified by the operator or its auditor as consistent with the agreed basis for the fee before payment and can be verified from that time for at least 5 years by the independent oversight entity or the auditor of the financial statements of the passport fund; and

                     (c)  the independent oversight entity or the entity responsible for the compliance review has during the previous 13 months stated in writing to the operator that it is not aware of any reasons to believe that the fees payable by the passport fund will result in the operator not complying with written policies and procedures for fees of the operator for the passport fund designed to ensure compliance with paragraphs (a) and (b).

Part 7Redemption and valuation for pricing

Division 7.1Redemption

48  Rights to redemptions—exchange traded passport funds

             (1)  This section applies to a passport fund if:

                     (a)  it is an index fund or benchmark fund; and

                     (b)  it is traded on one or more relevant financial markets.

             (2)  The operator must take reasonable steps to ensure that each member of the passport fund is able to sell the member’s interests in the fund on the relevant financial markets at a price that is not materially different from the net asset value per interest of the passport fund.

             (3)  Subject to this Division and any requirements of the economy in which the member is located, a member of the passport fund may request a redemption of the member’s interests under section 50 if trading of the interests has been suspended on all the relevant financial markets for 5 consecutive days on which one or more of the financial markets is open for business (not counting days on which the redemptions of interests in the passport fund are suspended under section 51).

             (4)  Subsection (3) does not apply to a passport fund if it became a regulated CIS before 1 January 2015.

             (5)  For this section, a financial market is relevant to a passport fund if:

                     (a)  it is operated in a participating economy; and

                     (b)  under the operating rules of the financial market, interests in the passport fund are admitted, and remain admitted, to trading status.

49  Rights to redemptions—other passport funds

             (1)  This section applies to a passport fund other than one to which section 48 applies.

             (2)  Subject to any requirements of the economy in which the member is located, a member of the passport fund may at any time request a redemption of the member’s interests under section 50.

             (3)  Subsection (2) does not apply if the operator has suspended redemptions in accordance with section 51.

50  Processing redemption requests

             (1)  When the operator of a passport fund receives a request for redemption under section 48 or 49, the operator must, within the redemption period, process the redemption request and pay the member at a price per interest (the redemption price) that is:

                     (a)  the valuation entity’s estimation of the net asset value per interest of the passport fund, taking into account any redemption fees or transaction costs associated with redemption that have been disclosed to the member before the request; and

                     (b)  calculated using a valuation of the assets of the passport fund that is conducted after the request for redemption is received from the member.

             (2)  The redemption period for requests for redemption must not exceed 15 days after the request is received by the operator, unless the operator has notified any member in writing that it will be a shorter period, in which case the shorter period applies as the maximum, or if there is a suspension permitted under section 51 or redemption is deferred under section 52.

             (3)  If a notification by the operator under subsection (2) is in effect, the operator may not increase the redemption period without reasonable notice to members.

             (4)  In the case of a request under section 48, the operator may not charge a redemption fee that is more than reasonably proportionate to the fee charged to any person who is entitled, under an arrangement with the operator, to redeem interests other than under section 48.

             (5)  The operator must give the member the option of having the redemption price paid out in the currency in which the member paid for its interests in the passport fund, at the exchange rate available to the operator at the time of the redemption, subject to any reasonable costs based on a reasonable estimate of costs for any foreign currency exchange that the operator considers necessary for the purpose.

51  Suspension of redemptions

Operator of a passport fund must suspend or restrict redemptions in certain circumstances

             (1)  The operator of a passport fund must suspend redemptions in the passport fund if it is directed to do so by the home regulator for the passport fund in writing and the direction has not been revoked in writing.

             (2)  The operator of a passport fund must suspend redemptions in the passport fund if the passport fund is in the process of being wound up. This does not prevent an interim or final distribution on a pro rata basis during the winding up of the fund.

