(1) A retail hedge fund may—
(a) post collateral to its counterparties; or
(b) receive collateral:
(i) to manage its counterparty exposure;
(ii) where counterparty limits have been breached.
| (2) | A manager must ensure that collateral arrangements satisfy the following rules and principles— |
| (a) | Legal Agreements: Collateral arrangements must be governed by appropriate global master collateral agreements. |
| (b) | Liquidity: Collateral must be sufficiently liquid to ensure that it can be converted to cash within seven days in a default event at a price that is close to its pre-sale valuation. |
| (c) | Valuations: Collateral must be capable of being valued on a daily basis and must be marked-to-market daily taking into account any haircuts on non-cash collateral, where applicable. |
| (d) | Issuer credit quality: Creditworthiness of the issuer of the collateral must be taken into account and relevant haircuts must be applied to take into account issuer default risk. |
| (e) | Legal rights: A manager must ensure that the collateral obligation is legally enforceable and that the collateral will be available to a portfolio without recourse to a counterparty, in the event of a default by the counterparty. |
| (f) | Concentration risks: A manager must take into account the concentration risks to a single issuer in a portfolio. |
| (g) | Relatedness: A manager may not accept securities issued by the counterparty as collateral. |
| (h) | Cash collateral: A manager must appropriately manage the reinvestment risk of cash collateral. |
