Hong Kong SFC Publishes Consultation Proposals on Public Fund Requirements
Following an initial “soft” consultation with industry participants and relevant stakeholders, the Securities and Futures Commission (SFC) launched a three-month consultation on proposed amendments to the Code on Unit Trusts and Mutual Funds (UT Code). The consultation ended on 19 March 2018.
The proposals seek to modernise the current requirements under the UT Code for public funds (referred to in this article as “funds”), in order to facilitate market development and enhance investor protection. The proposals are intended to create new opportunities and foster financial innovation in the market, and to align the regulatory regime with international standards, including recommendations from the International Organisation of Securities Commissions (IOSCO) and the Financial Stability Board.
Key proposals include: (i) strengthening requirements for key operators of funds (i.e., management companies, trustees and custodians, and delegates, if any); (ii) providing greater flexibility and enhanced safeguards for funds’ investment activities (particularly securities financing transactions, as hereinafter defined); (iii) introducing new fund types (e.g., active ETFs and closed-end funds); (iv) enhancing existing requirements for money market funds; (v) enhancing existing requirements for index funds and index-tracking (or passive) ETFs; and (vi) implementing related amendments to the SFC’s Code on MPF Products, Pooled Retirement Funds and Investment-Linked Assurance Schemes.
Key Operator Amendments
Management Companies
The proposals set forth requirements for management companies, including (among others) pertaining to: minimum capital; key personnel requirements; financial reports; appointment of service providers, representatives and agents; and risk management systems.
Minimum Capital
Currently, management companies must have minimum issued and paid-up capital and capital reserves of HK$1 million. In addition, asset managers licensed by the SFC for Type 9 regulated activity (asset management) are required to have on an ongoing basis a minimum paid-up capital of not less than HK$5 million under the financial resources rules, in order to cover risks associated with the regulated activities in which they engage.
To better reflect the expected financial standing and commitment of management companies managing funds in Hong Kong, the SFC proposes to increase such management companies’ minimum capital to HK$10 million (or equivalent).
Key Personnel Requirements
Currently, a management company and its delegates (if any) must each have at least two key personnel who are dedicated full-time staff and possess at least five years of experience with reputable institutions, in the management of public funds.
To provide flexibility for fund management groups with a multinational presence to leverage resources and expertise across group entities, the SFC proposes to relax the requirements with respect to “public fund experience” of these personnel, provided that the management company belongs to a well-established fund management group and possesses, on a group-wide basis, the requisite experience and resources as well as an appropriate oversight system to administer funds. In assessing the group’s overall experience, resources and capabilities, the SFC will take into account the number of years the group has been managing public funds, as well as the group’s regulatory record, assets under management attributable to funds, internal controls and risk management systems, and jurisdictions where the investment functions and operations are based.
However, in all cases, a management company’s two key personnel are expected to possess at least five years of investment management experience.
Financial Reports
The proposals would heighten the disclosure requirements for fund financial reports with respect to: soft dollar arrangements; formation costs; distribution; number of units/shares in issue and net asset value (NAV) per unit/share; investment portfolio; and collateral holdings. The SFC also introduced a new requirement to disclose information regarding leverage from the use of financial derivative instruments (FDIs).
- In respect of investment portfolio, the SFC proposes to require detailed disclosure as to: the use of FDIs; securities financing transactions; and securities borrowing transactions. Additional disclosures would be required for money market funds (i.e., portfolio’s weighted average maturity and weighted average life; amount of liquid assets on a daily and weekly basis, and as a percentage of NAV).
- For collateral holdings, additional disclosure requirements would include information as to: maturity tenor of collateral; re-investment of cash collateral; re-use or re-hypothecation of collateral; and custody/safe-keeping arrangements.
- With respect to leverage from FDIs, funds must disclose the lowest, highest and average gross amounts of leverage used during the period for any purpose, as well as the amounts of leverage from FDIs used for investment.
Appointment of Trustees/Custodians, Representatives and Agents
A management company must ensure that its trustees/custodians are properly qualified to discharge their duties, and that they fulfil their custody-related obligations. A management company must also ensure that the representatives and agents appointed for the fund (e.g., administrators, sub-custodians, brokers, valuation agents) possess sufficient expertise to deal with the fund’s underlying investments.
