Advanced Search

Investment Business (Alternative Investment Fund Managers) Rules 2016

Subscribe to a Global-Regulation Premium Membership Today!

Key Benefits:

Subscribe Now for only USD$40 per month.
Investment Business (Alternative Investment Fund Managers) Rules 2016
FA E R
N

AT F
TQUO U

BERMUDA

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT
FUND MANAGERS) RULES 2016

BR 53 / 2016

TABLE OF CONTENTS

Citation
Interpretation

Application for licence

Application for licence by an AIFM: information to be provided
Prerequisite for licensing

Capital and liquidity requirements

Minimum capital
Total capital
Liquidity
Breach of minimum capital and liquidity requirements
Professional liability risks

Organisational requirements

General organisational requirements

Operating conditions

General operating conditions
Remuneration
Conflicts of interest
Risk management
Liquidity management
Investment in securitisation positions

Independent valuation

Valuation

1
2

3
4

5
6
7
8
9

10

11
12
13
14
15
16

17

1

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Appointment of valuers
Qualifications of a valuer
Duties of a valuer
Valuation: liability of AIFM

Delegation of AIFM’s functions

Delegation: general provisions
Appointment of a delegate
Sub-delegation
Liability following delegation

Depositaries

Depositaries: general provisions and appointment
Depositaries: conflicts of interest
Duties of a depositary: cash flow monitoring
Safekeeping of assets: financial instruments
Safekeeping of assets: other assets
Depositaries: general compliance
Depositary: delegation of functions
Depositary liability for loss of financial instrument
Depositary liability for other losses
Liability and overseas depositaries

Transparency requirements

Annual report
Disclosure to investors
Prescribed information

Supervisory reporting

Reporting obligations to the Authority and to other competent authorities
AIFMs managing leveraged AIFs
Limits on leverage

Obligations for AIFMs managing AIFs

which acquire control of non-listed companies or issuers

Ways of acquiring control of shares
Notification of acquisition or disposal of major holdings and control of non-listed company
Disclosure in case of acquisition of control
Additional disclosure when control is acquired of non-listed company
Annual report of AIFs exercising control of non-listed companies
Asset stripping
Notification of marketing
Calculation of leverage
Calculating assets under management
Commencement

18
19
20
21

22
23
24
25

26
27
28
29
30
31
32
33
34
35

36
37
38

39
40
41

42
43
44
45
46
47
48
49
50
51

2

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

SCHEDULE I
Quantitative Reporting Requirements of AIFMs

SCHEDULE II
Obligations of Depositaries

SCHEDULE III
Calculation of Leverage

The Bermuda Monetary Authority, in exercise of the power conferred by section
19H of the Investment Business Act 2003, makes the following Rules:

Citation
These Rules may be cited as the Investment Business (Alternative Investment Fund

Managers) Rules 2016.

Interpretation
In these Rules—

“the Act” means the Investment Business Act 2003;

“authorised” means the permission granted to an entity to carry on an activity
under the oversight of a competent authority responsible for the regulation and
supervision of the activities to be carried on by the entity, and includes
“licensed”, “registered” or any other similar term;

“Authority” means the Bermuda Monetary Authority established by the Bermuda
Monetary Authority Act 1969;

“carried interest” means a share in the profits of the AIF accrued to the AIFM as
compensation for the management of the AIF, and excludes any share in the
profits of the AIF accrued to the AIFM as a return on any investment by the
AIFM in the AIF;

“close links” means a situation in which two or more persons are—

linked by participating interest in a company as defined by section 6 of the
Act;

linked by control, namely the relationship between a parent undertaking
and a subsidiary, as defined by section 5 of the Act;

linked to the same person by a control relationship;

“competent authority” means the regulatory authority of an overseas jurisdiction
that is empowered by law to supervise AIFMs, AIFs or depositaries;

1

2 (1)

(a)

(b)

(c)

3

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

“constitution” means the formation documents of an AIF including, but not limited
to, the memorandum and articles of association, bye-laws, trust deed, or
partnership agreements;

“depositary” means a person appointed in accordance with paragraph 26;

“employees’ representatives” means the employees' representatives of an
undertaking as provided under the Trade Union Act 1965, or under the laws
and practices of an overseas jurisdiction where the undertaking has its
registered office;

“established” means, for AIFs which are not authorised, the jurisdiction where the
AIF has its head office;

“EU” means the European Union of 28 member states;

“external valuer” means a person who performs the valuation function, described
in these Rules, in respect of an AIF managed by an AIFM and who is not the
AIFM of that AIF;

“feeder AIF” means an AIF which—

invests at least 85% of its assets in units or shares of another AIF (a master
AIF);

invests at least 85% of its assets in more than one master AIF where those
master AIFs have identical investment strategies; or

otherwise has an exposure of at least 85% of its assets to such a master
AIF;

“financial instrument” means an investment as prescribed by Part 1 of the First
Schedule to the Act, or such similar instrument as prescribed by the law of the
jurisdiction where the AIF is authorised or established;

“governing body” means, in relation to—

a company, the board of directors;

a partnership, the general partner;

a trust, the trustee; or

any other entity, such persons performing functions corresponding to
those persons respectively referred to in paragraphs (a), (b) and (c) by
whatever name called;

“IFA” means the Investment Funds Act 2006;

“issuer” means an undertaking governed by private or public law, including a state,
whose securities are admitted to trading on a regulated market;

(a)

(b)

(c)

(a)

(b)

(c)

(d)

4

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

“leverage” means any method by which the AIFM increases the exposure of an AIF
it manages, whether through borrowing of cash or securities, or leverage
embedded in derivative positions, or by any other means;

“master AIF” means an AIF in which another AIF (a feeder AIF) invests or has an
exposure in accordance with the definition of feeder AIF;

“material change” for the purposes of paragraphs 36 and 37, means a change
which, if known, would reasonably affect the mind of a prudent participant in
deciding whether to participate or to continue to participate in the AIF;

“minimum capital” means the regulatory capital requirement as prescribed under
paragraph 5, which AIFMs will have to fulfil as part of their initial licensing
process to meet the minimum licensing criteria under the Act;

“non-listed company” means an undertaking, the shares of which are not admitted
to trading on a regulated market;

“prime broker” has the meaning given in section 2 of the IFA;

“prospectus” has the meaning given to “fund prospectus” under section 2 of the
IFA, and where the AIF is not subject to the IFA, the document required under
the law of the jurisdiction where the AIF is authorised or established by
whatever name;

“regulated market” means an investment exchange or clearing house recognised
by the Authority under section 71 of the Act, or such other investment
exchange or clearing house regulated by an overseas regulator recognised by
the Authority;

“share” has the meaning given in section 2 of the Companies Act 1981;

“special arrangement” means an arrangement that arises as a direct consequence
of the illiquid nature of the assets of an AIF which impacts the specific
redemption rights of investors in a type of unit or share of the AIF and which
is a bespoke or separate arrangement from the general redemption rights of
investors;

“units” has the meaning given in section 2 of the IFA.

For the purposes of these Rules, “control” in relation to acquisition and
reporting requirements means—

for a non-listed company, holding more than 50% of the voting rights of
the non-listed company; and

for an issuer, the percentage of voting rights and the method of its
calculation, determined in accordance with the law where the issuer is
listed pertaining to the takeover of a corporate body.

(2)

(a)

(b)

5

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

When calculating the percentage of voting rights for the purposes of
subparagraph (2), if subparagraph (2)(b) does not apply, in addition to the voting rights
held directly by the AIF, the voting rights of the following shall be taken into account,
subject to control being established—

an undertaking controlled by the AIF; and

a person acting in their own name but on behalf of the AIF, or on behalf
of an undertaking controlled by the AIF,

and the percentage of voting rights shall be calculated on the basis of issued shares to
which voting rights are attached, even if the exercise of those rights is suspended.

Application for licence

Application for licence by an AIFM: information to be provided
In relation to an application under section 16 of the Act to which section 19E of the

Act applies, an applicant must provide the following information with the application—

identities of the AIFM’s shareholders or members, whether direct or
indirect, that are shareholder controllers and the amounts of those
shareholdings, accompanied by an explanation as to how this is suitable
taking into account the need to ensure the sound and prudent
management of the AIFM;

confirmation as to whether the applicant is an external or internal AIFM;

a description of the programme of activity of the AIFM together with an
explanation of how the AIFM intends to comply with its obligations under
the Act and these Rules;

a description of the investment activities to be carried on, including
discretionary portfolio management for persons other than an AIF for
which it is an external AIFM;

copies of the applicant’s remuneration policies and practices;

the address of the head office and the registered office of the AIFM;

where the AIFM intends to market funds in an overseas jurisdiction, the
name and address of any representative in that jurisdiction as applicable;

in relation to each AIF that it manages-–

fund specific information as directed by the Authority;

a description of the investment strategies and, in relation to a fund of
funds, information on the types of underlying funds;

(3)

(a)

(b)

3

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(ii)

6

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the policy regarding use of leverage, risk profiles and other
characteristics of the AIFs it manages or intends to manage;

identification of the jurisdiction where the AIF is authorised or
established, or expected to be authorised or established;

in the case of a feeder AIF, identification of the jurisdiction where the
master AIF is authorised;

a copy of the constitution and prospectus of each AIF that it proposes
to manage and, if applicable, any additional information disclosed to
investors;

appointment of a depositary for each AIF it manages and the
identification of the depositary;

confirmation that the AIFM has fulfilled, and how it is able to maintain, the
minimum capital and liquidity requirements;

confirmation regarding the arrangements made for the independent
valuation of assets and the calculation of the net asset value per unit or
share of the AIF, in accordance with paragraph 17, including identification
of the person performing the independent valuation function;

details of the applicant’s arrangements on delegation and sub-delegation
in accordance with these Rules, including identification of any delegates or
sub-delegates;

details regarding the leverage and risk limits adopted by the AIFM in
relation to each AIF it manages, in accordance with paragraphs 14 and 40.

Prerequisite for licensing
The Authority must be satisfied that the AIFM has the capacity to perform at least

the services of risk management and portfolio management.

Capital and liquidity requirements

Minimum capital
An internal AIFM must have a minimum amount of capital that is the equivalent

of EUR 300,000.

An external AIFM must have a minimum amount of capital that is the equivalent
of EUR 125,000.

(iii)

(iv)

(v)

(vi)

(vii)

(i)

(j)

(k)

(l)

4

5 (1)

(2)

7

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Total capital
Where the total value of the portfolios of AIFs managed by the AIFM exceeds

the equivalent of EUR 250 million, the AIFM must provide an additional amount of capital
that is equal to 0.02% of the amount in excess of the equivalent of EUR 250 million.

The total amount of capital is not required to exceed the equivalent of EUR 10
million.

For the purpose of calculating the total value mentioned in subparagraph
(1)—

the total value of the portfolios of the following AIFs must be included—

AIFs managed by the AIFM;

AIFs for which the AIFM has delegated functions;

the total value of portfolios of AIFs that the AIFM is managing under
delegation shall not be included.

The Authority may, on the application of an AIFM, exempt the AIFM from
complying with the requirements of subparagraph (1) and direct that the AIFM may be
permitted to not provide up to 50% of the additional capital if there is in force in relation
to the AIFM a guarantee of the same amount given by a bank, or an insurance undertaking
which is subject to supervision by the Authority, or is authorised by a competent authority
of a member state of the EU.

Without prejudice to the provisions outlined in subparagraphs (1) to (4), the
Authority may increase the total capital amount where the Authority is of the view that the
total amount of capital does not reasonably reflect the current position of the AIFM.

Liquidity
An AIFM shall maintain a minimum level of liquidity at all times equivalent to

three months of an AIFM’s annual expenditure.

Annual expenditure shall be based on the latest annual financial statements of
an AIFM and comprises total revenue less profit before appropriations.

Assets may be held to meet all or a portion of the minimum liquidity
requirement provided that the assets are maintained in a form that is able to be converted
to cash within a reasonable period of time by the AIFM.

Breach of minimum capital and liquidity requirements
An AIFM shall notify the Authority in writing within 14 days if it anticipates being

in breach of the minimum capital and liquidity requirements set out in paragraphs 5 to 7.

The notification shall contain the steps that the AIFM is taking or has taken to
remedy the breach.

6 (1)

(2)

(3)

(a)

(i)

(ii)

(b)

(4)

(5)

7 (1)

(2)

(3)

8 (1)

(2)

8

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Within 28 days of the date of the notification, the Authority may direct the AIFM
to submit information regarding minimum capital and liquidity to demonstrate compliance
with the requirements of these Rules.

Professional liability risks
To address professional liability risks resulting from regulated activities carried out

by an AIFM, an AIFM shall either—

hold additional capital which is appropriate to cover potential liability risks
arising from professional negligence; or

obtain professional indemnity insurance to cover liability risks arising from
professional negligence.

Organisational requirements

General organisational requirements
An AIFM shall at all times use adequate and appropriate human and technical

resources necessary for the proper management of the AIFs which it manages.

The AIFM must in particular adopt—

sound administrative and accounting procedures;

control and safeguard arrangements for electronic data processing;

adequate internal control mechanisms including, in particular—

policies and procedures for personal transactions by its employees;

policies and procedures for the holding or management of investments
in order to invest on its own account;

ensuring, at least, that each transaction involving the AIFs may be
reconstructed according to its origin, the parties to it, its nature, and
the time and place it was effected;

ensuring that the assets of the AIFs managed by the AIFM are invested
in accordance with the law of the jurisdiction where the AIF is
authorised, registered, or established and the constitution and
prospectus of the AIF.

Operating conditions

General operating conditions
An AIFM shall at all times comply with the following principles—

(3)

9

(a)

(b)

10 (1)

(2)

(a)

(b)

(c)

(i)

(ii)

(iii)

(iv)

11 (1)

9

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

act honestly and fairly with due skill, care and diligence when conducting
its activities;

act in the best interests of the AIFs, or the investors of the AIFs it manages;

have and employ the resources and procedures that are necessary for the
performance of its business activities;

take all reasonable steps to avoid conflicts of interest and where this
cannot be avoided, ensure that those conflicts of interest are disclosed in
order to prevent them from adversely affecting the interests of the AIFs
and their investors;

comply with all regulatory requirements applicable to the conduct of its
business activities so as to promote the best interests of the AIFs, or the
investors of the AIFs, and the integrity of the market;

ensure that the AIFs and their investors are treated fairly;

except where disclosed in the AIF’s constitution and prospectus, ensure
that no investor in an AIF should receive preferential treatment.

Where an AIFM undertakes to carry on portfolio management on a
discretionary basis which was not approved as one of the conditions of licensing by the
Authority, it must notify the Authority as a material change under section 19G of the Act.

An AIFM whose licence permits it to perform portfolio management services
on a discretionary basis must not invest all or part of the client’s portfolio in units of any
AIF that it manages—

without having first obtained the client’s approval to do so; and

without giving the Authority notice, of at least 14 days, of its intention to
do so.

Remuneration
Every AIFM shall establish and maintain remuneration policies and practices

for persons whose professional activities have a material impact on the risk profile of the
AIFM.

Remuneration policies are required to—

be consistent with the risk management policy of the AIFM;

promote sound and effective risk management;

not encourage risk-taking which is inconsistent with the risk profiles or
constitutions of the AIFs it manages.