             (3)  The operator of a passport fund must suspend redemptions in the passport fund during a period when:

                     (a)  the operator considers that a suspension is in the best interests of members; and

                     (b)  the operator considers that a suspension is fair as between members; and

                     (c)  either:

                              (i)  the operator considers that:

                                        (A)  a proportion of the assets of the passport fund are not able to be reliably valued; and

                                        (B)  that proportion is such that, in the reasonable opinion of the operator, there is a material risk that the redemption price will contain an error; and

                                        (C)  the error in the redemption price is likely to affect the decision of members of the passport fund about whether or not to redeem their interests; or

                             (ii)  the operator reasonably expects that more than 20% of the value of the assets of the passport fund could not be realised at or above the fair value of the assets within the period for satisfying redemption requests; and

                     (d)  the home regulator for the passport fund has not directed the operator in writing not to suspend redemptions or to cease suspension of redemptions.

Other passport funds must not otherwise suspend or restrict redemptions

             (4)  The operator of a passport fund must not suspend redemptions in circumstances other than those set out in subsections (1), (2) and (3).

Note:          Funds to which section 48 applies (exchange traded passport funds) are only required to provide redemptions in the circumstances set out in that section.

52  Deferral of redemptions

             (1)  This section applies in relation to a passport fund if, on a dealing day:

                     (a)  the redemption request is due for redemption; and

                     (b)  any deferred redemption requests under subsections (5) and (6);

together, amount to more than 10% by value of the interests in the passport fund.

             (2)  The operator does not contravene this Part if it limits the interests that will be redeemed on the day to a proportion of the interests in the passport fund (the daily limit) that is at least 10% by value of the interests in accordance with this section.

             (3)  The operator must divide the requests into priority groups based on the days on which they were received, giving higher priority to requests received on earlier days.

             (4)  The operator must process the requests by priority group.

             (5)  If redeeming all the requests in a priority group would take the interests redeemed on that day beyond the daily limit, the operator must:

                     (a)  redeem the same proportion of each request in the priority group; and

                     (b)  treat each request in the priority group as a deferred redemption request for the remainder of the interests requested, to be dealt with on the next dealing day.

             (6)  If the daily limit is filled before a priority group is reached, the operator must treat the whole of each request in that priority group as a deferred redemption request, to be dealt with on the next dealing day.

             (7)  For this section:

dealing day, in relation to a passport fund, means a day on which the members of the fund have a right to redeem their interests in the fund including following a deferral under this section.

Division 7.2Valuation of assets

53  Valuation of passport fund assets

             (1)  For this section, the valuation entity for a passport fund registered in a participating economy is the entity shown in the following table:

 

Item

Home economy for the passport fund

Valuation entity

1

Australia

The operator

2

Japan

The operator

3

Korea

The operator

4

New Zealand

The operator

5

Singapore

The manager of the collective investment scheme authorised by the Monetary Authority of Singapore under the Securities and Futures Act

6

Thailand

The operator

             (2)  When calculating the value of the assets of the passport fund for pricing, the valuation entity must ensure that the valuation is calculated in accordance with this section.

             (3)  The value of an asset of the passport fund is its market value.

             (4)  The value of a derivative that is not regularly traded on a financial market must not be calculated in a way that relies solely on a valuation provided by the counterparty to the derivative.

Part 8Effect of deregistration

  

54  Effect of deregistration

             (1)  A regulated CIS or a sub‑fund of a regulated CIS that has been deregistered as a passport fund must be operated in accordance with these rules until the regulated CIS or sub‑fund does not have any members who:

                     (a) became members:

                              (i) when the deregistered fund was a passport fund; or

                             (ii) on the expectation that the fund would become a passport fund; and

                     (b)  are not:

                              (i) the current operator or any previous operators; or

                             (ii) related parties of the entities mentioned in subparagraph (i).

             (2)  After a regulated CIS or a sub‑fund of a regulated CIS is deregistered as a passport fund neither the regulated CIS or its operator nor any sub‑fund or its operator may charge any fee on withdrawal of a member who satisfies paragraphs (1)(a) and (b).

