EXPLAN ATORY MEMOR ANDUM
TO:
COLLECTIVE INVESTMENTS INDUSTRY, TRUSTEES, FSB AND OTHER
INTERESTED PARTIES
FROM:
REGISTRAR OF COLLECTIVE INVESTMENT SCHEMES
DATE:
13 DECEMBER 2013
SUBJECT: REVISION OF BOARD NOTICE 80 TO THE COLLECTIVE INVESTMENT
SCHEMES CONTROL ACT, 2002 (ACT NO. 45 OF 2002) (“CISCA”)
____________________________________________________________________________
AMENDMENTS TO BOARD NOTICE 80 OF 2012: DETERMINATION OF SECURITIES, CLASSES OF
SECURITIES, ASSETS OR CLASSES OF ASSETS THAT MAY BE INCLUDED IN A PORTFOLIO OF
A COLLECTIVE INVESTMENT SCHEME IN SECURITIES AND THE MANNER IN WHICH AND
LIMITS AND CONDITIONS SUBJECT TO WHICH SECURITIES OR ASSETS MAY BE INCLUDED
(“the Conditions”)
The revision of Board Notice 80 of 2012 is aimed at allowing for changes set out hereunder, a number of
which are to address abuses and to allow for new developments, especially certain Financial Stability
Board and National Treasury imperatives, to clarify certain provisions and to remove inconsistencies
from the Conditions. This document addresses the most important aspects that have been amended, but
may ignore corrections of a grammatical nature, renumbering, or those purely for the purpose of
clarifying an existing condition.
This memorandum is not to be interpreted as providing the sole context for application of a specific
Condition.
General
The structure of the Conditions has been changed to include an additional chapter, namely Chapter VI,
which provides for guidelines for due diligence investigations where foreign equity and non-equity
securities are to be included in a portfolio.
The Registrar intends to issue an exemption for all managers to sub-section 45(a)(i) of CISCA that
requires a currency sovereign rating equal to that of South Africa for the country of investment in nonequities. The result will be that only sub-section 45(a)(ii) applies, i.e. application of the due diligence
guidelines for issuers determined by the Registrar.
Paragraph 14 of General Notice 569, currently determining the requirements for application of due
diligence to an exchange on which foreign equity securities are listed, will also be repealed as it is now
included in Chapter VI.
The previous Chapter VI that provides for “General” matters has been moved to the end as Chapter VII.
The Schedule
Under paragraph (b) of the definition of assets in liquid form and at the end of the definition, the
exclusion of a trust account as an asset in liquid form has been removed. This is related to the change to
paragraph 24 which confirms that an account in terms of section 105 of the Act can also operate as a
portfolio account but that the exposure created by such an account must then be added to other
exposures of the same entity. The proposed amendment is the result of proper consideration of the
meaning and purpose of sections 104 and 105 of the Act and also the practical requirement for an inflow
account under the manager in terms of section 104 that is not under the control of the Trustee, but
subject to other legislative safeguards.
Chapter 1: Standard Portfolio
1. A definition has been added for an investment company as the term is used further in the context
of exposures to equities of an investment company.
2. Under the definition of securities, sub-paragraph (a), the reference to repurchase agreements has
been deleted. Repurchase agreements are not permitted securities. However, the securities that
are exchanged in terms of a repurchase agreement or are the securities subject to the
repurchase agreement, may be permitted and accordingly the manner in which a repurchase
agreement may be applied is provided for in paragraph 16 of this chapter.
Condition 3(16) introduces the requirements that the securities which are the subject of the
repurchase agreement must be permissible in terms of the Notice, that the portfolio may not
suffer a loss as a result of the repurchase, other than normal market movements, and that any
gains must be applied for the benefit of the portfolio. It is certainly considered that a repurchase
agreement should not be used unless the intention is to obtain a benefit for the portfolio in the
first instance.
3. Condition 3 has been reworded in its entirety so as to provide for clearer reading. However,
wording has also been amended to clarify that the 120 percent limit as applied to a security’s
weighting in an index, only applies to an equity type portfolio, so as to avoid on-going abuse of
the rule in asset allocation type portfolios.
4. Condition 3(6) has been amended to clearly reflect its original intention, namely that a standard
portfolio may only invest in a fund of funds if the fund of funds is 85% invested offshore and does
not invest in another fund of funds or feeder fund.
5. Condition 3(9)(a) has been amended to provide reference to the due diligence investigations
required (Chapter VI) for foreign non-equity securities.
6. The previous inclusion of participatory interests in a collective investment scheme consisting of
non-equity securities and assets in liquid form has been removed and replaced with the inclusion
of assets in liquid form. It was always intended that assets in liquid form (including money market
funds) be permissible non-equity securities, however, its inclusion was omitted from Board Notice
80. The inclusion of investment in other non-equity portfolios is addressed under 3(3)(a) and
continued further reference to it under this paragraph 3(9) would be confusing.
7. Table 1 under Condition 3(9) has been expanded to provide for exposure limits for foreign nonequity securities as well as non-equity securities listed and traded on exchanges. The quality of
listed non-equity securities (other than foreign non-equity securities as subject to Chapter VI) is
tempered by other appropriateness and due diligence conditions, such as the Preamble and
Condition 17.