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(2)

(3)

(a)

(b)

12 (1)

(2)

(a)

(b)

(c)

10

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

In this paragraph, “persons whose professional activities have a material
impact on the risk profile of the AIFM” include, but are not limited to, chief executive
officers, senior executives or any employee carrying out a risk related activity and whose
remuneration puts them in the same bracket as senior executives.

Conflicts of interest
An AIFM shall establish and maintain policies and procedures relating to

identifying, preventing, managing and monitoring conflicts of interest in accordance with
subparagraph (2).

An AIFM shall, in the course of managing AIFs, identify—

conflicts of interest that may arise between—

itself and its controllers, directors, senior executives or associates; and

the AIF or any of its investors;

conflicts of interest that may arise between—

the AIF or its investors; and

another AIF or its investors;

conflicts of interest that may arise between—

the AIF or its investors; and

another client of the AIFM; or

conflicts of interest that may arise between two clients of the AIFM.

An AIFM shall segregate, within its own operating environment, tasks and
responsibilities which may be regarded as incompatible with each other or which may
potentially generate systematic conflicts of interest.

An AIFM shall regularly assess whether its operating conditions may involve
any other material conflicts of interest and disclose them to the investors of the AIFs.

Where an AIFM no longer has confidence that it is operating in accordance with
its conflicts of interest policies and procedures, the AIFM must disclose the general nature
or sources of conflicts of interest to the Authority, the AIF and its investors, before
undertaking business on behalf of the AIF.

Where the AIFM on behalf of an AIF engages the services of a prime broker,
the terms must be set out in writing.

Where an engagement for services under subparagraph (6) has been entered
into, the AIFM must inform the depositary of an AIF of such engagement.

(3)

13 (1)

(2)

(a)

(i)

(ii)

(b)

(i)

(ii)

(c)

(i)

(ii)

(d)

(3)

(4)

(5)

(6)

(7)

11

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

An AIFM must exercise due skill, care and diligence in the selection of prime
brokers.

Any provisions on transfer and re-use of AIF assets must be set out in the terms
of such engagement and must be consistent with the AIF’s constitution and prospectus.

Risk management
An AIFM must functionally and hierarchically separate the functions of risk

management from its operating units, including from the functions of portfolio
management.

An AIFM must ensure that specific safeguards against conflicts of interest allow
for the independent performance of risk management activities and that the risk
management process satisfies the requirements of this paragraph.

An AIFM must implement adequate risk management systems, policies and
procedures in order to identify, measure, manage and monitor on an ongoing basis all risks
relevant to each AIF investment strategy and to which each AIF is or may be exposed.

An AIFM must review its risk management systems at least once a year and
adapt them when necessary.

An AIFM must set a maximum level of leverage which it may employ on behalf
each AIF it manages and the extent of the right to re-use collateral or guarantee that could
be granted under the leveraging arrangement, taking into account—

the investment strategy of the AIF;

the sources of leverage of the AIF;

any other interlinkage or relationships with other financial services
institutions, which could pose systemic risk;

the need to limit the exposure to any single counterparty;

the extent to which the leverage is collateralised;

the asset-liability ratio; and

the scale, nature and extent of the activity of the AIFM on the markets
concerned.

Where an AIFM determines that it is no longer operating within the maximum
leverage limits disclosed to the Authority at the time of licensing, it shall notify the Authority
as a material change under section 19G of the Act.

An AIFM must establish and maintain qualitative or quantitative risk limits, or
both, for each AIF it manages, taking into account all relevant risks.

(8)

(9)

14 (1)

(2)

(3)

(4)

(5)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(6)

(7)

12

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

The qualitative and quantitative risk limits for each AIF must, at least, cover
the following risks—

market risks;

credit risks;

liquidity risks;

counterparty risks;

operational risks.

Where an AIFM determines that it is no longer operating within its risk limits
disclosed to the Authority at the time of licensing or subsequently, it shall notify the
Authority as a material change under section 19G of the Act.

An AIFM must—

when investing on behalf of an AIF, establish and maintain a documented
and regularly updated due diligence process, according to the investment
strategy, the objectives and risk profile of the AIF;

ensure that the risks associated with each investment position of the AIF
and their overall effect on the AIF’s portfolio can be identified, measured,
managed and monitored on an ongoing basis, including through the use
of appropriate stress testing procedures;

ensure that the risk profile of the AIF corresponds to the size, portfolio
structure, investment strategies, and objectives of the AIF as required
under its constitution and prospectus;

ensure that the risk profile of the AIF is disclosed to investors and is
consistent with the risk limits set out in this paragraph;

monitor compliance by the AIF with the risk limits set out in this paragraph.

An AIFM shall implement procedures relating to notification to the governing
body of the AIFM when the AIF’s risk profile is, or shall be, inconsistent with required risk
limits.

An AIFM’s procedures must make provision for periodic updates to be provided
to the AIFM’s governing body regarding the following matters—

the consistency between, and compliance with, the risk limits and the risk
profile as disclosed to investors of the AIFs; and

the adequacy and effectiveness of the risk management process, indicating
in particular, whether appropriate remedial measures have been or will be
taken in the event of any actual or anticipated deficiencies.

(8)

(a)

(b)

(c)

(d)

(e)

(9)

(10)

(a)

(b)

(c)

(d)

(e)

(11)

(12)

(a)

(b)

13

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

The procedures required in accordance with subparagraph (12) shall also make
provision for regular updates to be given to senior executives which outline the current level
of risk incurred by each managed AIF and any actual or foreseeable breaches of risk limits.

When setting risk limits, an AIFM shall take into account the strategies and
assets employed in respect of each AIF it manages as well as the law of the jurisdiction
where the AIF is authorised or established; and the risk limits must also be aligned with the
risk profile of the AIF, approved by the AIF’s governing body and disclosed to its investors.

Liquidity management
An AIFM shall, for each AIF that it manages which is not an unleveraged closed-

ended AIF, employ an appropriate liquidity management system and adopt procedures
which enable it to monitor the liquidity risk of the AIF and ensure that the liquidity profile
of the investments of the AIF complies with its underlying obligations.

An AIFM shall regularly conduct stress tests, under normal and exceptional
liquidity conditions, which enable it to assess and monitor the liquidity risk of the AIFs it
manages.

An AIFM shall ensure that for each AIF it manages the investment strategy,
the liquidity profile, and the redemption policy are consistent with one another.

Investment in securitisation positions
In this paragraph—

“credit institution” means—

a bank licensed under the Banks and Deposit Companies Act 1999;

an entity authorised by a member state of the EU to carry out banking
functions;

“securitisation” means a transaction or scheme whereby the credit risk
associated with an exposure or pool of exposures is tranched, having the
following characteristics—

payments in the transaction or scheme are dependent upon the
performance of the exposure or pool of exposures; and

the subordination of tranches determines the distribution of losses
during the ongoing life of the transaction or scheme;

“securitisation position” means an exposure to a securitisation;

“sponsor” means a credit institution other than an originator credit
institution that establishes and manages an asset-backed commercial
paper programme or other securitisation scheme that purchases exposures
from third party entities;

(13)

(14)

15 (1)

(2)

(3)

16 (1)

(a)

(i)

(ii)

(b)

(i)

(ii)

(c)

(d)

14

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

“tranche” means a contractually authorised segment of the credit risk
associated with an exposure or number of exposures, where a position in
the segment entails a risk of credit loss greater than or less than a position
of the same amount in each other such segment, without taking account
of credit protection provided by third parties directly to the holders of
positions in the segment or in other segments.

An AIFM must assume exposure to the credit risk of a securitisation on behalf
of one or more AIFs it manages only if the originator, sponsor or original lender has explicitly
disclosed to the AIFM that it retains, on an ongoing basis, a material net economic interest,
which must not be less than 5%.

Only the following shall qualify as retention of a material net economic interest
of not less than 5%—

retention of no less than 5% of the nominal value of each of the tranches
sold or transferred to the investors of the AIF;

in the case of securitisations of revolving exposures, retention of the
originator’s interest of no less than 5% of the nominal value of the
securitised exposures;

retention of randomly selected exposures, equivalent to not less than 5%
of the nominal value of the securitised exposures, where such exposures
would otherwise have been securitised in the securitisation, provided that
the number of potentially securitised exposures is not less than 100 at
origination;

retention of the first loss tranche and, if necessary, other tranches having
the same or a more severe risk profile than those transferred or sold to
investors of the AIF and not maturing any earlier than those transferred or
sold to investors of the AIF, so that the retention equals in total not less
than 5% of the nominal value of the securitised exposures;

retention of a first loss exposure of not less than 5% of every securitised
exposure in the securitisation.

Net economic interest must be measured at the origination and must be
maintained on an ongoing basis.

The net economic interest, including retained positions, interest or exposures,
must not be subject to any credit risk mitigation or any short positions or any other hedge
and shall not be sold.

The net economic interest must be determined by the notional value for off-
balance sheet items.

(e)

(2)

(3)

(a)

(b)

(c)

(d)

(e)

(4)

(5)

(6)

15

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

There must be no multiple applications of the retention requirements for any
given securitisation.

Independent valuation

Valuation
An AIFM must, for each AIF that it manages, ensure that policies and

procedures appropriate to the nature, scale and complexity of the business are adopted
and implemented so that a proper and independent valuation of the assets of the AIF can
be performed in accordance with these Rules, the constitution and prospectus of the AIF,
and the law of the jurisdiction where the AIF is authorised or established.

An AIFM shall ensure that the valuation shall be performed impartially and with
all due skill, care and diligence.

An AIFM must ensure that the net asset value per unit or share of an AIF is
calculated and disclosed to the investors of such AIF in accordance with these Rules, the
constitution and prospectus of the AIF, and the law of the jurisdiction where the AIF is
authorised or established.

The AIFM must ensure that the assets are valued and the net asset value per
unit is calculated at least once every year.

If the AIF is open ended, the AIFM must ensure that such valuations and
calculations are carried out at a frequency which is appropriate to the assets held by the
AIF and its issuance and redemption frequency.

If an AIF is closed-ended, an AIFM must carry out such valuations and
calculations in the event of an increase or decrease of the capital by the relevant AIF.

An AIFM must inform investors of the AIF of the valuation and calculation as
set out in these Rules, the constitution and prospectus of the AIF, and the law of the
jurisdiction where the AIF is authorised or established.

Appointment of valuers
An AIFM must ensure that the valuation function is performed by—

an external valuer, who must be a person independent of the AIF, the AIFM
and any other persons with close links to the AIF or the AIFM; or

the AIFM itself, provided that the valuation task is functionally independent
from the portfolio management, and the remuneration policy and other
measures ensure that conflicts of interest are mitigated and that undue
influence upon the employees is prevented.

An AIFM must ensure that the depositary of an AIF is not appointed as the
external valuer of that AIF unless it is satisfied that the depositary has functionally and

(7)

17 (1)

(2)

(3)

(4)

(5)

(6)

(7)

18 (1)

(a)

(b)

(2)

16

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

hierarchically separated the performance of its depositary function from its tasks as an
external valuer, and that it is able to manage the potential conflicts of interest, and monitor
and disclose them to the investors of the AIF.

Where a valuation is to be performed by an external valuer and this
arrangement was not approved by the Authority at the time of licensing, the AIFM shall
notify the Authority as a material change under section 19G of the Act.

Where the valuation function is not performed by an external valuer, the
Authority may require the AIFM to have its valuation procedures or valuations, or both,
verified by an external valuer or, where appropriate, an auditor.

Qualifications of a valuer
Where an external valuer performs the valuation function, the AIFM must ensure

and demonstrate that—

the external valuer is subject to mandatory registration under the law or
to rules of professional conduct;

the external valuer can provide sufficient professional guarantees to be
able to effectively perform the relevant valuation function in accordance
with these Rules;

the appointment of the external valuer complies with the requirements of
paragraphs 22 to 25 on delegation.

Duties of a valuer
An external valuer must perform the valuation function set out in these Rules

impartially and with all due skill, care and diligence.

An external valuer must not delegate the valuation function to a third party.

Valuation: liability of AIFM
An AIFM is responsible for the proper valuation of AIF assets, the calculation

of the net asset value of the AIF, and publication of that net asset value.

Any such liability towards the AIF and its investors shall not be affected by the
appointment by the AIFM of an external valuer in respect of that AIF.

Irrespective of any contractual arrangement that provides otherwise, an
external valuer is liable to the AIFM of an AIF in respect of which the valuer is appointed
for any losses suffered by the AIFM as a result of the external valuer’s negligence or
intentional failure to perform its tasks.

(3)

(4)

19

(a)

(b)

(c)

20 (1)

(2)

21 (1)

(2)

(3)

17

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Delegation of AIFM’s functions

Delegation: general provisions
An AIFM may delegate its functions to third parties if—

the AIFM is able to justify its entire delegation structure on objective
reasons;

the delegate has sufficient resources to perform the delegated functions;

the persons who effectively conduct the business of the delegate are fit
and proper, are of good repute and are sufficiently experienced to perform
the functions delegated to them;

the delegation must not prevent the effectiveness of supervision of the
AIFM and, in particular, must not prevent the AIFM from acting, or the AIF
from being managed, in the best interests of its investors.

The AIFM must be able to demonstrate to the Authority that—

the delegate is qualified and capable of undertaking the functions in
question;

the delegate was selected for appointment with all due care;

the AIFM is in a position to effectively monitor the delegated activity;

the AIFM is able at any time to give the delegate further instructions;

the AIFM is able at any time to revoke the delegation with immediate effect
when this is in the best interests of investors.

The AIFM must review the services provided by each delegate on an ongoing
basis.

An AIFM must not delegate, and a delegate must not sub-delegate, portfolio
management or risk management functions to—

a depositary or sub-delegate;

any other undertaking whose interests may conflict with those of the AIFM
or the investors of the AIF,

unless such undertaking has functionally and hierarchically separated its portfolio
management or risk management functions from its other potentially conflicting functions,
and the potential conflicts of interest are properly identified, managed, monitored and
disclosed to the investors of the AIF.

An AIFM must not delegate its functions to the extent that it becomes a post
office box entity and can no longer be considered to be the manager of the AIF.

22 (1)

(a)

(b)

(c)

(d)

(2)

(a)

(b)

(c)

(d)

(e)

(3)

(4)

(a)

(b)

(5)

18

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

For the purposes of subparagraph (1), delegation shall be deemed to prevent
the effective supervision of the AIFM where—

the AIFM, its auditors and the Authority do not have effective access to
data related to the delegated functions and to the business premises of
the delegate, or the Authority is not able to exercise those rights of access;

the delegate does not cooperate with the Authority of the AIFM in
connection with the delegated functions;

the AIFM does not make available on request to the Authority all
information necessary to enable the Authority to supervise the compliance
of the performance of the delegated functions with the requirements of
the Rules.

Appointment of a delegate
An AIFM shall not delegate its portfolio management or risk management

functions without the approval of the Authority.

Notwithstanding subparagraph (1), the Authority may allow an AIFM to
delegate either its portfolio management or risk management functions upon approval, but
not both.

Where an AIFM delegates the task of carrying out its portfolio management or
risk management functions and such delegation was not approved by the Authority at the
time of licensing or thereafter, the AIFM is required to notify the Authority as a material
change under section 19G of the Act.

