Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002)

DESCRIPTION

RETAIL HEDGE FUNDS

Permitted securities

The following are permitted as interest rate securities or interest rate trades:

Exposure limits

(1)

A manager may include the following interest rate securities whether listed on an exchange or not, in a portfolio in the following manner;

(a)

any money market instrument and repurchase transaction, provided that the market value of such interest rate securities does not exceed the percentage/s, specified in Table 3 below, with netting of issuer/borrower/counterparty risk applied:

(b)

bonds, debentures, debenture stock and debenture bonds, notes, whether or not they have inherent option rights or are convertible, provided that the applicable market value or exposure of such interest rate securities does not exceed the percentage/s, specified in Table 3 below, with netting of issuer/borrower/counterparty risk;

(c)

credit derivatives, provided that the market value of such interest rate securities does not exceed the percentage/s on a look-through basis, specified in Table 3 below, with netting of issuer/borrower/counterparty risk.

(2)

Interest rate derivatives may be used, provided that the portfolio exposure or value-at-risk complies with the limits set out in this Notice.

(3)

Market risk: A manager may select one of the exposure limits specified in Table 3 below. A portfolio has to stipulate upfront in the investment policy which approach it will employ to measure exposure.

(4)

The calculation of commitment must be based on an exact conversion of the financial derivative position into the market value of an equivalent position in the underlying asset of that derivative.

(5)

The commitment calculation of each financial derivative position should be converted to the base currency of the hedge fund using the ruling spot exchange rate.

(6)

Where any currency has two legs that are not in the base currency of the portfolio, both legs must be taken into account in the commitment calculation.

(7)

(a)

OTC counterparty exposure in the case of derivatives that involves collateral movements requires an ISDA agreement & CSA.

(b)

Counterparty exposure on interest rate derivatives is measured as the present value of the derivative (e.g. on, but not limited to, interest rate swaps, forward rate agreements, swaptions, caps and floors).

(8)

Netting to be applied under the commitment approach. The following steps must be taken by a manager when calculating total exposure using the commitment approach:

(a)

Calculate the commitment of each individual derivative (as well as any embedded derivatives and leverage linked to efficient portfolio management (EPM) techniques).

(b)

Identify netting and hedging arrangements. For each netting or hedging arrangement, calculate a net commitment as follows :

(i)

commitment is equal to the sum of the commitments of the individual financial derivative instruments (including embedded derivatives) after derivative netting;

(ii)

if the netting or hedging arrangement involves security positions, the market value of security positions can be used to offset commitment;

(iii)

the value of the resulting calculation is equal to net commitment.

(c)

Total exposure is then equal to the sum of:

(i)

the value of the commitment of each individual derivative not involved in netting or hedging arrangements; and

(ii)

the value of each net commitment after the netting or hedging arrangements as described above.