The Central Bank has issued a new Guidance Note 2/11 in relation to the appointment of a prime broker to Irish regulated funds and related matters.
The guidance note entitled “Professional collective investment schemes: Appointment of prime brokers and related issues” details the circumstances under which a professional collective investment scheme (“CIS”) may enter into arrangements with a prime broker or counterparty. It gives examples of the types of arrangements that may be entered into such as clearing and custody facilities.
A professional investor fund (“PIF”) and qualifying investor fund (“QIF”) may deliver assets of the CIS (by way of title transfer or security interest) to a prime broker under certain circumstances.
In the case of a PIF, cash delivered to the prime broker which is not protected by client money rules or other similar arrangements may not exceed 140% of the level of the PIF’s indebtedness to the prime broker.
In the case of a QIF, there is no limitation on the extent of the assets available to the prime broker but these must be disclosed in the QIF’s prospectus.
Collateral arrangements with OTC counterparties may be entered into but the counterparty must have a minimum credit rating of A-2 or equivalent.
The fund must also ensure that the trustee monitors compliance with GN 2/11 on an ongoing basis.
Arrangements with prime brokers or other counterparties must be disclosed in the prospectus and the agreement with the prime broker must be submitted to the Central Bank.
Amendments to existing Position
It can be noted that Guidance Note 2/11 replaces and implements the draft Guidance Note regarding the appointment of prime brokers to Irish authorised funds initially released by the Central Bank in 2004 and which was reflective of the approval of the Central Bank since then until now.
While the guidance note as implemented largely reflects the earlier draft, a number of amendments have been included.
For example under Section 3 of the 2004 draft, one of the conditions whereby a PIF or QIF may enter into arrangements with other counterparties is if the counterparty has a minimum credit rating of A2/P2. The finalised Guidance Note provides that counterparties will also qualify if they are “deemed by the CIS to have an implied rating of A-2 or equivalent.”
Section 4 of the finalised Guidance Note notes that compliance should be monitored by the trustee on an on-going basis.
Where a prime broker is appointed by a PIF or QIF or in the case of a QIF with an OTC counterparty risk exposure in excess of 40% of net assets, a number of new obligations are placed on the trustee. These include receiving daily reports from the prime broker or counterparty on assets held by the prime broker outside the custody network and valuations for those positions. Further, these must be reconciled with its own records.
The trustee is also required to confirm that on each valuation point it will reconcile assets on a valuation basis. Where the period between valuation points exceeds two weeks, the valuations received from the prime broker or counterparty must be independently verified.
The trustee is further required to request confirmation from the prime broker or counterparty that it does not hold assets other than in accordance with the requirements of the Guidance Note and the provisions of the sub-custody agreement.
The Central Bank issued a Guide to these changes in July entitled “Amendments to the UCITS Notices, Non-UCITS Notices and related Guidance Note to reflect UCITS IV and other Changes.”