Sub-delegation
A delegate may sub-delegate any of the functions delegated to it provided the

conditions in subparagraph (2) are met.

Those conditions referred to in subparagraph (1) are—

the delegate has received consent from the AIFM prior to the sub-
delegation;

the AIFM has notified the Authority in writing before the arrangements
have become effective;

in relation to the conditions set out in paragraph 22, on the understanding
that all references to the ‘delegate’ include references to a further ‘sub-
delegate’.

A delegate or sub-delegate which has delegated such functions must review
on an ongoing basis the services and functions provided by the delegate or sub-delegate.

(6)

(a)

(b)

(c)

23 (1)

(2)

(3)

24 (1)

(2)

(a)

(b)

(c)

(3)

19

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Liability following delegation
Irrespective of any contractual arrangements that provide otherwise, any liability

of an AIFM towards the AIF it manages or towards investors of such an AIF is not affected
by—

the delegation by the AIFM of any of the AIFM functions;

any sub-delegation of such functions by the delegate to another person;
or

any further sub-delegation of such functions by a sub-delegate.

Depositaries

Depositaries: general provisions and appointment
An AIFM shall ensure that a single depositary is appointed for each AIF that it

manages.

Undertakings eligible to be appointed as a depositary are—

a bank licensed under the Banks and Deposit Companies Act 1999; or

an undertaking authorised by a competent authority of a member state of
the EU to carry out the functions of a depositary.

Every depositary shall be engaged by written contract which specifies the
obligations required for the depositary to perform its functions for the AIF.

An AIFM shall notify the Authority in writing of any change to the appointment
of a depository as a material change under section 19G of the Act.

Liability to the investors of the AIF may be invoked directly or indirectly through
the AIFM, depending on the legal nature of the relationship between the depositary, the
AIFM and the investors.

An AIFM shall provide the depositary, upon commencement of its duties and
on an ongoing basis, with all relevant information it needs in order to comply with its
obligations pursuant to paragraph 31, including information to be provided to the depositary
by third parties.

Schedule II applies in respect of the appointment of a depositary under this
paragraph.

Depositaries: conflicts of interest
An AIFM shall not act as the depositary of any AIF that it manages.

A depositary shall act honestly, fairly, professionally, independently and in the
best interest of the AIF and its investors.

25

(a)

(b)

(c)

26 (1)

(2)

(a)

(b)

(3)

(4)

(5)

(6)

(7)

27 (1)

(2)

20

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

A depositary shall not carry out activities with regard to the AIF or the AIFM
on behalf of the AIF that may create conflicts of interest between the AIF, the investors in
the AIF, the AIFM and itself, unless the depositary has functionally and hierarchically
separated the performance of its depositary functions from its other potentially conflicting
tasks.

A depositary shall ensure that potential conflicts of interest are properly
identified, managed, monitored and disclosed to the investors of the AIF.

A depositary shall not re-use assets of the AIF, or of the AIFM acting on behalf
of the AIF, that have been entrusted to it for safe-keeping without the prior consent of the
AIF or the AIFM acting on its behalf.

An AIFM shall not appoint a prime broker, who is acting as counterparty to an
AIF, to be its depositary unless it is satisfied that the prime broker—

has functionally and hierarchically separated its depositary function from
its prime broker function;

is able to properly identify, manage, and monitor conflicts of interest; and

will disclose such conflicts of interest to investors of the AIF.

Duties of a depositary: cash flow monitoring
A depositary shall properly monitor an AIF’s cash flows and must ensure that

all payments made by or on behalf of investors of such AIF upon subscription of units or
shares of an AIF have been received.

A depositary shall ensure that all cash of the AIF is booked in cash accounts
opened in the name of—

the AIF;

the AIFM acting on behalf of the AIF; or

the depositary acting on behalf of the AIF.

Where a depositary opens a cash account in its own name, acting on behalf of
the AIF, it must not book on such an account the depositary’s own cash.

Schedule II applies in respect of the obligations of a depositary under this
paragraph.

Safekeeping of assets: financial instruments
The assets of the AIF, or the AIFM acting on behalf of the AIF, that comprise

financial instruments that can be held in custody, must be entrusted to the depositary for
safe-keeping as provided in subparagraphs (2) and (3).

(3)

(4)

(5)

(6)

(a)

(b)

(c)

28 (1)

(2)

(a)

(b)

(c)

(3)

(4)

29 (1)

21

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

The depositary must hold in custody all financial instruments that can be
registered in a financial instruments account opened in the depositary’s books and all
financial instruments that can be physically delivered to the depositary.

For that purpose, the depositary must ensure that all those financial
instruments that can be registered in a financial instruments account opened in the
depositary’s books are registered in the depositary’s books within segregated accounts
opened in the name of the AIF, or the AIFM acting on behalf of the AIF, so that they can
at all times be clearly identified as belonging to the AIF in accordance with the law which
applies to the depositary in the jurisdiction where it is authorised.

Schedule II applies in respect of the obligations of a depositary under this
paragraph.

Safekeeping of assets: other assets
A depositary shall verify that the other assets it holds on behalf of an AIF, or

the AIFM acting on behalf of an AIF, are owned by the AIF or the AIFM acting on behalf of
the AIF.

A depositary shall maintain a record of all assets that it has verified.

A depositary shall verify ownership on the basis of information and documents
provided to it by the AIF, or the AIFM acting on behalf of the AIF, or other evidence of
ownership available to it.

A depositary shall keep its records up to date.

Schedule II applies in respect of the obligations of a depositary under this
paragraph.

Depositaries: general compliance
A depositary of an AIF, or an AIFM acting on behalf of an AIF, shall ensure

that—

the following requirements are fulfilled in accordance with these Rules, the
constitution, the prospectus of the AIF, and the law of the jurisdiction
where the AIF is authorised or established—

the sale, issue, re-purchase, redemption and cancellation of units or
shares of the AIF are carried out;

the values of the units or shares of the AIF are calculated;

the instructions of the AIFM are carried out, unless there is a conflict
with these Rules, the constitution, the prospectus, or the law of the
jurisdiction where the AIF is authorised or established;

(2)

(3)

(4)

30 (1)

(2)

(3)

(4)

(5)

31 (1)

(a)

(i)

(ii)

(iii)

22

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

in transactions involving the AIF’s assets, any consideration is remitted to
the AIF without delay;

an AIF’s income is applied in accordance with these Rules, the constitution,
the prospectus, and the law of the jurisdiction where the AIF is authorised
or established.

Schedule II applies in respect of the obligations of a depositary under this
paragraph.

Depositary: delegation of functions
A depositary shall not delegate its functions, with the exception of those

relating to safe-keeping of assets.

If a depositary delegates any of the activities outlined in paragraphs 29 and 30
of these Rules, the following conditions shall apply—

the depositary shall not delegate any functions to an undertaking if the
purpose of the delegation is to enable it to avoid compliance with its
obligations under these Rules;

there are objective reasons for the delegation;

the depositary has exercised all due skill, care and diligence in the selection
and appointment of the delegate, and continues to exercise all due skill,
care and diligence in the periodic review and ongoing monitoring of any
delegate to whom it has delegated parts of its tasks, and of the
arrangements of the delegate in respect of the matters delegated to it; and

the depositary ensures that the delegate, at all times during the
performance of the delegated tasks, satisfies the conditions of
subparagraph (3).

The conditions referred to in subparagraph (2)(d) are—

the delegate has the structure and the expertise that are adequate and
proportionate to the nature and complexity of the assets of the AIF, or of
the AIFM acting on behalf of the AIF, which have been entrusted to it;

in relation to custody tasks referred to in paragraphs 29 and 30, the
delegate is subject to effective prudential regulation, including minimum
capital requirements, and supervision in the jurisdiction concerned, and
the delegate is subject to an external periodic audit to ensure that the
financial instruments are in its possession;

the delegate segregates the assets of the depository’s clients from its own
assets and from the assets of the depositary in such a way that they can,

(b)

(c)

(2)

32 (1)

(2)

(a)

(b)

(c)

(d)

(3)

(a)

(b)

(c)

23

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

at all times, be clearly identified as belonging to clients of a particular
depositary;

the delegate does not make use of the assets without the prior consent of
the AIF, or the AIFM acting on behalf of the AIF, and prior notification to
the depositary; and

the delegate complies with the general obligations and prohibitions set out
in paragraphs 27, 29, 30 and 31.

A delegate to whom functions have been delegated under this paragraph may
sub-delegate any or all of the delegated functions to a sub-delegate and, in such a case,
the requirements of this paragraph apply mutatis mutandis to the sub-delegate.

Where the law of the jurisdiction where the AIF is authorised or established
requires that assets be held in the custody of a local entity and no local entity satisfies the
requirements of subparagraph (3)(c), the depositary may delegate the custody of such
financial instruments to such a local entity only to the extent required by the law of that
jurisdiction and only for as long as there are no local parties that satisfy the delegation
requirement but subject to the requirements specified in subparagraph (6).

The requirements referred to in subparagraph (5) are—

the investors of the relevant AIF must be duly informed that such
delegation is required owing to legal constraints under the law of the
jurisdiction where the relevant AIF is authorised or established, and of the
circumstances justifying its delegation prior to their investment; and

the AIF, or AIFM on behalf of the AIF, must instruct the depositary to
delegate the custody of such financial instruments to such local entity.

Schedule II applies in respect of the obligations of a depositary under this
paragraph.

Depositary liability for loss of financial instrument
This paragraph applies where a financial instrument, held in custody in

accordance with these Rules by a depositary, delegate, or sub-delegate, is lost.

Subject to subparagraphs (3) and (4), where a financial instrument has been
lost, the depositary must return a financial instrument of identical type or the corresponding
amount to the AIF, or the AIFM acting on behalf of the AIF, without undue delay.

The depositary is not required to comply with the obligations in subparagraph
(2) if it can prove that the loss occurred owing to an external event beyond the depositary’s
reasonable control.

In the case of the loss of a financial instrument held in custody by a delegate,
the depositary is not required to comply with the obligation in subparagraph (2) if—

(d)

(e)

(4)

(5)

(6)

(a)

(b)

(7)

33 (1)

(2)

(3)

(4)

24

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the conditions around delegation of custody were met in accordance with
these Rules;

a written contract between a depositary and the delegate expressly
transfers the liability of the depositary to that third party and makes it
possible for the AIF, or the AIFM acting on behalf of the AIF, to make a
claim against the delegate in respect of the loss of financial instruments or
for the depositary to make such a claim on their behalf; and

a written contract between the depositary and the AIF, or the AIFM acting
on behalf of the AIF, expressly discharges the depositary of their liability
and establishes an objective reason for such discharge.

Irrespective of any contractual arrangements that provide otherwise, the
obligation of the depositary under subparagraph (2) or any liability of the depositary under
subparagraph (4)(b) is not affected by any delegation or sub-delegation under these Rules.

Schedule II applies in respect of the obligations of a depositary under this
paragraph.

Depositary liability for other losses
If an AIF, or investors of an AIF, have suffered losses other than the loss

referred to in paragraph 33, the depositary is liable to the AIF, or investors of the AIF, if
the losses are a result of the depositary’s negligent or intentional failure to comply with a
provision that applies to it.

Irrespective of any contractual arrangements that provide otherwise, any
liability of the depositary to the AIF, or to investors of the AIF, under subparagraph (1) is
not affected by any delegation by the depositary of its functions.

Schedule II applies in respect of the liabilities of a depositary as set out under
this paragraph.

Liability and overseas depositaries
This paragraph applies where—

the law of the jurisdiction where the AIF is authorised or established
requires certain financial instruments to be in held custody by a local entity;
and

there is no local entity that satisfies the delegation requirements in these
Rules.

The depositary is not liable for a failure to comply with the obligation under
paragraph 33(2), provided that the following conditions are met—

(a)

(b)

(c)

(5)

(6)

34 (1)

(2)

(3)

35 (1)

(a)

(b)

(2)

25

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the constitutional instruments of the AIF concerned expressly allow for a
discharge of the obligation;

the investors of the AIF were informed of the discharge and of the
circumstances justifying it prior to their investment;

the AIF, or the AIFM on behalf of the AIF, instructed the depositary to
delegate the custody of the financial instruments to a local entity;

a written contract between the depositary and the AIF, or the AIFM acting
on behalf of the AIF, expressly allows for such a discharge; and

a written contract between the depositary and the local entity expressly
transfers the depositary’s liability to the third party making it possible for
the AIF, or the AIFM acting on behalf of the AIF, to make a claim against
the local entity with regards to loss of financial instruments or the
depositary to make such a claim on their behalf.

Transparency requirements

Annual report
An AIFM shall, in such form that the Authority may require, for each AIF that

it manages and markets, prepare an annual report (the “annual report”) for each financial
year which shall be submitted to the Authority no later than 6 months following the end of
the relevant financial year of the AIF.

The annual report shall, where applicable, be submitted to the competent
authority of the jurisdiction where the AIF is authorised or established.

The annual report shall be provided to investors of the relevant AIF upon
request made to the AIFM.

The AIFM shall ensure that the information provided in the annual report is
presented in a form that provides materially relevant, reliable, comparable and clear
information relating to each AIF.

The annual report must contain all information investors require in relation to
AIF structures managed by the AIFM.

In addition to the information required in subparagraph (5), the annual report
shall comprise—

a balance-sheet or a statement of assets and liabilities;

an income and expenditure account for the financial year;

a report on the activities of the financial year;

(a)

(b)

(c)

(d)

(e)

36 (1)

(2)

(3)

(4)

(5)

(6)

(a)

(b)

(c)

26

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

written confirmation of any material changes in the information required
to be disclosed to investors of the AIF by these Rules during the financial
year covered by the report;

written confirmation of the total amount of remuneration for the financial
year, divided into fixed and variable remuneration, paid by the AIFM to its
staff, and number of beneficiaries, and, where relevant, carried interest
paid by the AIF;

a description of the aggregate amount of remuneration broken down by
senior management and members of staff of the AIFM whose actions have
a material impact on the risk profile of the AIF.

The accounting information provided in the annual report must be prepared in
accordance with the accounting standards set out in subparagraph (8) in the case of a
Bermuda authorised or established AIF, or prepared in accordance with the requirements
of the jurisdiction where the AIF is authorised or established.

The standards referred to in subparagraph (7) are—

Intentional Financial Reporting Standards (“IFRS”);

generally accepted accounting principles (“GAAP”) that apply in Bermuda,
Canada, the United Kingdom or the United States of America; or

such other GAAP as the Authority may recognise.

The accounting information provided in the annual report is required to be
audited by one or more persons authorised in accordance with the law of the jurisdiction
where the AIF is authorised or established.

Every person authorised to provide accounting information in accordance with
subparagraph (9) shall also provide a written report (the “auditor’s report”) to the AIFM
prior to the submission of the annual report by the AIFM to the Authority.

The auditor’s report required in accordance with subparagraph (10), which
shall include any qualifications made by the auditor, must be reproduced in full in the annual
report.

Disclosure to investors
An AIFM shall, for each of the AIFs that it manages and markets, make available

to the AIF investors the information prescribed in paragraph 38.