8. The exemption for Islamic funds from the determined exposure limits has been omitted as the
relevant period in Board Notice 80 has expired and the latest exemption was provided by a
separate notice.
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9. Condition 3(13) has been amended to extend investment in securities based on the value of Gold
to all of the other South African precious metals. An overall portfolio exposure limit of 10% to all
commodity referenced instruments has been determined, in line with the regulations applicable to
Pension Funds. The principle of excluding any instrument in terms of which a portfolio may be
obliged to take physical delivery of the commodity, has also been included.
10. The content of the existing Condition 3(16) has been moved one position further and a new
condition has been inserted in 3(16), to provide for repurchase agreements and as addressed
under paragraph 2 above.
Chapter II: Money Market Portfolios
11. The naming of this chapter has again been amended to remove the term “and Short term Debt”
as it is too cumbersome and confusing in an international context. The original intent was to
ensure that a manager could not circumvent the conditions contained in this chapter by
establishing a short-term debt portfolio and to name and market it as such. This has now been
addressed by extending the definition of “money market portfolio” so as to include any portfolio
structured as a short- term debt portfolio.
12. Further, the reference to a constant price in the definition has been deleted as this is no longer a
requirement and it is encouraged that money market portfolios apply daily marking to market
and provide a variable price.
13. Further under Condition 4 “Definitions”, a definition for an “interest rate swap” is included as it is
a transaction that is permitted for application to an existing money market instrument existing in
a portfolio.
14. A definition of a “maturity date” has been inserted so as to end on-going interpretation issues
and to clarify what the regulator’s intentions are pertaining to determinations of maturity dates,
namely to ensure that the date at which capital must be repaid with all interest is applied,
irrespective of so called “reset dates” or “roll-overs” and irrespective of it being subject to a
notice from the manager to reset the instrument. For instance, an agreement requiring notice by
a manager to confirm final repayment of capital plus interest to avoid automatic reset or roll-over
would not be acceptable; however, a requirement of a manager to confirm a reset or roll-over
would be acceptable.
15. Under Condition 5, a transaction for the swap of interest rates is deleted as it is not regarded as
a money market instrument. However, the manner in which a transaction for the swap of interest
rates may be applied to a money market instrument is determined in Condition 8(8), where it is
further clarified that such swap may not be applied against the portfolio, but only an instrument
and that it does not alter the maturity or create leverage.
16. The exemption for Islamic funds is again removed for the same reasons indicated under
paragraph 7 above.
17. Condition 8(7)(c) has been inserted so as to provide for the securitisation vehicles, also referred
to as “conduits”, that are permitted and regulated under the Banks Act. Clear requirements for
such vehicles as it pertains to money market portfolios, are provided, e.g. they may not be
synthetic, must be listed on an exchange, must provide sufficient disclosure to permit evaluation
of all risks involved, etc.
18. Condition 8(9) has been amended to clarify that a money market fund may apply a daily marked
to market variable price and where it does apply a constant price the portfolio must be valued on
a mark to market basis on the last day of the month. On this date the described adjustments
must be made to the actual yield. Where the yield becomes negative, the constant price must
be adjusted downwards and reported to the Registrar. This is done to bring the money market
portfolio closer to the Financial Stability Board and IOSCO requirements for money market
funds to address the systemic risks created by money market funds.
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19. Also in line with the international dictates referred to above, Conditions 10 and 11 have been
inserted.
20. Condition 8(10) requires the implementation and application of an on-going risk management
programme to ensure valuation and monitoring of the described risks relevant to money market
portfolios.
21. Under Condition 8(11), a constant 4% exposure by a money market portfolio to assets in liquid
form [as described in the new Condition 8(12)] is required. A level of 4% was considered after
careful evaluation of the natural levels of assets in liquid form in Money Market portfolios. Whilst
the European proposals require a 10% level, it is considered that due to the narrower
application of risk in money market instruments in South Africa, the 4% level should be
sufficient.
Chapter III: Fund of Funds Portfolio
22. Condition 9 now recognises the need for fund of fund portfolios to utilise financial instruments to
manage and hedge against exchange rate risks, subject to inclusion of such swaps being
permitted by the supplemental deed applicable to the portfolio.
Chapter IV: Feeder Fund Portfolio
23. Condition 11 also now recognises the need for feeder fund portfolios to utilise financial
instruments to manage and hedge against exchange rate risks, subject to inclusion of such
swaps being permitted by the supplemental deed applicable to the portfolio.
24. Condition 12 (g) confirms that a feeder fund cannot invest into a money market portfolio. Money
market portfolio investments are readily available and layering of costs in a low income portfolio
is not supported.
Chapter V: Financial Instruments
25. The definition of an “asset portfolio” has been deleted as it is not used anywhere.
26. Sub-paragraph 17(3) has been included to provide for the manner in which exposures created
by non-equity securities may be netted with financial instruments based on certain non-equity
securities.
Chapter VI: General
27. Condition 22 clarifies the position that the operational trust account as determined under section
105 of CISCA can be disregarded when exposure/investment limits are being applied.
JA BOYD
REGISTRAR OF COLLECTIVE INVESTMENT SCHEMES
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