40Netting and hedging arrangements

40 Netting and hedging arrangements

(1) For these rules, a relevant netting arrangement is the netting of positions between: (a) derivatives with the same underlying assets or index (disregarding any difference in the maturity dates of the derivatives); or (b) derivatives and the assets to which the derivative relates; or (c) derivatives and all of the assets that are components of the relevant underlying index to which the derivatives relate that are held by the fund in the proportions that each of those assets are weighted in the index. (2) For the rules, a relevant hedging arrangement is any holding of a derivative that the operator of the passport fund: (a) reasonably expects will reduce either: (i) both of the following types of risks: (A) the general market risk for a class of assets held by the passport fund; (B) specific risks arising from holding assets in that class; or (ii) the risk of receiving application moneys or having to pay redemption in a currency that differs from that for which the assets of the passport fund are or are likely to be required for the transactions of the passport fund; and (b) concludes with the sole purpose of offsetting those risks; and (c) reasonably expects does not provide an offsetting exposure that is greater than 105% of the exposure being offset at the time of entering into the arrangement. (3) For these rules, the net exposure of a relevant netting or hedging arrangement is determined by calculating the net value of the derivatives and assets to which the arrangement applies, using where applicable Appendix B to these rules and the exposures under any holding of the assets to which the arrangement applies. (4) The operator of a passport fund must document the reasons on which any expectations referred to in subsection (2) are based.