The information should be disclosed in accordance with the constitution and
prospectus of the AIF and at a minimum, at the same time as the annual report is made
available to investors.

(d)

(e)

(f)

(7)

(8)

(a)

(b)

(c)

(9)

(10)

(11)

37 (1)

(2)

27

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

An AIFM shall inform the investors of such information before investing in the
AIF and upon any material change thereof.

An AIFM shall inform the investors, before they invest in the AIF, of any
arrangement made by the depositary to contractually discharge itself of liability under
paragraph 33.

An AIFM shall also inform investors of the AIF of any changes with respect to
depositary liability without delay.

Where an AIF is required to publish a prospectus in accordance with the IFA
or in accordance with the law of the jurisdiction where it is authorised or established, only
such information referred to in this paragraph and paragraph 38 which is in addition to that
contained in the prospectus shall be disclosed separately or as additional information in the
prospectus.

An AIFM shall, for each of the AIFs it manages or markets, periodically disclose
the following information to investors of the relevant AIF—

the percentage of the AIF’s assets which are subject to special
arrangements arising from their illiquid nature;

any new arrangements for managing the liquidity of the AIF;

the current risk profile of the AIF and the risk management systems
employed by the AIFM to manage those risks.

An AIFM managing AIFs employing leverage must periodically disclose to
investors of the relevant AIF the following for each AIF within the time periods specified—

without undue delay, any changes to the maximum level of leverage which
the AIFM may employ on behalf of the AIF as well as any right of the re-
use of collateral or any guarantee granted under the leverage
arrangement;

the total amount of leverage employed by the AIF in accordance with the
constitution and prospectus of the AIF and at least at the same time as the
annual report is made available to investors.

Prescribed information
For the purposes of paragraph 37(6), the following information is prescribed—

a description of the investment strategy and objectives of the AIF;

information on where any master AIF is authorised or established, and
where the underlying funds are authorised or established, if the AIF is a
fund of funds;

a description of the types of assets in which the AIF may invest;

(3)

(4)

(5)

(6)

(7)

(a)

(b)

(c)

(8)

(a)

(b)

38

(a)

(b)

(c)

28

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the techniques the AIF may employ and all associated risks;

any applicable investment restrictions;

the circumstances in which the AIF may use leverage;

the types and sources of leverage permitted and the associated risks;

any restrictions on the use of leverage and any collateral and asset re-use
arrangements;

the maximum level of leverage which the AIFM is entitled to employ on
behalf of the AIF;

a description of the procedures by which the AIF may change its
investment strategy or investment policy, or both;

a description of the main legal implications of the contractual relationship
entered into for the purpose of investment, including information on—

the jurisdiction;

the applicable law;

the existence or not of any legal instruments providing for the
recognition and enforcement of judgments in the jurisdiction where the
AIF is authorised or established;

the identity of the AIFM, the AIF’s depositary, auditor and any other
service providers, and a description of their duties and the investors’
rights;

a description of how the AIFM is complying with the requirements of
paragraph 9 regarding professional liability risks;

a description of any delegated management function (portfolio or risk
management) by the AIFM, and any safe-keeping function delegated by
the depositary including identification of the delegate and any conflicts of
interest that may arise from such delegations;

a description of the AIF’s valuation procedure and of the pricing
methodology for valuing assets, including the methods used in valuing
hard-to-value assets in accordance with paragraph 17;

a description of the AIF’s liquidity risk management, including the
redemption both in normal and in exceptional circumstances, and the
existing redemption arrangements with investors;

a description of all fees, charges and expenses and of the maximum
amounts thereof which are directly or indirectly borne by investors;

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(i)

(ii)

(iii)

(iv)

(l)

(m)

(n)

(o)

(p)

29

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

a description of how the AIFM ensures a fair treatment of investors and,
whenever an investor obtains preferential treatment or the right to obtain
preferential treatment, a description of that preferential treatment, the
type of investors who obtain such preferential treatment and, where
relevant, their legal or economic links with the AIF or AIFM;

the most recent annual report prepared in accordance with paragraph 36;

the procedure and conditions for the issue and sale of units or shares;

the latest net asset value of the AIF or the latest market price of the unit
or share of the AIF, in accordance with paragraph 17 on valuation
principles;

where available, the historical performance of the AIF;

the identity of any prime broker and a description of any material
arrangements of the AIF with its prime brokers;

the way the conflicts of interest are managed in relation to a prime broker;

provision in the contract between a prime broker and a depositary on the
transfer and re-use of AIF assets;

information about any transfer to the prime broker of any liability of the
AIF;

a description of the means and timing of disclosure of information on
periodic disclosures and leverage.

Supervisory reporting

Reporting obligations to the Authority and to other competent authorities
An AIFM must report the following information to the Authority in such manner

as the Authority may direct, not later than one month after the end of the reporting periods
set out in subparagraph (5)—

the main instruments in which it is trading, including a break-down of
financial instruments and other assets, including the AIF’s investment
strategies and their geographical and sectoral investment focus;

the markets of which it is a member or where it actively trades;

the diversification of the AIF’s portfolio it manages, including but not
limited to, its principal exposures and most important concentrations.

Where the AIF is a fund of funds, upon written request by the AIFM to the
Authority, the reporting periods set out in subparagraph (5) may be extended by up to 15
days by the Authority.

(q)

(r)

(s)

(t)

(u)

(v)

(w)

(x)

(y)

(z)

39 (1)

(a)

(b)

(c)

(2)

30

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

An AIFM must, for each of the AIFs it manages and markets, report the
following information to the Authority in such manner as the Authority may direct, in
accordance with the reporting periods set out in subparagraph (5)-–

the percentage of the AIF’s assets which are subject to special
arrangements arising from their illiquid nature as disclosed to investors;

any new arrangements for managing the liquidity of the AIF;

the risk management systems employed by the AIFM to manage the
market risk, liquidity risk, counterparty risk and other risks including
operational risk;

the current risk profile of the AIF, including—

the market risk profile of the investments of the AIF, including the
expected return and volatility of the AIF in normal market conditions;

the liquidity profile of the investments of the AIF, including the liquidity
profile of the AIF’s assets, the profile of redemption terms and the
terms of financing provided by counterparties to the AIF;

information on the main categories of assets in which the AIF is investing,
including the corresponding short market value and long market value, the
turnover and performance during the reporting period; and

the results of periodic stress tests, under normal and exceptional
circumstances, performed in accordance with paragraphs 14(10) and
15(2).

An AIFM managing AIFs employing leverage on a substantial basis must make
available to the Authority—

the overall level of leverage employed by each AIF it manages;

a break-down between leverage arising from borrowing of cash or
securities and leverage embedded in financial derivatives;

the extent to which the AIF’s assets have been re-used under leveraging
arrangements; and

the identity of the five largest sources of borrowed cash or securities for
each of the AIFs managed or marketed by the AIFM, and the amounts of
leverage received from each of those sources for each of those AIFs.

The information required in subparagraph (4) must be reported to the Authority
as follows—

(3)

(a)

(b)

(c)

(d)

(i)

(ii)

(e)

(f)

(4)

(a)

(b)

(c)

(d)

(5)

31

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

every six months by an AIFM managing portfolios of AIFs whose assets
under management in total do not exceed the equivalent of EUR 1 billion,
for each of their AIFs;

on a quarterly basis by an AIFM managing portfolios of AIFs whose assets
under management in total exceed the equivalent of EUR 1 billion, for each
of their EU AIFs;

on a quarterly basis by an AIFM which is subject to the requirements
referred to in clause (a) of this subparagraph, for each AIF whose assets
under management, including any assets acquired through use of
leverage, in total exceed the equivalent of EUR 500 million, in respect of
that AIF;

on an annual basis by an AIFM in respect of each unleveraged AIF under
its management which, in accordance with its core investment policy,
invests in non-listed companies and issuers in order to acquire control.

The Authority may require all or part of the information required in
subparagraph (5) to be reported within different time frames and in such manner as the
Authority may direct.

The Authority may require an AIFM to provide it with any of the following
documents upon request—

an annual report of each AIF managed by the AIFM for each financial year;

a list of all AIFs which the AIFM manages on a quarterly basis;

where necessary, for the effective monitoring of systemic risk, the
Authority may require other information to be provided to it on a periodic
and ad hoc basis.

For the purposes of this paragraph, “leverage” shall be considered by the
Authority to be employed on a substantial basis when the exposure of an AIF (calculated
in accordance with the commitment method) exceeds three times its net asset value.

Schedule I applies for the purposes of this paragraph as applicable

AIFMs managing leveraged AIFs
An AIFM shall ensure and demonstrate that the leverage limits set by it for each

AIF that it manages are appropriate, and that the AIF complies with such limits at all times.

Limits on leverage
The Authority must—

assess the risks arising out of the use of leverage by an AIF managed by
an AIFM;

(a)

(b)

(c)

(d)

(6)

(7)

(a)

(b)

(c)

(8)

(9)

40

41 (1)

(a)

32

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

if required, impose the measures in subparagraph (2) on an AIFM, in order
to ensure the stability and integrity of the financial system in Bermuda or
the jurisdiction where an AIF is authorised or established, and to limit the
extent to which the use of leverage by an AIF managed by an AIFM
contributes to—

the build-up of systemic risk in the financial system; or

the risks of disorderly markets.

The measures referred to in subparagraph (1)(b) are—

to impose limits on the level of leverage that such an AIFM may employ;
or

to impose other restrictions on the AIFM.

The Authority may use its powers under sections 20 and 21 of the Act
(restriction of licence and revocation of licence, respectively) to impose limits on leverage
or other restrictions on an AIFM, but this subparagraph does not limit the powers of the
Authority.

Obligations for AIFMs managing AIFs

which acquire control of non-listed companies or issuers

Ways of acquiring control of shares
For the purposes of paragraphs 43 to 46, control of a non-listed company or

issuer is acquired in one of the following ways—

one AIF acquires control individually;

two or more AIFs, managed by the same AIFM, acquire control jointly on
the basis of an agreement aimed at acquiring such control; or

two or more AIFs, managed by two or more AIFMs, acquire control jointly
on the basis of an agreement aimed at acquiring such control.

Paragraphs 43 to 46 do not apply where the non-listed company or issuer is—

a small or medium-sized enterprise; or

a special purpose vehicle with the purpose of holding or administering real
estate.

In this paragraph, “small or medium-sized enterprise” means the category of
micro, small and medium-sized enterprises (SMEs), made up of enterprises which employ
fewer than 250 persons and which have an annual turnover not exceeding the equivalent

(b)

(i)

(ii)

(2)

(a)

(b)

(3)

42 (1)

(a)

(b)

(c)

(2)

(a)

(b)

(3)

33

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

of EUR 50 million or an annual balance sheet total not exceeding the equivalent of EUR 43
million.

Notification of acquisition or disposal of major holdings and control of non-listed
company

When an AIF acquires, disposes of, or holds shares of a non-listed company,
the AIFM managing the AIF must notify the Authority in writing of the proportion of voting
rights of the non-listed company held by the AIF at any time when that proportion reaches,
exceeds or falls below the thresholds of 10%, 20%, 30%, 50% and 75%.

When an AIF acquires control of a non-listed company, the AIFM managing the
AIF must notify the following persons of such control—

the non-listed company;

the non-listed company’s shareholders, of which the identities and
addresses are available to the AIFM, or can be made available by the non-
listed company or through a register to which AIFM has or can obtain
access; and

the Authority.

The notification required under subparagraphs (1) and (2) must contain the
following additional information—

the resulting voting rights in the non-listed company acquired by the AIF;

the conditions subject to which control was acquired, information about
the identity of the different shareholders involved, any person entitled to
exercise voting rights on their behalf and, if applicable, the chain of
undertakings through which voting rights are effectively held; and

the date on which control was acquired.

The AIFM must—

in its notification to the non-listed company, request the governing body
of the non-listed company to inform the employees’ representatives or,
where there are none, the employees themselves, without undue delay of
the acquisition of control by the AIF and of the information in subparagraph
(3); and

use its best efforts to ensure the governing body complies with its request.

The notifications required under this paragraph by an AIFM must be made as
soon as possible, and in any event no later than 14 days after the date on which the AIF
reaches, exceeds or falls below the relevant threshold, or acquires control over the non-
listed company.

43 (1)

(2)

(a)

(b)

(c)

(3)

(a)

(b)

(c)

(4)

(a)

(b)

(5)

34

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Disclosure in case of acquisition of control
When an AIF acquires control of a non-listed company or an issuer in

accordance with paragraph 43, the AIFM managing the AIF must make available the
information in subparagraph (2) to—

the non-listed company or issuer;

the shareholders of the non-listed company or issuer of which the identities
and addresses are available to the AIFM, or can be made available by the
non-listed company or issuer or through a register to which the AIFM has
or can obtain access; and

the Authority.

The information referred to in subparagraph (1) is—

the identity of the AIFM which either individually or in agreement with other
AIFMs manages the AIF or AIFs that have acquired control;

the policy for preventing and managing conflicts of interest, in particular
between the AIFM, the AIF or AIFs, and the non-listed company, or the
issuer, as applicable;

the specific safeguards to ensure that any agreement between the AIFM,
the AIF or AIFs, the non-listed company and the issuer, as applicable, is
concluded at arm’s length; and

the policy for external and internal communication relating to the non-
listed company or issuer, in particular as regards employees of the non-
listed company or issuer.

The AIFM must—

in its notification to the non-listed company or issuer, request the
governing body of the non-listed company or issuer to give the employees’
representatives, or where there are none, the employees themselves,
without undue delay the information in subparagraph (2); and

use its best efforts to ensure that the governing body complies with its
request.

Additional disclosure when control is acquired of non-listed company
When an AIF acquires control of a non-listed company, the AIFM managing the

AIF, must ensure that within a period of 28 days starting on the day on which control is
acquired, the AIF, or the AIFM acting on behalf of the AIF, discloses its intentions with
regard to the matters in subparagraph (2) to—

the non-listed company; and

44 (1)

(a)

(b)

(c)

(2)

(a)

(b)

(c)

(d)

(3)

(a)

(b)

45 (1)

(a)

35

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the shareholders of the non-listed company of which the identities and
addresses are available to the AIFM, or can be made available by the non-
listed company or through a register to which the AIFM has or can obtain
access.

The matters referred to in subparagraph (1) are the future business of the non-
listed company and the likely repercussions on employment by the non-listed company,
including any material change in the conditions of employment.

The AIFM must—

request that the governing body of the non-listed company notify the
employees’ representatives or, where there are none, the employees
themselves, without undue delay, about the AIF’s intentions with regard
to the matters referred to in subparagraph (2); and

use its best efforts to ensure the governing body complies with its request.

When an AIF acquires control of a non-listed company, the AIFM managing the
AIF must provide the Authority and the AIF’s investors with information on the financing of
the acquisition.

Annual report of AIFs exercising control of non-listed companies
When an AIF acquires control of a non-listed company, the AIFM managing the

AIF must, in addition to the information prescribed in paragraph 38, include in the AIF’s
annual report information prescribed in subparagraph (3) relating to the non-listed
company.

An AIFM shall use its best efforts to ensure that—

the annual report of the non-listed company contains the information in
subparagraph (3); and

the report is made available by the governing body of the non-listed
company to the employees’ representatives or, where there are none, the
employees themselves within the period in which the annual report must
be prepared.

