UCITS liquid financial assets

From Commission Directive 2007/16/EC Fair Value comes from Article 19(1)(g) of Directive 85/611/EEC

Article 8

Articles 1(2) and 19(1)(g) of Directive 85/611/EEC
Liquid financial assets with respect to financial derivative instruments
1. The reference in Article 1(2) of Directive 85/611/EEC to liquid financial assets shall be understood, with respect to financial derivative instruments, as a reference to financial derivative instruments which fulfil the following criteria:

(a) their underlyings consist in one or more of the following:

(i) assets as listed in Article 19(1) of Directive 85/611/EEC including financial instruments having one or several characteristics of those assets;

(ii) interest rates;

(iii) foreign exchange rates or currencies;

(iv) financial indices;

(b) in the case of OTC derivatives, they comply with the conditions set out in the second and third indents of Article 19(1)(g) of Directive 85/611/EEC.

2. Financial derivative instruments as referred to in Article 19(1)(g) of Directive 85/611/EEC shall be taken to include instruments which fulfil the following criteria:

(a) they allow the transfer of the credit risk of an asset as referred to in point (a) of paragraph 1 of this Article independently from the other risks associated with that asset;

(b) they do not result in the delivery or in the transfer, including in the form of cash, of assets other than those referred to in Article 19(1) and (2) of Directive 85/611/EEC;

(c) they comply with the criteria for OTC-derivatives laid down in the second and third indents of Article 19(1)(g) of Directive 85/611/EEC and in paragraphs 3 and 4 of this Article;

(d) their risks are adequately captured by the risk management process of the UCITS, and by its internal control mechanisms in the case of risks of asymmetry of information between the UCITS and the counterparty to the credit derivative resulting from potential access of the counterparty to non-public information on firms the assets of which are used as underlyings by credit derivatives.

3. For the purposes of the third indent of Article 19(1)(g) of Directive 85/611/EEC, the reference to fair value shall be understood as a reference to the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
4. For the purposes of the third indent of Article 19(1)(g) of Directive 85/611/EEC, the reference to reliable and verifiable valuation shall be understood as a reference to a valuation, by the UCITS, corresponding to the fair value as referred to in paragraph 3 of this Article, which does not rely only on market quotations by the counterparty and which fulfils the following criteria:

(a) the basis for the valuation is either a reliable up-to-date market value of the instrument, or, if such a value is not available, a pricing model using an adequate recognised methodology;

(b) verification of the valuation is carried out by one of the following:

(i) an appropriate third party which is independent from the counterparty of the OTC-derivative, at an adequate frequency and in such a way that the UCITS is able to check it;

(ii) a unit within the UCITS which is independent from the department in charge of managing the assets and which is adequately equipped for such purpose.

5. The reference in Articles 1(2) and 19(1)(g) of Directive 85/611/EEC to liquid financial assets shall be understood as excluding derivatives on commodities.