Risk Management Systems
The proposed provisions require, among other things, that a management company implement and maintain risk management and control systems to effectively monitor and to measure the risks of the fund’s positions and their contribution to the overall risk profile of its portfolio. Among other requirements, the systems must: be commensurate with the nature and scale of the fund’s transactions and investment activities; reflect the fund’s retail nature and risk profile; and be able to respond to normal and exceptional circumstances (including extreme market conditions).
A management company must also implement and maintain effective liquidity risk management policies and procedures, which take into account factors including the fund’s: investment strategy and objectives; investor base; liquidity profile; underlying obligations; and redemption policy.
Further, a management company must implement and maintain effective policies and procedures to assess the credit risk of the securities and instruments in which the fund invests. The fund cannot rely exclusively on external ratings to assess credit quality.
Additional Provisions
- Valuation and Pricing. A management company must inform its trustee/custodian of any pricing error in a timely manner. A pricing error of at least 0.5% of the fund’s NAV (including the aggregate of simultaneous or successive incidents) must be reported to the SFC.
- Withdrawal of Authorisation. In cases where a withdrawal is not due to the fund’s merger or termination, the SFC must be satisfied that the interests of investors will be safeguarded before granting its approval for the withdrawal (e.g. offshore funds must continue to be regulated by their primary regulator).
- Self-Managed Funds. In practice, a self-managed fund will not be authorised by the SFC to be offered to retail investors unless the fund delegates its investment management function to a qualified management company. The SFC explicitly stipulated this requirement in the proposed revisions to the UT Code.
Trustees and Custodians
Custody chains have become increasingly complex due to the increased internationalisation of fund portfolios. As the appointment of sub-custodians in foreign jurisdictions has created various risks and challenges in protecting fund assets, IOSCO has developed standards for custody of assets in collective investment schemes. In order to align Hong Kong’s regulatory requirements with the IOSCO standards and to enhance investor protection, the SFC has proposed requirements with respect to a trustee/custodian’s: appointment and eligibility; general obligations; and internal controls and systems.
Appointment and Eligibility
A trustee or custodian must have status as one of the following (i) a licensed bank in Hong Kong; (ii) a banking institution outside Hong Kong, which is under prudential regulation and supervision; (iii) a subsidiary trust company of a licensed bank, or of a banking institution outside Hong Kong that is under prudential regulation and supervision; or (iv) a registered trust company under the supervision of Mandatory Provident Fund Schemes Authority.
A management company and its trustee/custodian may be subsidiaries of the same holding company, provided they are functionally independent of each other pursuant to their respective policies and procedures.
General Obligations
The proposals require trustees/custodians to:
(i) Exercise due skill, care and diligence in discharging their obligations (including the selection and monitoring of agents, nominees and delegates);
(ii) Maintain proper records of fund property that cannot by its nature be held in custody (e.g., over-the-counter (OTC) derivatives);
(iii) Segregate fund property from (a) the property of the management company and its investment delegates (if any) and (b) the property of other funds and clients;
(iv) Properly monitor the fund’s cash flows;
(v) Maintain appropriate measures to verify ownership of fund property; and
(vi) Maintain a clear mechanism for: prompt escalation to senior management of the trustee/custodian and of the management company, as to information regarding potential breaches of the trustee/custodian’s obligations and duties; and the timely reporting to the SFC regarding material breaches.
Review of Internal Controls and Systems
The proposals include substantial amendments to Appendix G of the UT Code, which sets out the requirements with respect to the periodic independent audit of the trustee's or custodian's internal controls and systems – in particular, to: (i) expand the scope of audits by setting out minimum areas to be covered; (ii) require an independent auditor’s opinions on the design suitability and operational effectiveness of the controls; and (iii) require the independent auditor to report to the management of the trustee/custodian any material weakness in, or failure of, controls or control systems identified, and to provide recommendations for improvement. Reports of such periodic audit are to be submitted to the SFC.
Investment Activities
Diversification
The SFC proposes to enhance the diversification requirements by introducing: (i) a limit of 20% of a fund’s NAV for investments in, or exposure to, entities within the same group; and (ii) a separate diversification limit of 20% of a fund’s NAV for cash deposits with the same entity (or entities within the same group), except in the event of launch, merger or termination of the fund. For this purpose, “entities within the same group” means entities in the same group for purposes of consolidated financial statements prepared under internationally recognised accounting standards.