The information referred to in subparagraph (1) is—

a fair review of the development of the non-listed company’s business
representing the situation at the end of the period covered by the annual
report;

any important events that have occurred since the end of the financial
year;

the non-listed company’s likely future development; and

(b)

(2)

(3)

(a)

(b)

(4)

46 (1)

(2)

(a)

(b)

(3)

(a)

(b)

(c)

36

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

in relation to the non-listed company’s acquisition or disposal of its own
shares—

the reasons for acquisitions made during the financial year;

the number and nominal value or, in the absence of a nominal value,
the accountable part of the shares acquired and disposed of during the
financial year and the proportion of the subscribed capital which they
represent;

in the case of acquisition or disposal for a value, the consideration for
the shares; and

the number and nominal value or, in the absence of a nominal value,
the accountable part of all the shares acquired and held by the non-
listed company and the proportion of the subscribed capital which they
represent.

If the information in subparagraph (3) is included in the non-listed company’s
annual report, the AIFM must make the information available to the investors of the AIF,
in so far as it is already available, within six months following the end of the financial year
of the AIF, and in any event, no later than the date on which the annual report of the non-
listed company must be prepared in accordance with the law applicable in the jurisdiction
in which the non-listed company has its registered office.

If the information in subparagraph (3) is included in the AIF’s annual report,
the AIFM must request and use its best efforts to ensure that the governing body of the
non-listed company makes that information available to employees’ representatives of the
non-listed company or, where there are none, to the employees themselves, no later than
six months following the end of the financial year of the AIF.

Asset stripping
When an AIF acquires control of a non-listed company or an issuer, for a period

of 24 months following the acquisition of control, the AIFM managing the AIF—

must not facilitate, support or instruct any distribution, capital reduction,
share redemption or acquisition by the non-listed company or issuer of its
own shares;

in so far as the AIFM is authorised to vote on behalf of the AIF at the
meetings of the governing body of the non-listed company or issuer, must
not vote in favour of a distribution, capital reduction, share redemption or
acquisition by the non-listed company or issuer of its own shares; and

in any event, must use its best efforts to prevent distributions, capital
reductions share redemptions or the acquisition by the non-listed company
or issuer of its own shares.

(d)

(i)

(ii)

(iii)

(iv)

(4)

(5)

47 (1)

(a)

(b)

(c)

37

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

The obligations imposed on an AIFM under subparagraph (1) shall relate to the
following—

any distribution to shareholders made when on the closing date of the last
financial year the net assets as set out in the non-listed company or issuer’s
annual accounts are, or following such a distribution would become, lower
than the amount of the subscribed capital plus those reserves which may
not be distributed under the law or the constitution, on the understanding
that where the uncalled part of the subscribed capital is not included in the
assets shown in the balance sheet, this amount must be deducted from
the amount of subscribed capital;

any distribution to shareholders the amount of which would exceed the
amount of the profits at the end of the last financial year plus any profits
brought forward and sums drawn from reserves available for this purpose,
less any losses brought forward and sums placed to reserves in accordance
with the law or the constitution;

to the extent that acquisitions of own shares are permitted, the acquisitions
by the non-listed company, including shares previously acquired by the
non-listed company and held by it, and shares acquired by a person acting
in his own name but on the non-listed company’s behalf, that would have
the effect of reducing the net assets below the amount mentioned in clause
(a) of this subparagraph.

For the purposes of this paragraph—

in subparagraph (1), “distribution” means a distribution to shareholders,
including a payment of dividends and of interest relating to shares;

the requirements relating to capital reductions shall not apply on a
reduction in the subscribed capital, for which the purpose is to offset losses
incurred, or to include sums of money in a non-distributable reserve,
provided that the amount of such reserve is not more than 10% of the
reduced subscribed capital.

Notification of marketing
Within 14 days of commencement of marketing in an overseas jurisdiction, an

AIFM shall notify the Authority in such form as the Authority may direct, and include the
information set out in subparagraph (2).

The information referred to in subparagraph (1) is—

identify the jurisdiction where marketing is to be conducted;

identify the competent authorities in those jurisdictions to whom the AIF
and AIFM shall report;

(2)

(a)

(b)

(c)

(3)

(a)

(b)

48 (1)

(2)

(a)

(b)

38

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

state the name and address of the AIFM in respect of each AIF;

state the name and address of each AIF which the applicant intends to
market from within Bermuda and the manner in which it intends to market
the AIF; and

certify that it is permitted to market each AIF in that manner in the
jurisdiction concerned.

The relevant AIF or AIFM shall notify the Authority when marketing has ceased
in a jurisdiction, or when it is unable to comply with the notification requirements under
paragraph 48(1).

Calculation of leverage
For the purposes of these Rules, an AIFM shall calculate leverage for each AIF

under management in accordance with the provisions set out in Schedule III.

Calculating assets under management
For the purposes of calculating assets under management as required under these

Rules, the AIFM shall include the following—

AIFs managed by the AIFM for which the AIFM has delegated functions
shall be included in the calculation but any portfolio of AIFs that the AIFM
is managing under delegation shall be excluded;

each derivative instrument position, including any derivative embedded in
transferable securities, shall be converted into its equivalent position in the
underlying assets of that derivative using the conversion methodologies
set out in Schedule III and the absolute value of that equivalent position
shall then be used for the calculation of the total value of the assets under
management;

where an AIF invests in other AIFs managed by the same externally
appointed AIFM, that investment may be excluded from the calculation of
the AIFM’s assets under management;

where one compartment within an internally or externally managed AIF
invests in another compartment of that AIF, that investment may be
excluded from the calculation of the AIFM’s assets under management.

Commencement
These Rules shall come into operation on such day as the Chairman may appoint

by notice published in the Gazette.

(c)

(d)

(e)

(3)

49

50

(a)

(b)

(c)

(d)

51

39

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

SCHEDULE I

(paragraph 39)

QUANTITATIVE REPORTING REQUIREMENTS OF AIFMS

For the purposes of reporting under paragraph 39 of the Rules, the following information shall be
reported.
AIFM Specific Information
Identification of Fund manager
AIF Quarterly Information (paragraph 39(7)(b))
Detailed list of all AIFs which the AIFM manages (the following information should be reported per
AIF which is under management of the AIFM)—
(a) Identification of AIF;
(b) Fund identification code(s);
(c) Inception date of AIF;
(d) An indication of the AIF type i.e. Hedge Fund; Private Equity; Real Estate; Fund of Funds; ILS;

Other;
(e) NAV;
(f) Base currency of the AIF according to ISO 4217 and assets under management as calculated

under the Rules;
(g) An indication as to whether the AIF is authorised or established in the EU and information with

regard to that status.
AIF General Information (paragraph 39(5))
(a) Domicile of the AIF;
(b) Identification of prime broker(s) of the AIF.
Principal markets/instruments in which it trades on behalf of the AIFs it manages
(paragraph 39(1))
From the most important market/instrument to the fifth most important market/instrument—
(a) The principal markets in which the AIFM trades on behalf of the AIFs it manages;
(b) The principal instruments in which it trades on behalf of the AIFs it manages;
(c) Values of assets under management for all AIFs managed, calculated as set out in the Rules.
Investment details (paragraph 39(1) and (3))
(a) Jurisdictions of the three main funding sources (excluding units or shares of the AIF bought by

investors);
(b) Predominant AIF type;
(c) Main instruments in which the AIF is trading from the most important instrument to the fifth

most important instrument, including information on: the type of instrument/instrument code;
value; indication of long/short positions;

40

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

(d) Breakdown of investment strategies for the predominant AIF type including the strategy that
best describes the AIF’s strategy and the percentage share of the NAV;

(e) A geographical breakdown of the investments held by the AIF by percentage of the total NAV
of the AIF;

(f) A breakdown of the ten principal exposures of the AIF at the reporting date including
information on: type of asset/liability; name/description of the asset/liability; value as calculated
in accordance with the Rules; percentage of gross market value; long/short position;
counterparty (where relevant);

(g) A breakdown of the five most important portfolio concentrations including information, such as:
type of asset/liability; name/description of the market; value of the aggregate exposure as
calculated in accordance with the Rules; percentage of gross market value; long/short position;
counterparty (where relevant);

(h) Typical deal/position size;
(i) Principal markets in which AIF trades taking into account size of exposure;
(j) A breakdown of information on investor concentration, such as: the percentage of the AIF’s

equity that is beneficially owned by the five beneficial owners that have the largest equity
interest in the AIF (look through to beneficial owners); percentage breakdown of investor
concentration by status of investor; indication as to whether the client is professional/retail;

(k) Information on the instruments traded and individual exposures in which the AIFM is trading,
including details on the main categories of assets (as determined by the Authority) in which the
AIF invested as at the reporting date;

(l) Currency exposure (total long and short value of exposures) by currency group.
Risk Related Information (paragraph 39(1) and (3))
(a) Value of turnover in each asset class over the reporting months;
(b) Information on each company over which the AIF has a dominant influence, such as: the name;

percentage of voting rights; transaction type;
(c) Expected annual investment return/IRR in normal market conditions (in percentage);
(d) Information on trading and clearing mechanisms, such as: estimate percentage (in terms of

market value) of securities traded; estimated percentage (in terms of trade volumes) of
derivatives that are traded; estimate percentage (in terms of trade volumes) of derivatives
transactions cleared; estimated percentage (in terms of market value) of repo trades cleared;

(e) Information on the value of collateral and other credit support that the AIF has posted to all
counterparties, such as: value of collateral posited in the form of cash and cash equivalents;
value of collateral posited in the form of other securities (excluding cash and cash equivalents);
value of other collateral and credit support (including face amount of letters of credit and similar
third party credit support);

(f) Of the amount of collateral and other credit support that the reporting fund has posted to
counterparties, the percentage that has been re-hypothecated by counterparties;

(g) Information on the top five counterparty exposures, such as: identity of the top five
counterparties to which the AIF has the greatest mark-to-market net counterparty credit
exposure, measured as a % of the NAV of the AIF; identity of the top five counterparties that
have the greatest mark-to-market net counterparty credit exposure to the AIF, measured as a
% of the NAV of the AIF;

41

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

(h) An indication as to whether the AIF cleared any transactions directly through a CCP and if so,
information on the top three CCPs in terms of value held and net credit exposure;

(i) Breakdown/profile of investor liquidity, as a percentage of the portfolio capable of being
liquidated within the respective prescribed periods of time;

(j) Value of unencumbered cash;
(k) Breakdown/profile of investor liquidity, as a percentage of investor equity that can be redeemed

within the prescribed periods of time (as a percentage of the AIF’s NAV);
(l) Information as determined by the Authority on investor redemptions;
(m) Information as determined by the Authority on special arrangements and preferential

treatment;
(n) A breakdown of the ownership of units in the AIF by investor group (as % of NAV of AIF assets;

look through to the beneficial owners where known or possible);
(o) Information on financing of liquidity, such as: the aggregate amount of borrowing by, and cash

financing available to, the AIF; information on the prescribed period for which the creditor is
contractually committed to provide such financing;

(p) Information as determined by the Authority on the value of borrowings of cash or securities;
(q) Information as determined by the Authority on the value of borrowing embedded in financial

instruments;
(r) Information on the five largest sources of borrowed cash or securities (short positions);
(s) Value of securities borrowed for short positions;
(t) Gross exposure of financial and/or legal structures controlled by the AIF;
(u) Leverage of the AIF, as calculated in accordance with the Rules;
(v) Total number of open positions;
(w) Information of the historical risk profile per reporting period.

42

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

SCHEDULE II

(paragraphs 26, 28, 29, 30, 31, 32, 33 and 34)

OBLIGATIONS OF DEPOSITARIES

Contractual particulars
A contract by which the depositary is appointed in accordance with paragraph

26(3) of the Rules should be drawn up between the depositary on the one hand and the
AIFM and, as the case may be, or the AIF on the other hand and shall include at least the
following elements—

a description of the services to be provided by the depositary and the
procedures to be adopted for each type of asset in which the AIF may
invest and which shall then be entrusted to the depositary;

a description of the way in which the safe-keeping and oversight function
is to be performed depending on the types of assets and the geographical
regions in which the AIF plans to invest. With respect to the custody duties
this description shall include country lists and procedures for adding and,
as the case may be, or withdrawing countries from that list. This shall be
consistent with the information provided in the AIF rules, instruments of
incorporation and offering documents regarding the assets in which the
AIF may invest;

a statement that the depositary’s liability shall not be affected by any
delegation of its custody functions unless it has discharged itself of its
liability in accordance with paragraphs 32 and 35 of the Rules;

the period of validity and the conditions for amendment and termination
of the contract including the situations which could lead to the termination
of the contract and details regarding the termination procedure and, if
applicable, the procedures by which the depositary should send all relevant
information to its successor;

the confidentiality obligations applicable to the parties in accordance with
relevant laws and regulations. These obligations shall not impair the ability
of competent authorities to have access to the relevant documents and
information;

the means and procedures by which the depositary transmits to the AIFM
or the AIF all relevant information that it needs to perform its duties,
including the exercise of any rights attached to assets, and in order to allow
the AIFM and the AIF to have a timely and accurate overview of the
accounts of the AIF;

1. (1)

(a)

(b)

(c)

(d)

(e)

(f)

43

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the means and procedures by which the AIFM or the AIF transmits all
relevant information or ensures the depositary has access to all the
information it needs to fulfil its duties, including the procedures ensuring
that the depositary will receive information from other parties appointed
by the AIF or the AIFM;

information on whether or not the depositary, or a third party to whom
safe-keeping functions are delegated in accordance with paragraph 32 of
the Rules, may re-use the assets it has been entrusted with and, if any,
the conditions attached to any such re-use;

the procedures to be followed when an amendment to the AIF rules,
instruments of incorporation or offering documents is being considered,
detailing the situations in which the depositary is to be informed, or where
the prior agreement of the depositary is needed to proceed with the
amendment;

all necessary information that needs to be exchanged between the AIF,
the AIFM, a third party acting on behalf of the AIF or the AIFM, on the one
hand, and the depositary, on the other hand, related to the sale,
subscription, redemption, issue, cancellation and re-purchase of units or
shares of the AIF;

all necessary information that needs to be exchanged between the AIF,
the AIFM, a third party acting on behalf of the AIF or the AIFM and the
depositary related to the performance of the depositary’s oversight and
control function;

where the parties to the contract envisage appointing third parties to carry
out parts of their respective duties, a commitment to provide, on a regular
basis, details of any third party appointed and, upon request, information
on the criteria used to select the third party and the steps envisaged to
monitor the activities carried out by the selected third party;

information on the tasks and responsibilities of the parties to the contract
in respect of obligations relating to the prevention of money laundering
and the financing of terrorism;

information on all cash accounts opened in the name of the AIF, or in the
name of the AIFM acting on behalf of the AIF, and the procedures ensuring
that the depositary will be informed when any new account is opened in
the name of the AIF or in the name of the AIFM acting on behalf of the
AIF;

details regarding the depositary’s escalation procedures, including the
identification of the persons to be contacted within the AIF and, as the case
may be, or the AIFM by the depositary when it launches such a procedure;

(g)

(h)

(i)

(j)

(k)

(l)

(m)

(n)

(o)

44

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

a commitment by the depositary to notify the AIFM when it becomes aware
that the segregation of assets is not, or is no longer, sufficient to ensure
protection from insolvency of a third party to whom safe-keeping functions
are delegated in accordance with paragraph 32 of the Rules;

the procedures ensuring that the depositary, in respect of its duties, has
the ability to enquire into the conduct of the AIFM and, as the case may
be, or the AIF and to assess the quality of information transmitted,
including by way of having access to the books of the AIF and, as the case
may be, or AIFM or by way of on-site visits;

the procedures ensuring that the AIFM and, as the case may be, or the AIF
can review the performance of the depositary in respect of the depositary’s
contractual obligations.