             (3)  After a regulated CIS or a sub‑fund of a regulated CIS is deregistered as a passport fund neither the regulated CIS or its operator nor any sub‑fund or its operator may issue any interest in, nor accept any money or money’s worth for an issue of an interest in the regulated CIS or sub‑fund of the regulated CIS on the basis the fund is or was a passport fund.

Part 9Dictionary

  

55  Definitions

                   For these rules:

assessed as having an acceptable risk, in relation to a holding of assets and arrangements by a passport fund, means when the operator has performed the following within a period of no more than 1 month before the most recent acquisition of the asset or arrangement and subsequent to any event that gives the operator reason to doubt the previous assessment performed:

                     (a)  assessed the creditworthiness of the issuers, guarantors or counterparties of the assets or arrangements in accordance with written policies and procedures which include having regard to independent sources of information; and

                     (b)  assessed the risk for members of the passport fund of holding the proposed concentration of the assets given the creditworthiness of the issuers, guarantors or counterparties; and

                     (c)  concluded there was no disproportionate risk relative to the risks associated with the passport fund’s investment strategy; and

                     (d)  documented the assessments and the reasons for the conclusion.

assessed central clearing counterparty: see section 27.

benchmark fund means a passport fund that has publicly disclosed that it has an investment strategy of seeking to achieve returns that meet or exceed an eligible index.

business day means a day that banks in the place are generally open for business.

CIS: see collective investment scheme.

collective investment scheme or CIS means a scheme or an arrangement that is intended to have the following features:

                     (a)  at least 2 persons or a person acting on behalf of more than one beneficiary or group of beneficiaries (members) contribute money or money’s worth for the right to the benefits produced by the scheme;

                     (b)  the contributions are pooled to produce financial benefits or an interest in property for the contributors or persons directly or indirectly acquiring their rights from the contributors (members);

                     (c)  not all the members, in their capacities as members take part in day to day management of the scheme;

                     (d)  the pool is managed as a whole for the benefit of the members collectively.

conflict: includes an actual or potential conflict.

constituent document: see section 4.

control: see section 57.

custodian: see section 13.

depository receipt over gold: see section 22.

derivative: see section 25.

eligible index: an index is an eligible index for a passport fund if:

                     (a)  it predominantly relates to financial assets or commodities that are regularly traded; and

                     (b)  it has a clearly defined objective or the market or sector which it aims to represent is clearly defined; and

                     (c)  it represents a reasonable benchmark for a market or market sector for which it is widely used; and

                     (d)  it is made up entirely of constituents that, with the exception of those related to commodity prices are investments that a passport fund would be permitted to hold under these rules; and

                     (e)  it is defined and calculated by a person who is not a related party of the operator of the passport fund unless, where the 2 parties are related parties, there are adequate arrangements in place for managing the specific conflicts of interest that might arise in this situation; and

                      (f)  it has no:

                              (i) constituent; or

                             (ii) for commodity indexes—group of constituents relating to substantially the same commodity;

                            exceeding 25% of the index; and

                     (g)  information about it (including information about the composition of the index and the methodology used to construct and rebalance the index) is readily accessible to the public.

embeds a derivative and embedded derivative: see section 26.

fair value, in relation to an asset or an interest, is the market price of the asset or an interest, or the value that the operator would reasonably expect to receive if it were sold on the current market if it is:

                     (a)  an asset that is not traded on a financial market; or

                     (b)  an asset of a passport fund in relation to which the valuation entity under section 53 is satisfied that the market price is either unavailable or does not reasonably represent the value of the asset.

financial asset CIS means a CIS that predominantly holds assets that a passport fund is permitted to hold under Division 6.2 and may not be reasonably regarded as predominantly a vehicle for investment in:

                     (a)  physical assets, other than depository receipts over gold; or

                     (b)  derivatives where the value is determined by or varied with respect to the price of physical assets, other than gold.