The following arrangements with entities within the same group will be covered under the enhanced requirements: (i) investments in securities issued by such entities; (ii) exposure to such entities through underlying assets of FDIs; and (iii) net counterparty exposure to such entities arising from transactions of OTC derivative instruments. However, the requirements will not cover: index-based FDIs; FDIs transacted on an exchange where the clearing house performs a central counterparty role; and FDIs that are marked-to-market daily in the valuation of their positions and subject to margin requirements on at least a daily basis.
Illiquid Assets
The SFC proposes to clarify that “illiquid assets” means securities that cannot be readily convertible into cash at limited cost in an adequately short timeframe, thereby impairing the fund’s ability to satisfy its redemption and other payment obligations.
Loans and Borrowings
Currently, a fund may not lend, assume, guarantee, endorse or otherwise become directly or contingently liable for, or in connection with, any obligation or indebtedness of any person. The maximum limit for a fund’s borrowing is 25% of the fund’s NAV (except for a capital markets fund, in which case the limit is 10%). The SFC proposes to lower a fund’s borrowing limit to 10% of its NAV. The SFC also proposes exceptions in the case of securities financing transactions that may lead to direct or contingent liabilities or obligations, as discussed further below.
Securities Financing Transactions
The existing provisions of Chapter 7 of the UT Code (Core Investment Requirements) do not specifically cover securities lending, sale and repurchase (repo) and reverse repurchase (reverse repo) transactions (collectively, securities financing transactions). In recognition of this, as well as funds’ increased use of derivatives, the SFC proposes to introduce provisions to govern securities financing transactions, which would provide greater flexibility for funds to invest in derivatives. The proposals aim to reflect market developments and financial innovation, while establishing appropriate safeguards consistent with international standards and practices.
According to the SFC’s current published guidance, funds may only engage in securities financing transactions if: (i) it is in the best interests of holders to do so; (ii) associated risks have been properly addressed; and (iii) the minimum disclosure requirements in the fund’s offering documents have been met.
The SFC’s proposals would introduce explicit provisions in Chapter 7 to permit management companies to engage in securities financing transactions provided that: (i) it is in the best interest of the holders of units/shares to do so; (ii) associated risks have been properly mitigated and addressed; (iii) the counterparties to such transactions are “substantial financial institutions” (as defined in the UT Code) or other entities that the SFC approves on a case-by-case basis, taking into account factors such as the entity’s regulatory status and NAV; (iv) the fund has at least 100% collateralisation in respect of the transaction to ensure there is no uncollateralised counterparty risk exposure arising from such reverse repo; (v) all revenues from the transaction (net of direct and indirect expenses for services rendered in connection with the transaction) are returned to the fund; (vi) the fund is able at all times to recall the securities or the full amount of cash (as the case may be) subject to the transaction, or to terminate the transaction; and (vii) the fund obtains indemnification from the securities lending agent to protect against counterparty default.
Use of Derivatives Investments
Plain Vanilla Funds (PVFs)
Current restrictions upon a PVF’s investments in futures, options and warrants are set out in Chapters 7.6 – 7.10 of the UT Code.1 Recognising that financial innovation and changing investment needs have led to funds’ increased use of derivatives, the SFC proposes to remove these restrictions to provide funds with flexibility in implementing their investment objectives and strategies. The proposals would expand the types of derivatives in which PVFs may invest, subject to an overall derivatives limit of 50% of NAV. Throughout this article, all percentage calculations of derivatives exposure are based on the “commitment approach”, which measures the use derivatives for investment (non-hedging) purposes. Note that “hedging” has been narrowly defined in the proposed revisions to the UT Code.
Funds with Extensive Derivatives Investments
Where a fund investing in derivatives exceeds such 50% exposure, the fund will be governed by and subject to additional requirements under Chapter 8.9 (which covers funds that invest extensively in FDIs, up to a limit of 100% of NAV).
Such funds will likely be considered as “derivative products”, which are subject to enhanced distribution requirements under the Code of Conduct for Persons Licensed or Registered with the SFC (Code of Conduct). The Code of Conduct requires that, in order to distribute a derivative product, an SFC-licensed or registered person: (i) must assess the client’s knowledge of derivatives, and may not market the product to clients that are not knowledgeable with respect to derivatives; and (ii) must assure itself that the client understands the nature and risks of the product and has sufficient net worth to be able to assume the risks and bear the potential losses associated with trading in the product.
Retail Hedge Funds
UCITS funds with FDI investments of over 100% of their NAV will be governed by and subject to the requirements under Chapter 8.7 (which covers retail hedge funds). Such funds are subject to a minimum initial investment subscription of US$50,000, and similarly will be considered as “derivative products”.