The details of the means and procedures set out in subparagraph (1) shall be
described in the contract appointing the depositary or any subsequent amendment to the
contract.

The contract appointing the depositary or the subsequent amendment to the
contract referred to in subparagraph (2) shall be done in writing.

The parties may agree to transmit all or part of the information that flows
between them electronically, provided that proper recording of such information is ensured.

Unless otherwise provided by the law of the jurisdiction applicable, there shall
be no obligation to enter into a specific written agreement for each AIF; it shall be possible
for the AIFM and the depositary to enter into a framework agreement listing the AIFs
managed by that AIFM to which the agreement applies.

The law of the jurisdiction applicable to the contract appointing the depositary
and any subsequent agreement shall be specified.

Cash monitoring — general requirements
Where a cash account is maintained or opened at an entity referred to in

paragraph 28 of the Rules in the name of the AIF, in the name of the AIFM acting on behalf
of the AIF, or in the name of the depositary acting on behalf of the AIF, an AIFM shall
ensure that the depositary is provided, upon commencement of its duties and on an ongoing
basis, with all relevant information it needs to comply with its obligations.

In order to have access to all information regarding the AIF’s cash accounts
and have a clear overview of all the AIF’s cash flows, a depositary shall at least—

be informed, upon its appointment, of all existing cash accounts opened
in the name of the AIF, or in the name of the AIFM acting on behalf of the
AIF;

(p)

(q)

(r)

(2)

(3)

(4)

(5)

(6)

2. (1)

(2)

(a)

45

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

be informed at the opening of any new cash account by the AIF or by the
AIFM acting on behalf of the AIF;

be provided with all information related to the cash accounts opened at a
third party entity, directly by those third parties.

Monitoring of the AIF’s cash flows
A depositary shall ensure effective and proper monitoring of the AIF’s cash flows

and, in particular, it shall at least—

ensure that all cash of the AIF is booked in accounts opened with entities
eligible to be appointed as a depositary in accordance with paragraph 26
of the Rules in the relevant markets where cash accounts are required for
the purposes of the AIF’s operations and which are subject to prudential
regulation and supervision;

implement effective and proper procedures to reconcile all cash flow
movements and perform such reconciliations on a daily basis or, in case of
infrequent cash movements, when such cash flow movements occur;

implement appropriate procedures to identify at the close of business day
significant cash flows and, in particular, those which could be inconsistent
with the AIF’s operations;

review periodically the adequacy of those procedures including through a
full review of the reconciliation process at least once a year and ensuring
that the cash accounts opened in the name of the AIF, in the name of the
AIFM acting on behalf of the AIF, or in the name of the depositary acting
on behalf of the AIF are included in the reconciliation process;

monitor on an ongoing basis the outcomes of the reconciliations and
actions taken as a result of any discrepancies identified by the
reconciliation procedures and notify the AIFM if an irregularity has not been
rectified without undue delay and also the competent authorities if the
situation cannot be clarified and, as the case may be, or corrected;

check the consistency of its own records of cash positions with those of
the AIFM. The AIFM shall ensure that all instructions and information
related to a cash account opened with a third party are sent to the
depositary, so that the depositary is able to perform its own reconciliation
procedure.

Financial instruments to be held in custody
Financial instruments belonging to the AIF, or to the AIFM acting on behalf of

the AIF, which are not able to be physically delivered to the depositary shall be included in

(b)

(c)

3.

(a)

(b)

(c)

(d)

(e)

(f)

4. (1)

46

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the scope of the custody duties of the depositary where all of the following requirements
are met—

they are transferable securities including those which embed derivatives,
money market instruments or units of collective investment undertakings;

they are capable of being registered or held in an account directly or
indirectly in the name of the depositary.

Financial instruments which, in accordance with applicable national law, are
only directly registered in the name of the AIF with the issuer itself or its agent, such as a
registrar or a transfer agent, shall not be held in custody.

Financial instruments belonging to the AIF, or to the AIFM acting on behalf of
the AIF, which are able to be physically delivered to the depositary shall always be included
in the scope of the custody duties of the depositary.

Safekeeping duties with regard to assets held in custody
In order to comply with the obligations laid down in paragraph 29(1) of the

Rules with respect to financial instruments to be held in custody, a depositary shall ensure
at least that—

the financial instruments are properly registered in accordance with
paragraph 29(3) of the Rules;

records and segregated accounts are maintained in a way that ensures
their accuracy and, in particular, record the correspondence with the
financial instruments and cash held for AIFs;

reconciliations are conducted on a regular basis between the depositary’s
internal accounts and records and those of any third party to whom
custody functions are delegated in accordance with paragraph 32(1) and
(2) of the Rules;

due care is exercised in relation to the financial instruments held in custody
in order to ensure a high standard of investor protection;

all relevant custody risks throughout the custody chain are assessed and
monitored and the AIFM is informed of any material risk identified;

adequate organisational arrangements are introduced to minimise the risk
of loss or diminution of the financial instruments, or of rights in connection
with those financial instruments as a result of fraud, poor administration,
inadequate registering or negligence;

the AIF’s ownership right or the ownership right of the AIFM acting on
behalf of the AIF over the assets is verified.

(a)

(b)

(2)

(3)

5. (1)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

47

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Where a depositary has delegated its custody functions to a delegate in
accordance with paragraph 32(1) and (2) of the Rules, it shall remain subject to the
requirements of subparagraph (1)(b) to (e). It shall also ensure that the delegate complies
with the requirements of subparagraph (1)(b) to (g) and the segregation obligations laid
down in this Schedule under the heading ‘Segregation Obligations’.

A depositary’s safe-keeping duties as referred to in subparagraphs (1) and (2)
shall apply on a look-through basis to underlying assets held in accordance with or by
financial arrangements and any legal structures controlled directly or indirectly by the AIF
or the AIFM acting on behalf of the AIF. The requirement referred to in subparagraph (1)
shall not apply to fund of funds structures or master-feeder structures where the underlying
funds have a depositary which keeps in custody the assets of these funds.

Safekeeping duties regarding ownership verification and record-keeping
In order to comply with the obligations referred to in paragraphs 30(1), (2),

(3) and (4) of the Rules, a depositary shall at least—

have access without undue delay to all relevant information it needs in
order to perform its ownership verification and record-keeping duties,
including relevant information to be provided to the depositary by third
parties;

possess sufficient and reliable information for it to be satisfied of the AIF’s
ownership right, or of the ownership right of the AIFM acting on behalf of
the AIF, over the assets;

maintain a record of those assets for which it is satisfied that the AIF, or
the AIFM acting on behalf of the AIF, holds the ownership. In order to
comply with this obligation, the depositary shall—

register in its record, in the name of the AIF, assets, including their
respective notional amounts, for which it is satisfied that the AIF or the
AIFM acting on behalf of the AIF holds the ownership;

be able to provide at any time a comprehensive and up-to-date
inventory of the AIF’s assets, including their respective notional
amounts.

For the purpose of subparagraph (1), the depositary shall ensure that there
are procedures in place so that registered assets cannot be assigned, transferred,
exchanged or delivered without the depositary or its delegate having been informed of such
transactions and the depositary shall have access without undue delay to documentary
evidence of each transaction and position from the relevant third party. The AIFM shall
ensure that the relevant third party provides the depositary, without undue delay, with
certificates or other documentary evidence every time there is a sale or acquisition of assets
or a corporate action resulting in the issue of financial instruments and at least once a year.

(2)

(3)

6. (1)

(a)

(b)

(c)

(i)

(ii)

(2)

48

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

In any event, a depositary shall ensure that the AIFM has and implements
appropriate procedures to verify that the assets acquired by the AIF it manages are
appropriately registered in the name of the AIF, or in the name of the AIFM acting on behalf
of the AIF, and to check the consistency between the positions in the AIFMs records and
the assets for which the depositary is satisfied that the AIF, or the AIFM acting on behalf
of the AIF, holds the ownership. The AIFM shall ensure that all instructions and relevant
information related to the AIF’s assets are sent to the depositary, so that the depositary is
able to perform its own verification or reconciliation procedure.

A depositary shall set up and implement an escalation procedure for situations
where an anomaly is detected, including notification of the AIFM and of the competent
authorities if the situation cannot be clarified and, as the case may be, or corrected.

A depositary’s safe-keeping duties referred to in subparagraphs (1) to (4) shall
apply on a look-through basis to underlying assets held in accordance with or by financial
arrangements and any legal structures established by the AIF, or by the AIFM acting on
behalf of the AIF, for the purposes of investing in the underlying assets and which are
controlled directly or indirectly by the AIF, or by the AIFM acting on behalf of the AIF. The
requirement referred to in subparagraph (1) shall not apply to fund of funds structures and
master-feeder structures where the underlying funds have a depositary which provides
ownership verification and record-keeping functions for this fund’s assets.

Oversight duties — general requirements
At the time of its appointment, the depositary shall assess the risks associated

with the nature, scale and complexity of the AIF’s strategy and the AIFM’s organisation in
order to devise oversight procedures which are appropriate to the AIF and the assets in
which it invests and which are then implemented and applied. Such procedures shall be
regularly updated.

In performing its oversight duties under paragraph 31 of the Rules, a
depositary shall perform ex-post controls and verifications of processes and procedures that
are under the responsibility of the AIFM, the AIF or an appointed third party. The depositary
shall in all circumstances ensure that an appropriate verification and reconciliation
procedure exists which is implemented and applied and frequently reviewed. The AIFM shall
ensure that all instructions related to the AIF’s assets and operations are sent to the
depositary, so that the depositary is able to perform its own verification or reconciliation
procedure.

A depositary shall establish a clear and comprehensive escalation procedure to
deal with situations where potential irregularities are detected in the course of its oversight
duties, the details of which shall be made available to the competent authorities of the AIFM
upon request.

(3)

(4)

(5)

7. (1)

(2)

(3)

49

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Duties regarding subscription and redemptions
In order to comply with paragraph 31 of the Rules, the depositary shall meet

the following requirements—

the depositary shall ensure that the AIF, the AIFM or the designated entity
has established, implements and applies an appropriate and consistent
procedure to—

reconcile the subscription orders with the subscription proceeds, and
the number of units or shares issued with the subscription proceeds
received by the AIF;

reconcile the redemption orders with the redemptions paid, and the
number of units or shares cancelled with the redemptions paid by the
AIF;

verify on a regular basis that the reconciliation procedure is
appropriate;

for the purposes of clause (a)(i), (ii) and (iii), the depositary shall, in
particular, regularly check the consistency between the total number of
units or shares in the AIF’s accounts and the total number of outstanding
shares or units that appear in the AIF’s register.

A depositary shall ensure and regularly check that the procedures regarding
the sale, issue, re-purchase, redemption and cancellation of shares or units of the AIF
comply with the applicable national law, and with the AIF rules or instruments of
incorporation, and verify that these procedures are effectively implemented.

The frequency of the depositary’s checks shall be consistent with the frequency
of subscriptions and redemptions.

Duties regarding the valuation of shares/units
In order to comply with paragraph 31 of the Rules, the depositary shall—

verify on an ongoing basis that appropriate and consistent procedures are
established and applied for the valuation of the assets of the AIF in
compliance with paragraph 17(1) of the Rules and its implementing
measures and with the AIF rules and instruments of incorporation; and

ensure that the valuation policies and procedures are effectively
implemented and periodically reviewed.

A depositary’s procedures shall be conducted at a frequency consistent with
the frequency of the AIF’s valuation policy as defined in paragraph 17(1) of the Rules and
its implementing measures.

8. (1)

(a)

(i)

(ii)

(iii)

(b)

(2)

(3)

9. (1)

(a)

(b)

(2)

50

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Where a depositary considers that the calculation of the value of the shares or
units of the AIF has not been performed in compliance with applicable law or the AIF rules
or paragraph 17(1) of the Rules, it shall notify the AIFM and, as the case may be, or the
AIF and ensure that timely remedial action is taken in the best interest of the investors in
the AIF.

Where an external valuer has been appointed, a depositary shall check that
the external valuer’s appointment is in accordance with paragraph 18 of the Rules and its
implementing measures.

Duties regarding the carrying out of the AIFM’s instructions
In order to comply with paragraph 31 of the Rules, the depositary shall at least—

set up and implement appropriate procedures to verify that the AIF and
AIFM comply with applicable laws and regulations and with the AIF’s rules
and instruments of incorporation. In particular, the depositary shall
monitor the AIF’s compliance with investment restrictions and leverage
limits set in the AIF’s offering documents. Those procedures shall be
proportionate to the nature, scale and complexity of the AIF;

set up and implement an escalation procedure where the AIF has breached
one of the limits or restrictions referred to in clause (a).

Duties regarding the timely settlement of transactions
In order to comply with paragraph 31 of the Rules, the depositary shall set up

a procedure to detect any situation where a consideration related to the operations
involving the assets of the AIF, or of the AIFM acting on behalf of the AIF, is not remitted
to the AIF within the usual time limits, notify the AIFM and, where the situation has not
been remedied, request the restitution of the financial instruments from the counterparty
where possible.

Where transactions do not take place on a regulated market, the usual time
limits shall be assessed with regard to the conditions attached to the transactions (OTC
derivative contracts or investments in real estate assets or in privately held companies).

Duties related to the AIF’s income distribution
In order to comply with paragraph 31 of the Rules, the depositary shall—

ensure that the net income calculation, once declared by the AIFM, is
applied in accordance with the AIF rules, instruments of incorporation and
applicable national law;

ensure that appropriate measures are taken where the AIF’s auditors have
expressed reserves on the annual financial statements. The AIF, or the

(3)

(4)

10.

(a)

(b)

11. (1)

(2)

12. (1)

(a)

(b)

51

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

AIFM acting on behalf of the AIF, shall provide the depositary with all
information on reserves expressed on the financial statements; and

check the completeness and accuracy of dividend payments, once they are
declared by the AIFM, and, where relevant, of the carried interest.

Where a depositary considers that the income calculation has not been
performed in compliance with applicable law or with the AIF rules or instruments of
incorporation, it shall notify the AIFM and, as the case may be, or the AIF and ensure that
timely remedial action has been taken in the best interest of the AIF’s investors.

Due diligence
In order to fulfil the obligations laid down in paragraph 32(2)(c) of the Rules,

the depositary shall implement and apply an appropriate documented due diligence
procedure for the selection and ongoing monitoring of the delegate. That procedure shall
be reviewed regularly, at least once a year, and made available upon request to competent
authorities.