financial asset regulated CIS means a financial asset CIS:

                     (a)  whose members are generally able to redeem their interests from the scheme or arrangement or sell their interests on a financial market for a price that is not materially different from the net asset value per interest; and

                     (b)  that is either:

                              (i)  a regulated CIS; or

                             (ii)  a CIS that in the opinion of the home regulator for the passport fund holding an interest in the CIS, notified in writing to the operator of the fund by the home regulator, is subject to regulation that is broadly similar in effectiveness to that applying to a regulated CIS in the home economy for the passport fund having regard to the IOSCO Principles relating to collective investments.

financial market means a facility through which offers to acquire or dispose of assets in which a passport fund may invest under section 19 are regularly made or accepted that is regulated in an IOSCO jurisdiction.

independent oversight entity: see section 14.

index fund means a passport fund that has publicly disclosed that it has an investment strategy of seeking to achieve returns that track an eligible index excluding on a leverage or an inverse basis.

interest means the right to a benefit produced by a CIS.

IOSCO means the International Organization of Securities Commissions.

IOSCO assessment methodology means the IOSCO Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation published in September 2011, as revised from time to time.

IOSCO financial services related business means an entity that carries on business in a financial, capital markets or financial services industry and is regulated in an IOSCO jurisdiction or an entity that provides legal, accounting or compliance services related to that kind of business or consultation services relating to, and addressing particular issues arising in, the operation of CIS.

IOSCO jurisdiction means a jurisdiction in which the securities regulator is an ordinary or associate member of IOSCO.

IOSCO Principles means the Objectives and Principles of Securities Regulation published by IOSCO, as revised from time to time.

jurisdiction includes any administrative region that has a securities regulator that is a member of IOSCO.

laws of a host economy for a passport fund means the laws of that host economy, to the extent that the laws are administered by the host regulator for the fund for that host economy.

Note:          Laws include regulations and other regulatory requirements.

laws of the home economy for a passport fund means the laws of the home economy for the fund, to the extent that the laws are administered by the home regulator for the fund.

Note:          Laws include regulations and other regulatory requirements.

market price, in relation to an asset or an interest, is the prevailing price at which it was last transacted or bid for on the financial market on which it was last traded at the time of valuation and if traded simultaneously the financial market determined by the valuation entity under section 53.

member of a CIS means a person who holds an interest in the CIS.

money market instrument: see section 24.

net asset value per interest of a passport fund means the market value of the assets of the passport fund, calculated in accordance with Division 7.2 less any liabilities, other than liabilities to members as members, divided by the number of interests in the passport fund and if there is more than one class of interest in a passport fund on the basis of the assets, liabilities and interests attributable to the class.

officer of an entity includes a director and a Chief Executive Officer of the entity, or their equivalents.

operator of a regulated CIS: see section 56.

Passport Regulator, for a participating economy, has the meaning shown in the following table and includes an entity that is a successor to the regulatory functions of a Passport Regulator:

 

Item

Participating economy

Passport Regulator

1

Australia

Australian Securities and Investments Commission

2

Japan

Financial Services Agency

3

Korea

Financial Supervisory Service and Financial Services Commission

4

New Zealand

Financial Markets Authority

5

Singapore

Monetary Authority of Singapore

6

Thailand

Securities and Exchange Commission

regulated CIS: see section 56.

related party: see section 57.

relevant hedging arrangements: see section 40.

relevant netting arrangements: see section 40.

risk‑assessed government securities: see section 30.

securities lending arrangement: see section 28.

sub‑fund: a CIS is a sub‑fund if:

                     (a)  the CIS forms part of a regulated CIS that also includes another CIS; and

                     (b)  the assets of the CIS cannot be lawfully applied under:

                              (i)  if the CIS is a passport fund—any laws of the home economy for that passport fund; or

                             (ii)  if a passport fund holds an interest in the CIS—any laws of the home economy for the passport fund holding the interest (whether or not the CIS is also a passport fund);

                            except in meeting liabilities or otherwise for the CIS or the entitlements of members in the CIS.

transferable security: see section 23.

unquoted transferable security means a transferable security that the operator does not reasonably believe on any business day in the place in which it is acquired by the passport fund, can be reliably valued and sold for that value and includes any transferable security that:

                     (a)  is not traded on a financial market; and

                     (b)  is not approved for trading on a financial market.