Disclosure to Investors
The SFC proposes that funds must disclose in the “product key facts statement” the purpose of, and expected maximum leverage arising from, derivatives investments.
In addition, the SFC proposes to require HK-domiciled funds to include in their interim and annual financial reports information regarding the leverage arising from derivatives investments.
Other Safeguards
The SFC also proposes the following amendments to enhance investor protection:
- Diversification. Exposure to a reference entity of a derivative, together with other investments of the fund, would be subject to: (i) single entity limit of 10% of the fund’s NAV; and (ii) group limit of 20%. Counterparties. Counterparties in OTC derivatives transactions must be substantial financial institutions, whose net exposure complies with the diversification requirements (i.e., 10% single entity; 20% group limit).
- Collateral Provided by OTC Derivatives Counterparty. The following restrictions would apply: (i) the collateral must be subject to a prudent haircut policy; (ii) eligible collateral may not include: structured products whose payouts rely on embedded derivatives or synthetic instruments; securities issued by special purpose vehicles, special investment vehicles or similar entities; securitised products or unlisted collective investment schemes; and (iii) the fund’s collateral reinvestment policy must prohibit non-cash collateral reinvestment, and limit the reinvestment of cash collateral to: short-term deposits; high-quality money market instruments; and acceptable regulated money market funds.
- Asset Coverage. A fund must at all times be able to meet its payment and delivery obligations under all derivatives transactions. The management company must monitor and ensure that all derivatives transactions are adequately covered on an ongoing basis.
Investment in Other Funds
The SFC proposes to remove Chapter 8.1 of the UT Code, pertaining to unit portfolio management funds (UPMF). As a result, existing UPMFs would be classified as Chapter 7 funds, and therefore be subject to the Core Investment Requirements under the proposed amended UT Code.
Under the consultation, a feeder fund would mean a fund that may invest 90% or more of its NAV in a single fund (i.e. the master fund), rather than 100% of a fund’s assets under the current definition.
New Fund Types
The SFC introduces new chapters in the UT Code for listed open-end funds (also known as active ETFs) and closed-end funds, in order to facilitate the development of new products.
Active ETFs
An active ETF is a fund that is listed and traded on The Stock Exchange of Hong Kong Limited (SEHK), which is actively managed. Unlike a passive ETF, an active ETF does not track the performance of an index or a benchmark.
The SFC considered the whether it would be feasible to require full portfolio transparency for active ETFs. This requirement has been widely debated in other jurisdictions, and various regulatory approaches have been adopted. While some regulators require full portfolio disclosure on a daily basis, others permit the disclosure of an active ETF’s portfolio only to participating dealers and market makers ahead of the public.
The SFC has chosen not to adopt a full portfolio transparency regime for active ETFs, as requiring public disclosure on a daily basis might hinder the growth of active ETFs. The SFC proposes to permit the provision of portfolio information to participating dealers and market makers ahead of the public, in order to facilitate secondary market pricing as well as the long-term development of active ETFs in Hong Kong.
Subject to consultation feedback, a new Chapter 8.10 will be introduced to set out the regulatory requirements for active ETFs, including provisions covering: authorisation; availability to deal; investment restrictions; benchmark requirements; portfolio transparency requirements; dissemination of trading information; and requirements in relation to market makers.
- Authorisation. Active ETFs would be authorised for public offering in Hong Kong under section 104 of the Securities and Futures Ordinance, in a manner similar to the passive ETF listing process.
- Dealing. The requirements would cover conducting primary market creation and redemption through participating dealers and secondary market trading by retail investors.
- Investment Restrictions. These would be as set forth under the proposed amended Chapter 7 (Core Investments Requirements).
- Benchmark. Where an active ETF makes reference to a benchmark, it must be disclosed in the fund’s offering documents.
- Portfolio Transparency. An active ETF must publish full portfolio information on a monthly basis (with no more than one-month delay). However, participating dealers and market makers may be provided with portfolio information ahead of the public.
- Dissemination of Trading Information. An active ETF must update and publish its indicative NAV per unit or share every 15 seconds during trading hours on the SEHK.
- Market Makers. There must be at least one market maker for units or shares for each trading counter of an active ETF.