When selecting and appointing a delegate to whom safe-keeping functions are
delegated in accordance with paragraph 32 of the Rules, the depositary shall exercise all
due skill, care and diligence to ensure that entrusting financial instruments to this delegate
provides an adequate standard of protection. It shall at least—

assess the regulatory and legal framework, including country risk, custody
risk and the enforceability of the delegate’s contracts. That assessment
shall, in particular, enable the depositary to determine the potential
implication of an insolvency of the third party for the assets and rights of
the AIF. If a depositary becomes aware that the segregation of assets is
not sufficient to ensure protection from insolvency because of the law of
the country where the delegate is located, it shall immediately inform the
AIFM;

assess whether the delegate’s practice, procedures and internal controls
are adequate to ensure that the financial instruments of the AIF, or of the
AIFM acting on behalf of the AIF, are subject to a high standard of care
and protection;

assess whether the delegate’s financial strength and reputation are
consistent with the tasks delegated. That assessment shall be based on
information provided by the potential third party as well as other data and
information, where available;

ensure that the delegate has the operational and technological capabilities
to perform the delegated custody tasks with a satisfactory degree of
protection and security.

(c)

(2)

13. (1)

(2)

(a)

(b)

(c)

(d)

52

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

A depositary shall exercise all due skill, care and diligence in the periodic review
and ongoing monitoring to ensure that the delegate continues to comply with the criteria
and the conditions set out in paragraph 32 of the Rules. To this end, the depositary shall
at least—

monitor the delegate’s performance and its compliance with the
depositary’s standards;

ensure that the delegate exercises a high standard of care, prudence and
diligence in the performance of its custody tasks and, in particular, that it
effectively segregates the financial instruments in line with the
requirements of this Schedule under paragraph 14;

review the custody risks associated with the decision to entrust the assets
to the delegate and without undue delay notify the AIF or AIFM of any
change in those risks. That assessment shall be based on information
provided by the third party and other data and information where available.
During market turmoil or when a risk has been identified, the frequency
and the scope of the review shall be increased. If the depositary becomes
aware that the segregation of assets is no longer sufficient to ensure
protection from insolvency because of the law of the country where the
third party is located, it shall immediately inform the AIFM.

Where the delegate further delegates any of the functions delegated to it, the
conditions and criteria set out in subparagraphs (1), (2) and (3) shall apply mutatis
mutandis.

A depositary shall monitor compliance with paragraph 27(1) of the Rules.

A depositary shall devise contingency plans for each market in which it appoints
a delegate in accordance with paragraph 32 of the Rules, to perform safe-keeping duties.
Such a contingency plan shall include the identification of an alternative provider, if any.

A depositary shall take measures, including termination of the contract, which
are in the best interest of the AIF and its investors where the delegate no longer complies
with the requirements.

Segregation obligations
Where safe-keeping functions have been delegated wholly or partly to a

delegate, a depositary shall ensure that the delegate to whom safe-keeping functions are
delegated pursuant to paragraph 32 of the Rules acts in accordance with the segregation
obligation laid down in paragraph 32(3)(c) of the Rules by verifying that the delegate—

keeps such records and accounts as are necessary to enable it at any time
and without delay to distinguish assets of the depositary’s AIF clients from
its own assets, assets of its other clients, assets held by the depositary for

(3)

(a)

(b)

(c)

(4)

(5)

(6)

(7)

14. (1)

(a)

53

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

its own account and assets held for clients of the depositary which are not
AIFs;

maintains records and accounts in a way that ensures their accuracy and,
in particular, their correspondence to the assets safe-kept for the
depositary’s clients;

conducts, on a regular basis, reconciliations between its internal accounts
and records and those of the third party to whom it has delegated safe-
keeping functions in accordance with paragraph 32(2)(c) of the Rules;

introduces adequate organisational arrangements to minimise the risk of
loss or diminution of financial instruments or of rights in connection with
those financial instruments as a result of misuse of the financial
instruments, fraud, poor administration, inadequate record-keeping or
negligence;

where the third party is an entity which is subject to effective prudential
regulation and supervision that has the same effect as Bermuda and is
effectively enforced, the depositary shall take the necessary steps to
ensure that the AIF’s cash is held in an account or accounts in accordance
with paragraph 28(1) to (3) of the Rules.

Where a depositary has delegated its custody functions to a delegate in
accordance with paragraph 32 of the Rules, the monitoring of the delegate’s compliance
with its segregation obligations shall ensure that the financial instruments belonging to its
clients are protected from any insolvency of that delegate. If, according to the applicable
law, including in particular the law relating to property or insolvency, the requirements laid
down in subparagraph (1) are not sufficient to achieve that objective, the depositary shall
assess what additional arrangements are to be made in order to minimise the risk of loss
and maintain an adequate standard of protection.

Subparagraphs (1) and (2) shall apply mutatis mutandis when the delegate, to
whom safe-keeping functions are delegated in accordance with paragraph 32 of the Rules,
has decided to delegate all or part of its safe-keeping functions to another sub-delegate
pursuant to paragraph 32(2)(c) of the Rules.

Loss of a financial instrument held in custody
A loss of a financial instrument held in custody within the meaning of paragraph

33 of the Rules shall be deemed to have taken place when, in relation to a financial
instrument held in custody by the depositary or by a delegate to whom the custody of
financial instruments held in custody has been delegated, any of the following conditions
is met—

a stated right of ownership of the AIF is demonstrated not to be valid
because it either ceased to exist or never existed;

(b)

(c)

(d)

(e)

(2)

(3)

15. (1)

(a)

54

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the AIF has been definitively deprived of its right of ownership over the
financial instrument;

the AIF is definitively unable to directly or indirectly dispose of the financial
instrument.

The ascertainment by the AIFM of the loss of a financial instrument shall follow
a documented process readily available to the competent authorities. Once a loss is
ascertained, it shall be notified immediately to investors in a durable medium.

A financial instrument held in custody shall not be deemed to be lost within the
meaning of paragraph 33 of the Rules where an AIF is definitively deprived of its right of
ownership in respect of a particular instrument, but this instrument is substituted by or
converted into another financial instrument or instruments.

In the event of insolvency of the delegate to whom the custody of financial
instruments held in custody has been delegated, the loss of a financial instrument held in
custody shall be ascertained by the AIFM as soon as one of the conditions listed in
subparagraph (1) is met with certainty. There shall be certainty as to whether any of the
conditions set out in subparagraph (1) is fulfilled at the latest at the end of the insolvency
proceedings. The AIFM and the depositary shall monitor closely the insolvency proceedings
to determine whether all or some of the financial instruments entrusted to the third party
to whom the custody of financial instruments has been delegated are effectively lost.

A loss of a financial instrument held in custody shall be ascertained irrespective
of whether the conditions listed in subparagraph (1) are the result of fraud, negligence or
other intentional or non-intentional behaviour.

Depositary liability discharge for other losses
A depositary’s liability under paragraph 34(2) of the Rules shall not be

triggered, provided the depositary can prove that all the following conditions are met—

the event which led to the loss is not the result of any act or omission of
the depositary or of a delegate to whom the custody of financial
instruments held in custody in accordance with paragraph 29(1) of the
Rules has been delegated;

the depositary could not have reasonably prevented the occurrence of the
event which led to the loss despite adopting all precautions incumbent on
a diligent depositary as reflected in common industry practice;

despite rigorous and comprehensive due diligence, the depositary could
not have prevented the loss.

The requirements referred to in subparagraph (1)(a) and (b) may be deemed
to be fulfilled in the following circumstances—

(b)

(c)

(2)

(3)

(4)

(5)

16. (1)

(a)

(b)

(c)

(2)

55

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

natural events beyond human control or influence;

the adoption of any law, decree, regulation, decision or order by any
government or governmental body, including any court or tribunal, which
impacts the financial instruments held in custody;

war, riots or other major upheavals.

The requirements referred to subparagraph (1)(a) and (b) shall not be deemed
to be fulfilled in cases such as an accounting error, operational failure, fraud, failure to apply
the segregation requirements at the level of the depositary or a third party to whom the
custody of financial instruments held in custody in accordance with paragraph 29(1) of the
Rules has been delegated.

A depositary’s liability under paragraph 34(2) of the Rules is not triggered when
the depositary has ensured that the depositary and the delegate to whom the custody of
financial instruments held in custody in accordance with paragraph 29(1) of the Rules has
been delegated have taken all of the following actions—

establishing, implementing, applying and maintaining structures and
procedures, and ensuring expertise that are adequate and proportionate
to the nature and complexity of the assets of the AIF in order to identify
in a timely manner and monitor on an ongoing basis external events which
may result in loss of a financial instrument held in custody;

assessing on an ongoing basis whether any of the events identified under
clause (a) presents a significant risk of loss of a financial instrument held
in custody;

informing the AIFM of the significant risks identified and taking appropriate
actions, if any, to prevent or mitigate the loss of financial instruments held
in custody, where actual or potential external events have been identified
which are believed to present a significant risk of loss of a financial
instrument held in custody.

This paragraph shall apply mutatis mutandis to the delegate when the
depositary has contractually transferred its liability in accordance with paragraphs 33 and
35 of the Rules.

Objective reasons for the depositary to contract a discharge of liability
The objective reasons for contracting a discharge pursuant to paragraphs 33

and 34 of the Rules shall be—

limited to precise and concrete circumstances characterising a given
activity;

consistent with the depositary’s policies and decisions.

(a)

(b)

(c)

(3)

(4)

(a)

(b)

(c)

(5)

17. (1)

(a)

(b)

56

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

The objective reasons shall be established each time the depositary intends to
discharge itself of liability.

The depositary shall be deemed to have objective reasons for contracting the
discharge of its liability in accordance with paragraphs 33 and 34 of the Rules when the
depositary can demonstrate that it had no other option but to delegate its custody duties
to a delegate. In particular, this shall be the case where—

the law of a jurisdiction applicable requires that certain financial
instruments be held in custody by a local entity and local entities exist that
satisfy the delegation criteria laid down in paragraphs 33 and 34 of the
Rules; or

the AIFM insists on maintaining an investment in a particular jurisdiction
despite warnings by the depositary as to the increased risk this presents.

(2)

(3)

(a)

(b)

57

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

SCHEDULE III

(paragraph 49)

CALCULATION OF LEVERAGE

GENERAL PROVISIONS ON THE CALCULATION OF LEVERAGE
When calculating leverage of an AIF, leverage shall be expressed as the ratio

between the exposure of an AIF and its net asset value.

AIFMs shall calculate the exposure of the AIFs managed in accordance with the
gross method and the commitment method as set out in A and B below.

Exposure contained in any financial or legal structures involving third parties
controlled by the relevant AIF shall be included in the calculation of the exposure where
the structures referred to are specifically set up to directly or indirectly increase the
exposure at the level of the AIF. For AIFs whose core investment policy is to acquire control
of non-listed companies or issuers, the AIFM shall not include in the calculation of the
leverage any exposure that exists at the level of those non-listed companies and issuers
provided that the AIF, or the AIFM acting on behalf of the AIF, does not have to bear
potential losses beyond its investment in the respective company or issuer.

AIFMs shall exclude borrowing arrangements entered into if these are temporary
in nature and are fully covered by contractual capital commitments from investors in the
AIF.

An AIFM shall have appropriately documented procedures to calculate the exposure
of each AIF under its management in accordance with the gross method and the
commitment method. The calculation shall be applied consistently over time.

Methods of increasing the exposure of an AIF
When calculating exposure, AIFMs shall use the methods set out in Annex I for the

situations referred to therein.

Conversion methodologies for derivative instruments
AIFMs shall use the conversion methodologies set out in Annex II for the derivative

instruments referred to therein.

A. GROSS METHOD FOR CALCULATING THE EXPOSURE OF THE AIF
The exposure of an AIF calculated in accordance with the gross method shall be

the sum of the absolute values of all positions valued in accordance with the Rules and this
Schedule. For the calculation of the exposure of an AIF in accordance with the gross
method, an AIFM shall—

1.

2.

3.

4.

5.

6.

7.

1.

58

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

exclude the value of any cash and cash equivalents which are highly liquid
investments held in the base currency of the AIF, that are readily
convertible to a known amount of cash, are subject to an insignificant risk
of change in value and provide a return no greater than the rate of a three-
month high quality government bond;

convert derivative instruments into the equivalent position in their
underlying assets using the conversion methodologies set out in Annex II
and the methods set out in paragraphs (4) to (9) and (14) of Annex I;

exclude cash borrowings that remain in cash or cash equivalent as referred
to in point (a) and where the amounts of that payable are known;

include exposure resulting from the reinvestment of cash borrowings,
expressed as the higher of the market value of the investment realised or
the total amount of the cash borrowed as referred to in paragraphs (1) and
(2) of Annex I;

include positions within re-purchase or reverse re-purchase agreements
and securities lending or borrowing or other arrangements in accordance
with paragraphs (3) and (10) to (13) of Annex I.

B. COMMITMENT METHOD FOR CALCULATING THE EXPOSURE OF AN AIF
The exposure of an AIF calculated in accordance with the commitment method

shall be the sum of the absolute values of all positions valued in accordance with the Rules,
subject to the criteria provided for in paragraphs 2 to 9.

For the calculation of the exposure of an AIF in accordance with the commitment
method, an AIFM shall—

convert each derivative instrument position into an equivalent position in
the underlying asset of that derivative using the conversion methodologies;

apply netting and hedging arrangements;

calculate the exposure created through the reinvestment of borrowings
where such reinvestment increases the exposure of the AIF as defined in
paragraphs (1) and (2) of Annex I;

include other arrangements in the calculation in accordance with
paragraphs (3) and (10) to (13) of Annex I.

For the purposes of calculating the exposure of an AIF according to the
commitment method—

netting arrangements shall include combinations of trades on derivative
instruments or security positions which refer to the same underlying asset,

(a)

(b)

(c)

(d)

(e)

1.

2.

(a)

(b)

(c)

(d)

3.

(a)

59

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

irrespective — in the case of derivative instruments — of the maturity date
of the derivative instruments and where those trades on derivative
instruments or security positions are concluded with the sole aim of
eliminating the risks linked to positions taken through the other derivative
instruments or security positions;

hedging arrangements shall include combinations of trades on derivative
instruments or security positions which do not necessarily refer to the same
underlying asset and where those trades on derivative instruments or
security positions are concluded with the sole aim of offsetting risks linked
to positions taken through the other derivative instruments or security
positions.

By way of derogation from paragraph 2, a derivative instrument shall not be
converted into an equivalent position in the underlying asset if it has all of the following
characteristics—

it swaps the performance of financial assets held in the AIF’s portfolio for
the performance of other reference financial assets;

it totally offsets the risks of the swapped assets held in the AIF’s portfolio
so that the AIF’s performance does not depend on the performance of the
swapped assets;

it includes neither additional optional features, nor leverage clauses nor
other additional risks as compared to a direct holding of the reference
financial assets.

By way of derogation from paragraph 2, a derivative instrument shall not be
converted into an equivalent position in the underlying asset when calculating the exposure
according to the commitment method if it meets both of the following conditions—

the combined holding by the AIF of a derivative instrument relating to a
financial asset and cash which is invested in cash equivalent is equivalent
to holding a long position in the given financial asset;

the derivative instrument shall not generate any incremental exposure and
leverage or risk.