USD means the lawful currency of the United States of America.

value of the assets of a passport fund means the market value of the assets of the passport fund, including derivatives and securities lending arrangements, after deducting any liabilities of the passport fund other than liabilities to members as members.

56  Meaning of regulated CIS and operator

                   For these rules:

                     (a)  a regulated CIS in a participating economy listed in the table below is a scheme that:

                              (i)  was established in the participating economy; and

                             (ii)  has the legal character specified in the table below; and

                     (b)  its operator is the entity shown in the table.

 

Item

Home economy for the passport fund

Legal character of CIS

Operator

1

Australia

A CIS registered under the Corporations Act 2001

The person licensed to operate the CIS under the Corporations Act 2001

2

Japan

A scheme under the Act on Investment Trusts and Investment Corporations

The operator under the Act on Investment Trusts and Investment Corporations

3

Korea

A CIS under the Financial Investment Business and Capital Markets Act of Korea

The collective investment business entity of the CIS

4

New Zealand

A managed investment scheme registered under the Financial Markets Conduct Act 2013 of New Zealand

The manager of the managed investment scheme licensed under the Financial Markets Conduct Act 2013

5

Singapore

A CIS authorised under the Securities and Futures Act of Singapore

The manager of the authorised scheme

6

Thailand

A CIS under the Securities and Exchange Act B.E. 2535 (1992)

The securities company licensed to manage the mutual fund under the Securities and Exchange Act B.E. 2535 (1992)

Note:          The operator will be a body corporate.

57  Meaning of control and related party

             (1) For these rules, an entity controls a second entity if the first entity holds a majority of the voting shares of the second entity or the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

             (2)  In determining whether the first entity has this capacity:

                     (a)  the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

                     (b)  any practice or pattern of behaviour affecting the second entity’s financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

             (3)  The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity’s financial and operating policies, unless the first entity controls the third entity or vice versa or there is an entity that controls both the first entity and the third entity.

             (4)  If the first entity is under a legal obligation to exercise a shareholding or use a capacity for the benefit of someone other than the first entity’s members, it shall be disregarded in determining if there is control.

             (5)  For these rules, each of the following is a related party of an entity (the first entity):

                     (a)  a director of the first entity;

                     (b)  an entity which has a director in common with the first entity;

                     (c)  an entity (the controlling entity) that controls the first entity, whether directly or by intermediate entities that it controls;

                     (d)  a director of the controlling entity;

                     (e)  the persons that comprise the controlling entity, if the controlling entity is not a corporation;

                      (f)  other entities controlled by any of the above;

                     (g)  a relative of any of the persons listed in paragraph (a), (d) or (e);

                     (h)  an entity or person that is reasonably likely to become covered by one or more of paragraphs (a) to (g);

                      (i) an entity or person that was a related party in the past 6 months under one or more of paragraphs (a) to (h).


Appendix A

   

             (1)  For these rules, the maximum potential loss of a derivative or securities lending arrangement is the sum of:

                     (a)  the current replacement cost at market value; and

                     (b)  for derivatives—the greater of the notional principal amount or the market value of the underlying multiplied by the percentage in the table below subject to subsection (3); and

                     (c)  the fair value of any collateral that has been transferred to the counterparty to a derivative or securities lending arrangement but not including where the collateral is held by the passport fund and an encumbrance over it is provided to the counterparty to secure the obligations of the passport fund to the counterparty under the derivative or securities lending arrangement.