Subject to consultation with the SFC, an unlisted fund would be authorised to issue a listed share class for the purpose of listing on the SEHK, and such listed share class would be required to comply with the provisions applicable to active ETFs in Chapter 8.10.
Closed-End Funds
Closed-end funds are generally subject to redemption restrictions and are typically used to invest in relatively less liquid assets or restricted markets. As closed-end funds do not have to maintain liquidity buffers to meet redemption requests, such funds may be able to fully invest their assets to generate returns for investors.
Subject to consultation feedbacks, a new Chapter 8.11 will be introduced to codify existing requirements applicable to closed-end funds seeking the SFC’s authorisation under the UT Code. The chapter will set out the following regulations:
- Restrictions as to Liquidity. An applicant seeking to have a closed-end fund authorised may be granted flexibility from strict compliance with Chapter 7 and/or Chapter 8 (for example, with respect to the holding of illiquid securities), taking into account the fund’s inability to allow investors to redeem. The applicant will need to consult with SFC on any flexibility to be sought.
- Holder Base. The fund must be widely held, having at least 300 holders with no holders holding 30% or more of the votes exercisable at any general meeting of the fund.
- Trading Discount. The fund must have implemented policies and procedures to address any “prolonged significant discount” of its trading price on the SEHK to its NAV, which must be fair and equitable to holders and properly disclosed. An example would be providing specified redemption window(s) to allow holders to redeem their units/shares at net asset value.
- Redemptions, Takeovers and Mergers. These transactions must be carried out in a manner fair and equitable to all holders (i.e., with timely and adequate disclosure to holders and the market). The management company and the trustee/custodian should as soon as practicable consult with the SFC as to the manner in which these activities can be carried out.
- Transparency: The fund must disclose daily on its website the last closing NAV. The website must also disclose that the following matters are subject to holders' approval: (i) retirement or removal of the management company and appointment of the replacement management company; (ii) material changes in the fund’s investment objective, policy or restrictions; (iii) new issuance of shares following listing at a price below NAV per unit; and (iv) request for delisting or de-authorisation.
Enhanced Requirements for Money Market Funds
The SFC proposes enhancements to ensure robust requirements and to align with the relevant IOSCO Policy Recommendation for Money Market Funds (MMFs) issued in October 2012. These proposals are set out below.
Definition of an MMF
The SFC proposes to clarify that an MMF means a fund that invests in short-term, high-quality money market instruments and which seeks to offer returns in line with money rates. As such, funds that are presented as having similar investment objectives would be subject to applicable MMF requirements even if such funds are not marketed as MMFs.
Permitted Assets
MMFs may invest only in: short-term deposits; high-quality money market instruments (e.g., government bills, certificates of deposit, commercial paper, short-term notes and bankers’ acceptances); MMFs authorised by the SFC or regulated in a generally comparable manner; asset-based securities (subject to a 15% maximum limit); and derivatives (for hedging purpose only). In assessing whether a money market instrument is high quality, its credit quality and liquidity profile (among other factors) must be taken into account.
Repo Transactions and Relevant Safeguards
The amount of cash received under a repo transaction is limited to 10% of an MMF’s NAV. Also, the aggregate amount of cash provided to the same counterparty in reverse repo transactions may not exceed 15% of an MMF’s NAV.
Portfolio Maturity Limits
The SFC proposes to require an MMF to maintain a portfolio with a weighted average maturity not exceeding 60 days and a weighted average life not exceeding 120 days.2
Minimum Percentages of Liquid Assets
The SFC proposes that an MMF maintain minimum percentages of liquid assets on both a daily and weekly basis. An MMF would be required to hold: (i) at least 10% of its NAV in liquid assets (i.e., cash, instruments or securities convertible into cash (whether by maturity or through exercise of a demand feature) within one business day); and (ii) at least 30% of its NAV in liquid assets (i.e., cash, instruments or securities convertible into cash (whether by maturity or through exercise of a demand feature) within five business days).
Amortised Cost Accounting and Constant NAV
Consistent with relevant IOSCO recommendations, the SFC proposes that MMFs offering a stable/constant NAV, or adopting amortised cost accounting for valuing the fund’s assets, may be considered by the SFC only upon an application for authorisation, and on a case-by-case basis. In considering whether to authorise a particular MMF, the SFC must be satisfied that the fund has measures and safeguards in place to address risks associated with offering a stable/constant NAV or adopting amortised cost accounting for valuation.