Hedging arrangements shall be taken into account when calculating the exposure
of an AIF only if they comply with all the following conditions—

the positions involved within the hedging relationship do not aim to
generate a return and general and specific risks are offset;

there is a verifiable reduction of market risk at the level of the AIF;

(b)

4.

(a)

(b)

(c)

5.

(a)

(b)

6.

(a)

(b)

60

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

the risks linked to derivative instruments, general and specific, if any, are
offset;

the hedging arrangements relate to the same asset class;

the hedging arrangements are efficient in stressed market conditions.

Subject to paragraph 6, derivative instruments used for currency hedging purposes
and that do not add any incremental exposure, leverage or other risks shall not be included
in the calculation.

An AIFM shall net positions in any of the following cases—

between derivative instruments, provided they refer to the same
underlying asset, even if the maturity date of the derivative instruments is
different;

between a derivative instrument whose underlying asset is a transferable
security, money market instrument or units, and that same corresponding
underlying asset.

AIFMs managing AIFs that, in accordance with their core investment policy,
primarily invest in interest rate derivatives shall make use of specific duration netting rules
in order to take into account the correlation between the maturity segments of the interest
rate curve as set out in the duration netting rules set out in paragraph 10.

Duration netting rules
Duration netting rules shall be applied by AIFMs when calculating the exposure

of AIFs according to paragraph 8.

The duration netting rules shall not be used where they would lead to a
misrepresentation of the risk profile of the AIF. AIFMs availing themselves of those netting
rules shall not include other sources of risk such as volatility in their interest rate strategy.
Consequently, interest rate arbitrage strategies shall not apply those netting rules.

The use of those duration netting rules shall not generate any unjustified level
of leverage through investment in short-term positions. Short-dated interest rate
derivatives shall not be the main source of performance for an AIF with medium duration
which uses the duration netting rules.

Interest rate derivatives shall be converted into their equivalent underlying
asset position and netted in accordance with Annex III.

An AIF making use of the duration netting rules may still make use of the
hedging framework. Duration netting rules may be applied only to the interest rate
derivatives which are not included in hedging arrangements.

(c)

(d)

(e)

7.

8.

(a)

(b)

9.

10. (1)

(2)

(3)

(4)

(5)

61

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

ANNEX I

Methods of increasing the exposure of an AIF
Unsecured cash borrowings: When cash borrowings are invested they have the

propensity to increase the exposure of the AIF by the total amount of those borrowings.
Therefore, the minimum exposure is always the amount of the borrowing. It might be
higher if the value of the investment realised with the borrowing is greater than the
borrowed amount. To avoid double counting, cash borrowings that are used to finance the
exposure shall not be included within the calculation. If the cash borrowings are not
invested but remain in cash or cash equivalent they will not increase the exposure of the
AIF.

Secured cash borrowings: Secured cash borrowings are similar to unsecured cash
borrowings but the loan may be secured by a pool of assets or a single asset. If the cash
borrowings are not invested but remain in cash or cash equivalent they will not increase
the exposure of the AIF.

Convertible borrowings: Convertible borrowings are purchased debt which has the
ability, under certain circumstances, to enable the holder or issuer to convert that debt into
another asset. The exposure of the AIF is the market value of such borrowings.

Interest rate swaps: An interest rate swap is an agreement to exchange interest
rate cash flows, calculated on a notional principal amount, at specified intervals (payment
dates) during the life of the agreement. Each party’s payment obligation is computed using
a different interest rate based on the notional exposures.

Contracts for differences: A contract for differences (CFD) is an agreement between
two parties — the investor and the CFD provider — to pay the other the change in the price
of an underlying asset. Depending on which way the price moves, one party pays the other
the difference from the time the contract was agreed to the point in time where it ends.
Exposure is the market value of the underlying asset. The same treatment must be applied
to financial spread bets.

Futures contracts: A futures contract is an agreement to buy or sell a stated amount
of a security, currency, commodity, index or other asset at a specific future date and at a
pre-agreed price. The exposure is the market value of the equivalent underlying asset.

Total return swaps: A total return swap is an agreement in which one party (total
return payer) transfers the total economic performance of a reference obligation to the
other party (total return receiver). Total economic performance includes income from
interest and fees, gains or losses from market movements, and credit losses. The exposure

(1)

(2)

(3)

(4)

(5)

(6)

(7)

62

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

of the AIF is the market value of the equivalent reference assets which have a bearing on
the economic performance of the swap.

Forward agreements: A forward agreement is a customised, bilateral agreement
to exchange an asset or cash flows at a specified future settlement date at a forward price
agreed on the trade date. One party to the forward is the buyer (long), who agrees to pay
the forward price on the settlement date; the other is the seller (short), who agrees to
receive the forward price. Entering into a forward contract typically does not require the
payment of a fee. The exposure of the AIF is the market value of the equivalent underlying
asset. This may be replaced by the notional value of the contract where this is more
conservative.

Options: An option is an agreement that gives the buyer, who pays a fee
(premium), the right — but not the obligation — to buy or sell a specified amount of an
underlying asset at an agreed price (strike or exercise price) on or until the expiration of
the contract (expiry). A call option is an option to buy, and a put option an option to sell.
The bounds of the exposure of the fund will be on the one side a potential unlimited
exposure and on the other side an exposure that is limited to the higher of the premium
paid or the market value of that option. The exposure between these two bounds is
determined as the delta (an options delta measures the sensitivity of an option’s price solely
to a change in the price of the underlying asset) adjusted equivalent of the underlying
position. The same approach must be adopted for embedded derivatives, e.g. in structured
products. The structure should be broken down into its component parts and the effect of
layers of derivative exposures must be adequately captured.

Re-purchase agreements: The re-purchase agreement normally occurs where an
AIF ‘sells’ securities to a reverse-repo counterparty and agrees to buy them back at an
agreed price in the future. The AIF will incur a financing cost from engaging in this
transaction and will therefore need to re-invest the cash proceeds (effectively cash
collateral) in order to generate a return greater than the financing cost incurred. This
reinvestment of ‘cash collateral’ means that incremental market risk will be carried by the
AIF and consequently must be taken into account in the global exposure calculation. The
economic risks and rewards of the ‘sold’ securities remain with the AIF. Also, a repo
transaction will almost always give rise to leverage as the cash collateral will be reinvested.
In the event that non-cash collateral is received as part of the transaction and this collateral
is further used as part of another repo, or stock-loan agreement, the full market value of
the collateral must be included in the global exposure amount. The exposure of the AIF is
increased by the reinvested part of the cash collateral.

Reverse re-purchase agreements: This transaction occurs where an AIF ‘purchases’
securities from a repo counterparty and agrees to sell them back at an agreed price in the
future. AIFs normally engage in these transactions to generate a low-risk money-market
type return, and the ‘purchased’ securities act as collateral. Therefore, no global exposure

(8)

(9)

(10)

(11)

63

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

is generated; nor does the AIF take on the risks and rewards of the ‘purchased’ securities,
i.e. there is no incremental market risk. However, it is possible for the ‘purchased’ securities
to be further used as part of a repo or security-loan transaction, as described above, and
in that case the full market value of the securities must be included in the global exposure
amount. The economic risks and rewards of the purchased securities remain with the
counterparty and therefore this does not increase the exposure of the AIF.

Securities lending arrangements: An AIF engaging in a securities lending
transaction will lend a security to a security-borrowing counterparty (who will normally
borrow the security to cover a physical short sale transaction) for an agreed fee. The
security borrower will deliver either cash or non-cash collateral to the AIF. Only where cash
collateral is reinvested in instruments, other than cash or cash equivalent, will global
exposure be created. If the non-cash collateral is further used as part of a repo or another
security lending transaction, the full market value of the securities must be included in the
global exposure amount as described above. Exposure is created to the extent that the cash
collateral has been reinvested.

Securities borrowing arrangements: An AIF engaging in the borrowing of securities
will borrow a security from a security-lending counterparty for an agreed fee. The AIF will
then sell the security in the market. The AIF is now short that security. To the extent that
the cash proceeds from the sale are reinvested this will also increase the exposure of the
AIF. Exposure is the market value of the shorted securities; additional exposure is created
to the extent that the cash received is reinvested.

Credit default swaps: A credit default swap (CDS) is a credit derivative agreement
that gives the buyer protection, usually the full recovery, in case the reference entity
defaults or suffers a credit event. In return, the seller of the CDS receives from the buyer
a regular fee, called the spread. For the protection seller, the exposure is the higher of the
market value of the underlying reference assets or the notional value of the credit default
swap. For the protection buyer, the exposure is the market value of the underlying
reference asset.

ANNEX II

Conversion methodologies for derivative instruments
The following conversion methods shall be applied to the non-exhaustive list below

of standard derivatives—

Futures—

Bond future: Number of contracts * notional contract size * market
price of the cheapest-to-deliver reference bond;

Interest rate future: Number of contracts * notional contract size;

(12)

(13)

(14)

(1)

(a)

(i)

(ii)

64

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Currency future: Number of contracts * notional contract size;

Equity future: Number of contracts * notional contract size * market
price of underlying equity share;

Index futures: Number of contracts * notional contract size * index
level;

Plain vanilla options (bought/sold puts and calls)—

Plain vanilla bond option: Notional contract value * market value of
underlying reference bond * delta;

Plain vanilla equity option: Number of contracts * notional contract
size* market value of underlying equity share * delta;

Plain vanilla interest rate option: Notional contract value * delta;

Plain vanilla currency option: Notional contract value of currency leg(s)
* delta;

Plain vanilla index options: Number of contracts * notional contract size
* index level * delta;

Plain vanilla options on futures: Number of contracts * notional contract
size * market value of underlying asset * delta;

Plain vanilla swaptions: Reference swap commitment conversion
amount * delta;

Warrants and rights: Number of shares/bonds * market value of
underlying referenced instrument * delta;

Swaps—

Plain vanilla fixed/floating rate interest rate and inflation swaps:
notional contract value;

Currency swaps: Notional value of currency leg(s);

Cross currency interest rate swaps: Notional value of currency leg(s);

Basic total return swap: Underlying market value of reference asset(s);

Non-basic total return swap: Cumulative underlying market value of
both legs of the TRS;

Single name credit default swap—

Protection seller - The higher of the market value of the underlying
reference asset or the notional value of the Credit Default Swap;

Protection buyer - Market value of the underlying reference asset;

(iii)

(iv)

(v)

(b)

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(c)

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(A)

(B)

65

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

Contract for differences: Number of shares/bonds * market value of
underlying referenced instrument;

Forwards—

FX forward: notional value of currency leg(s);

Forward rate agreement: notional value;

Leveraged exposure to indices with embedded leverage - A derivative
providing leveraged exposure to an underlying index, or indices that
embed leveraged exposure to their portfolio, must apply the standard
applicable commitment approach to the assets in question.

The following conversion methods shall be applied to the non-exhaustive list below
of financial instruments which embed derivatives—

Convertible bonds: Number of referenced shares * market value of
underlying referenced shares * delta;

Credit linked notes: Market value of underlying reference asset(s);

Partly paid securities: Number of shares/bonds * market value of
underlying referenced instruments;

Warrants and rights: Number of shares/bonds * market value of underlying
referenced instrument * delta.

List of examples of non-standard derivatives with the related commitment
methodology being used—

Variance swaps: Variance swaps are contracts that allow investors to gain
exposure to the variance (squared volatility) of an underlying asset and, in
particular, to trade future realised (or historical) volatility against current
implied volatility. According to market practice, the strike and the variance
notional are expressed in terms of volatility. For the variance notional, this
gives—

variance notional = vega notional
2 strike

The vega notional provides a theoretical measure of the profit or loss
resulting from a 1% change in volatility;

As realised volatility cannot be less than zero, a long swap position has
a known maximum loss. The maximum loss on a short swap is often
limited by the inclusion of a cap on volatility. However without a cap,
a short swap’s potential losses are unlimited;

(vii)

(d)

(i)

(ii)

(e)

(2)

(a)

(b)

(c)

(d)

(3)

(a)

(i)

(ii)

66

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

The conversion methodology to be used for a given contract at time t is—

Variance notional * (current) variancet (without volatility cap);

Variance notional * min [(current) variancet volatility cap2] (with
volatility cap) whereby: (current) variancet is a function of the squared
realised and implied volatility, more precisely—

(current) variance = t * realized volatility (0,t)2 + T - t *implied volatility (t,T)2

T T

Volatility swaps - by analogy with the variance swaps, the following
conversion formulae should be applied to volatility swaps—

Vega notional * (current) volatilityt (without volatility cap);

Vega notional * min [(current) volatilityt; volatility cap] (with volatility
cap) whereby the (current) volatility t is a function of the realised and
implied volatility.

Barrier (knock-in knock-out) options - Number of contracts * notional contract size
* market value of underlying equity share * delta.

ANNEX III

Duration netting rules
An interest rate derivative shall be converted into its equivalent underlying asset

position in accordance with the following methodology—

The equivalent underlying asset position of each interest rate derivative instrument shall be
calculated as its duration divided by the target duration of the AIF and multiplied by the
equivalent underlying asset position—
where—
(a) duration FDI is the duration (sensitivity of the market value of the financial derivative

instrument to interest rate movements) of the interest rate derivative instrument;
(b) duration target is in line with the investment strategy, the directional positions and the

expected level of risk at any time and will be regularised otherwise. It is also in line with
the portfolio duration under normal market conditions;

(c) CV derivative is the converted value of the derivative position as defined by the Annex
II.

The equivalent underlying asset positions calculated in accordance with paragraph
(1) shall be netted as follows—

(b)

(i)

(ii)

(c)

(i)

(ii)

(4)

(1)

(2)

67

INVESTMENT BUSINESS (ALTERNATIVE INVESTMENT FUND MANAGERS)
RULES 2016

(a) Each interest rate derivative instrument shall be allocated to the appropriate maturity
range of the following maturity-based ladder—
Maturities ranges—
1. 0 - 2 years
2. 2 - 7 years
3. 7 - 15 years
4. > 15 years

(b) The long and short equivalent underlying asset positions shall be netted within each
maturity range. The amount of the former which is netted with the latter is the netted
amount for that maturity range;

(c) Starting with the shortest maturity range, the netted amounts between two adjoining
maturity ranges shall be calculated by netting the amount of the remaining unnetted
long (or short) position in the maturity range (i) with the amount of the remaining
unnetted short (long) position in the maturity range (i + 1);

(d) Starting with the shortest maturity range, the netted amounts between two remote
maturity ranges separated by another one shall be calculated by netting the amount of
the remaining unnetted long (or short) position in the maturity range (i) with the
amount of the remaining unnetted short (long) position in the maturity range (i + 2);

(e) The netted amount shall be calculated between the remaining unnetted long and short
positions of the two most remote maturity ranges.

The AIF shall calculate its exposures as the sum of absolute values—

(a) 0% of the netted amount for each maturity range;
(b) 40% of the netted amounts between two adjoining maturity ranges (i) and (i + 1);
(c) 75% of the netted amounts between two remote maturity ranges separated by another

one, meaning maturity ranges (i) and (i + 2);
(d) 100% of the netted amounts between the two most remote maturity ranges; and
(e) 100% of the remaining unnetted positions.

Made this 27th day of June 2016



Chairman
The Bermuda Monetary Authority

(3)

68