             (2)  The market value of the underlying is:

                     (a)  if the underlying is an asset—the market value of the asset; or

                     (b)  if the underlying is an interest rate or rate of inflation on which an interest rate is based—the notional value of the principal to which that rate is applied; or

                     (c)  if the underlying is an index—the market value of the assets represented in the index.

 

Item

Residual Term

Interest rate contracts

Currency Exchange rate contracts

Equity derivative contracts

Total return swaps and Credit default swaps

Other contracts

1

1 year or less

0%

1%

6%

10%

10%

2

> 1 year and < 5 years

0.5%

5%

8%

10%

12%

3

> 5 years

1.5%

7.5%

10%

10%

15%

             (3)  In the case of credit default swaps where the passport fund is entitled to payments unaffected by a credit event of the person liable under the underlying, the relevant percentage is 0% unless the credit default swap contract incorporates a provision on closeout upon insolvency of the counterparty in which case the amount to be added for the purposes of paragraph (1)(b) is 10% of any unpaid amount that may become payable to the passport fund at the time of the calculation that is not covered by collateral at fair value.

Appendix B

   

             (1)  The value of a derivative is:

                     (a)  if the derivative is listed in the table below—as specified in the table; and

                     (b)  if the derivative is not listed in the table below or if a value specified in the table does not give a reasonable relative estimation of the market risk—the value which in the reasonable opinion of the operator has appropriate relativity to the values of other derivatives calculated in accordance with paragraph (a) above, taking into account the market value of the equivalent position in the underlying asset.

Example:    A value calculated in accordance with the table may not give a reasonable relative estimation of the risks for certain binary options or whether the notional contract value is determined in an un‑assumed manner.

             (2)  The operator may demonstrate compliance with a requirement of the Passport Rules, for the home economy or any host economy for the passport fund, affected by a value of a derivative by using instead of the value under subsection (1) above, a value for a derivative calculated by reference to the notional value of the derivative where the amount is higher.

             (3)  If the value of a derivative is calculated in accordance with paragraph (1)(b), the operator must:

                     (a)  document why the value is appropriate; and

                     (b)  keep a copy of that documentation for 5 years after the derivative has been terminated.

 

Types of derivatives

Commitment value

Plain vanilla options (including bought/sold puts and calls)

Bond option

Notional contract value x market value of underlying reference bond x delta

Currency option

Notional contract value of foreign currency leg(s) x delta

Equity option

Notional contract size x market value of underlying equity share if the contract size is determined by the number of underlying shares x delta

Index option

Notional contract value x index level x delta

or

Point value x index level x delta, if appropriate

Interest rate option

Notional contract value x delta

Warrant and Rights

Number of shares/bonds x market value of underlying referenced instrument x delta

Futures

Bond future

Notional contract size x market price of the cheapest‑to‑deliver reference bond

Currency future

Number of contracts x notional contract size

Equity future

Notional contract size x market price of underlying equity transferable security

Index future

Notional contract size x index level

Interest rate future

Number of contracts x notional contract size

Commodity future

Notional contract size x market price of underlying commodity

Swaps

Contract for differences

Number of shares/bonds x market value of underlying referenced instrument

Credit default swap

Protection buyer: market value of the underlying reference asset

Protection seller: the higher of the market value of the underlying reference asset or the notional value of the credit default swap

Currency swap

Notional value of foreign currency leg(s)

Interest rate swap

Market value of underlying (the notional value of the fixed leg may also be applied)

Total return swap

Market value of underlying reference asset(s)

Forwards

Forward rate agreement

Notional value

FX forward

Notional value of foreign currency leg(s)

             (4)  For this Appendix, delta means the proportionate amount that the operator reasonably believes the value of the derivative to the passport fund would fall if there was a marginal adverse change in the amount of the underlying for that derivative.

             (5)  For this Appendix all values are to be calculated in the currency of the home economy for the passport fund by applying the exchange rate reasonably determined by the operator.