Difference between revisions of "Financial derivative instrument"

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What is an eligible derivative for a UCITS to invest in. This little nugget cleared up a whale of confusion, fear and loathing that had existed in UCITS III about whether a derivative needed to be actually terminable, or whether the UCITS needed only to be able to offset its risk to the derivative position somehow. This makes it clear the trade must be terminable at any time.
 
What is an eligible derivative for a UCITS to invest in. This little nugget cleared up a whale of confusion, fear and loathing that had existed in UCITS III about whether a derivative needed to be actually terminable, or whether the UCITS needed only to be able to offset its risk to the derivative position somehow. This makes it clear the trade must be terminable at any time.
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===What is a [[financial derivative instrument]] exactly===
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To our best read, a swap or a forward or a future of some kind, [[OTC]] or [[exchange traded]], but in any case under the [[MiFID]] aegis, and not [[SFTR]]. So, not a  [[stock loan]] or a [[repo]], though don’t expect that to stop mendacious UCITS managers trying to tell you they have to be able to call their term stock loans and repos at par on any day. (it’s like, ''no, you don’t'', and ''if you did, that wouldn't be a term transaction would it, Bozo, so what do you actually think you’re trying to achieve?''
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Support for this view?
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*The [https://www.handbook.fca.org.uk/handbook/BIPRU/13/3.html definition of financial derivative instrument in BIPRU] (see BIPRU {{bipruprov|13.3.3}}).
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*The fact that BIPRU specifies a totally different exposure treatment for [[Financial derivative instrument - UCITS IV Provision|financial derivative instruments]] (BIPRU {{bipruprov|13.3}} than it does for [[Securities financing transaction|securities financing transactions]] (BIPRU {{bipruprov|13.8}})
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*The fact that financial derivartives are regulated by [[MiFID]] and not [[SFTR]], and [[Securities financing transaction|securities financing transactions]] are regulated by [[SFTR]] and not [[MiFID]]
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*If they’d wanted to include [[securities financing transaction]]s, ''they could have''. They're never short of a verbal diarrhorea, so why go all coy now?

Latest revision as of 12:41, 31 July 2020

UCITS Anatomy


Article financial derivative instrument, UCITS IV (view template)

(g) financial derivative instruments, including equivalent cash-settled instruments, dealt in on a regulated market referred to in points (a), (b) and (c) or financial derivative instruments dealt in over-the-counter (OTC) derivatives, provided that:
(i) the underlying of the derivative consists of instruments covered by this paragraph, financial indices, interest rates, foreign exchange rates or currencies, in which the UCITS may invest according to its investment objectives as stated in its fund rules or instruments of incorporation;
(ii) the counterparties to OTC derivative transactions are institutions subject to prudential supervision, and belonging to the categories approved by the competent authorities of the UCITS home Member State; and
(iii) the OTC derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time at their fair value at the UCITS’ initiative; or

Resources: UCITS IV (2009/65/EC (EUR Lex)) | UCITS V (2014/91/EU (EUR Lex)) | ESMA Guidance on UCITS | Depositary comparison under AIFMD and UCITS
Navigation - UCITS IV: 50(1)(g) Financial derivative instruments
Navigation - UCITS V: 22(2) Written contract with depositary | 22(3) (subscriptions, redemptions, valuation by depositary) | 22(4) (cash monitoring | 22(5) (safekeeping by depositary) | 22(7) (no reuse of assets by depositary) | 22a (delegation of depositary functions)

What is an eligible derivative for a UCITS to invest in. This little nugget cleared up a whale of confusion, fear and loathing that had existed in UCITS III about whether a derivative needed to be actually terminable, or whether the UCITS needed only to be able to offset its risk to the derivative position somehow. This makes it clear the trade must be terminable at any time.

What is a financial derivative instrument exactly

To our best read, a swap or a forward or a future of some kind, OTC or exchange traded, but in any case under the MiFID aegis, and not SFTR. So, not a stock loan or a repo, though don’t expect that to stop mendacious UCITS managers trying to tell you they have to be able to call their term stock loans and repos at par on any day. (it’s like, no, you don’t, and if you did, that wouldn't be a term transaction would it, Bozo, so what do you actually think you’re trying to achieve?

Support for this view?