32Valuation of derivatives and securities lending arrangements

32 Valuation of derivatives and securities lending arrangements

For sections 30 and 31 the value of a derivative as it relates to an entity is assessed as follows: (a) if it relates to the entity in the manner described in items 3a and 3b of the tables in subsection 30(8) or 31(4), the value is assessed in accordance with Appendix B to these rules and may be a negative value in case of a permitted short exposure; (b) if it relates to the entity in the manner described in items 4a and 4b of the tables in subsection 30(8) or 31(4), the value is assessed as the maximum potential loss in accordance with Appendix A of these rules and may be determined: (i) after netting off any liability of the passport fund to the entity where: (A) the passport fund has a netting arrangement with its counterparty which creates a single legal obligation, covering all included transactions, such that, in the event of the counterparty’s failure to perform owing to default, bankruptcy, liquidation or any other similar circumstance, the passport fund would have a claim to receive or an obligation to pay only the net sum of the transactions subject to the netting arrangement; and (B) the operator is reasonably satisfied that the netting arrangement is legally effective under the law of the jurisdiction in which the counterparty is incorporated and, if a foreign branch of an entity is involved, also under the law of the jurisdiction in which the branch is located, the law that governs the individual included transactions and the law that governs the netting agreement; and (ii) after deducting the fair value of any collateral for an obligation of the passport fund under the arrangement, which is held by the passport fund as an asset of the fund and without encumbrance that is in the form of legal title to the asset, and that is: (A) cash; or (B) money market instruments that have been assessed by the operator of the passport fund as having acceptable risk.