Enhanced Requirements for Unlisted Index Funds and Index-Tracking ETFs (Passive ETFs)
The SFC’s proposals in relation to authorising/ongoing requirements for index funds and passive ETFs are set out below.
Clarifying Requirements for Funds that Adopt Hybrid Index-Tracking Strategies through Derivatives
As a number of passive ETFs have used a hybrid of physical and synthetic replication strategies to track underlying indices through derivatives investments, the SFC sees the need to propose that, if the derivatives investments (in any form) of an index fund or a passive ETF exceed 50% of the fund’s NAV, the fund must, in addition to complying with the requirements under Chapter 8.6 of the UT Code (applicable to passive ETFs), comply with the structural requirements applicable to the fund manager and the fund itself in relation to derivatives investments under Chapter 8.8 of the UT Code (applicable to structured funds).
Enhancing the “Broadly Based” Requirement for an Underlying Index
The SFC generally considers an index as too concentrated if it has a single constituent security weighting of more than 20%. However, in circumstances where certain securities are highly dominant in a market, the weighting limit for the largest single component in an index may be increased to 35%; such an index would not be considered broadly based.
Codifying the Market Maker Requirement
There must be at least one market maker for each trading counter of the ETF, which will provide at least three months’ notice prior to terminating market making arrangements.
Enhanced Disclosure Requirements for Securities Financing Transactions by Passive ETFs
The SFC proposes that securities financing transactions undertaken by passive ETFs will be subject to the enhanced requirements under Chapter 7. A passive ETF must disclose on its website whenever securities financing transactions exceed 50% of the ETF’s NAV.
Listed and Unlisted Share Class for Index Funds and Passive ETFs
Subject to consultation with the SFC, funds under Chapter 8.6 may have unlisted and/or listed units or share classes, provided that the dealing arrangements and risks associated with both share classes are clearly disclosed in the offering documents. The unlisted class and listed class must comply with the requirements for index funds and passive ETFs, respectively, in Chapter 8.6.
Streamlining Other Requirements
The proposals would also: (i) remove the “Acceptable ETF Regime”; (ii) remove the requirements for a “Product Description Document”, so that all ETFs are subject to the same disclosure requirements; and (iii) impose the same trading information disclosure requirements for foreign and local ETFs.
Application of the Proposed Amendments to UCITS Funds
Under the proposed amended UT Code, UCITS funds continue to be deemed compliant in substance with the relevant provisions of the UT Code as referred to in the SFC’s streamlined approach for authorising UCITS funds. For clarity, sections of the proposed amended UT Code applicable to UCITS funds are set out in Appendix B to the consultation paper.
UCITS funds will be required to disclose in the product key facts statements the purposes of, and expected maximum leverage arising from, derivatives investments. Where a UCITS fund has more than 100% of its NAV in derivatives investments, it will be subject to a further minimum initial subscription of US$50,000.
Implementation Timeline
With respect to new funds with new management companies and new trustees/custodians, all of the proposed amendments to the UT Code will be effective immediately upon their gazettal. With respect to all funds and management companies, the following proposed amendments will also take effect upon gazettal: (i) flexibility to allow management companies to leverage group resources with respect to funds’ investment expertise and experience; (ii) requirements relating to active ETFs and closed-end funds; (iii) operational and post-authorisation requirements; and (iv) codification of existing requirements and practices.
With respect to other proposed amendments, a 12-month transition period from the effective date generally will be provided to existing funds or new funds with existing key operator(s), in order for such funds to comply with the proposed amended UT Code.
Conclusion
Fund managers should carefully consider the wide-ranging proposed amendments and be mindful of any relevant future developments. A substantial amount of work and time may be required to update relevant policies and procedures to comply with these amendments.
Footnotes
1) Restrictions include: (i) a PVF may only enter into futures contracts for non-hedging purposes, and provided that the net total aggregate value of contract prices, together with the aggregate value of holdings of physical commodities and commodity-based investments, may not exceed 20% of the fund’s NAV; (ii) the value (i.e., total amount of premium paid) of a PVF’s investment in warrants and options for non-hedging purposes may not exceed 15% of the fund’s NAV; (iii) with respect to the writing of call options on portfolio investments, the exercise price may not exceed 25% of the PVF’s NAV.
2) The term “weighted average maturity” is a measure of the average length of time to maturity of all the underlying securities in the fund weighted to reflect the relative holdings in each instrument. It is used to measure the sensitivity of an MMF to changing money market interest rates.
