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

Board Notices

Determination on the requirements for hedge funds

Part 3 : Retail Hedge Fund

12. Derivatives

 

(1) When a manager includes derivatives in a portfolio, the manager must—
(a) ensure that the exposure does not exceed the net asset value of that portfolio, provided that when a transferable security or money market instrument contains an embedded derivative, the exposure created by that derivative must be taken into account when exposure is calculated;
(b) be satisfied that an over-the counter derivative can be valued with reasonable accuracy and on a reliable and consistent basis;
(c) ensure that the derivative can be sold, liquidated or closed out by an offsetting transaction, at market value at any time, at the manager's initiative;
(d) ensure that the fund administrator has the ability to value the derivatives instruments independently, where applicable;
(e) ensure that the underlying assets of the derivative are taken into consideration in determining the resulting exposure;
(f) not permit the position exposure to the underlying assets of derivatives (including embedded derivatives in transferable securities, money market instruments or investment funds) when combined with positions resulting from direct investments, to exceed the investment limits or counterparty limits;
(g) ensure that the derivative does not result in the delivery of a security that is not permitted under this Notice.

 

(2) A manager must ensure that the portfolio—
(a) is at all times capable of meeting its payment and delivery obligations for cash settled derivatives by holding assets in liquid form which are sufficient to cover the obligations; and
(b) establishes and maintains risk management processes which monitor derivative positions so that they are adequately covered in accordance with these requirements.