25Requirements for derivatives

25 Requirements for derivatives

(1) A passport fund may enter into a derivative only if: (a) the underlying asset or index from which the value of the derivative is determined is one or more of the following: (i) an asset that the passport fund may hold under subsection 19(2); (ii) a rate of interest; (iii) a rate of inflation that is calculated, endorsed or determined by a government or government agency; (iv) an eligible index; and (b) the fair value of the derivative in the economy in which it is acquired by the passport fund can readily be determined, in accordance with Division 7.2; and (c) other than in exceptional circumstances, the derivative can be closed out or sold for that value, in that economy, on any business day in the place of the relevant office of the counterparty or if the derivative is traded on a financial market, when the financial market is open for trading of derivatives. Meaning of derivative (2) For these rules, a derivative is an arrangement between an entity and another party (the counterparty for the derivative): (a) where the arrangement is not: (i) currency; or (ii) a deposit; or (iii) a loan of moneys or securities; or (iv) a transferable security; or (v) a money market instrument; or (vi) a depository receipt over gold; and (b) under the arrangement: (i) one party must, or may be required to, provide consideration of a particular kind to the other on a future day; and (ii) the consideration or, if arrangements of that kind are commonly sold or closed out before performance, the value of the arrangement on sale or close out, is ultimately determined by or modified by reference (wholly or in part) to a variable; and (iii) no substantial part of the consideration provided by either party under the contract is the provision of services; and (iv) the consideration is not the provision of goods that the fund is to use for operational purposes; and (v) no party will be under an obligation to deliver an asset that is not a permitted asset under subsection 19(2).