French Banking Law // VOLCKER Rule Analysis

 

Weekly analysis of the 17 July 2021: FIRST SENTIER INVESTORS GLOBAL UMBRELLA FUND PLC – FSSA ASIAN EQUITY PLUS FUND I (CAPITALISATION) USD. The analysis will be made thanks to EURONEXT FUNDS360. This fund has been selected for its orientation in the Chinese market and its performance.

  1. Overall performance on the 15/07/2021:

Historical performance of the fund: +29,11% over the last year, +934,45% since launch in 25/02/2005. The purpose of this analysis is to determine if this fund shall be or not considered as a leveraged UCI (undertakings for collective investments).

If a fund is considered as a leveraged UCI, an eligible guarantee must be established by the banking entity for any transaction.

 

2. Fund overview :

Type of UCI: UCITS

“ An umbrella investment company with variable capital and with segregated liability between sub-funds incorporated with limited liability under the laws of Ireland under registration number 288284 and a collective investment scheme recognised in the United Kingdom under section 264 of the Financial Services and Markets Act 2000.”

Legal form: Irish SICAV (open-ended investment company)

COMPARTMENT: YES / FSSA ASIAN EQUITY PLUS FUND I (CAPITALISATION) USD

Type of investment policy:

“The Fund invests primarily in securities in the Asia Pacific region (excluding Japan). Such companies will be selected on the basis of their high dividend yields and their potential for long term capital appreciation. The Investment Manager will select investments which it believes offer the potential for sustainable above average dividend yields in addition to price appreciation.”

This fund is an equity fund, focused in the Chinese sector.

APPLICABLE LAW: Ireland

ISIN : IE00B067MR52

 

Profile of investors:

“Class VI are available for all eligible investors, including:- (i)    financial  intermediaries  which,  in  accordance  with  the  relevant  regulatory  requirements,  are  not  allowed  to  accept  or  keep  trail  commission  (in  the  EU  this  will  include  financial  intermediaries providing discretionary portfolio management and/ or investment advice on an independent basis); (ii)   financial  intermediaries  which  provide  non-independent  advice  and  which  according  to  separate  fee  arrangements  with  their  clients  are  not  allowed  to  accept  and  keep  trail  commission; and (iii)  institutional  investors  investing on their own account.”

 

This fund is open to both retail and institutional investors.

Level of investment in other UCIs:

“A UCITS may not invest more than 20% of net assets in any one CIS.  Investment in AIFs may not, in aggregate, exceed 30% of net assets. The CIS are prohibited from investing more than 10% of net assets in other open-ended CIS.”

This fund shall not invest more than 40% in any leveraged UCI (10%).

 

GLOBAL EXPOSURE:

“Global exposure will be measured using the commitment approach and such exposure cannot exceed 100% of the Net Asset Value of the Fund.”

The total fund exposure is regulated by the UCITS Regulation. Therefore, the global exposure of the SICAV shall not exceed 300% of the net asset value.

 

Asset Manager : First Sentier Investors (Hong Kong) Limited

3. SUMMARY

To be considered as a leveraged UCI, a fund shall:

  • Have a global exposure of more than 3 times the NAV
  • Invest in more than 40% in others leveraged UCI

Regarding the investment policy and the characteristics described, this fund shall not be considered as a leveraged UCI.

Therefore, global exposure shall not be above 300% of the total assets.

Therefore, any financial institution that would make an operation with this fund shall not need to set an eligible guarantee.

 

4. Volcker Rule Analysis

4.1. Introduction to the Volcker Rule

Source: https://www.nortonrosefulbright.com/en-a/knowledge/publications/ce3b3aa3/implications-of-the-volcker-rule-for-foreign-banking-entities

“Section 13 of the Bank Holding Company Act of 1956, as amended (the “Volcker Rule”), introduced in the Dodd-Frank Act, 3 generally “prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions”

The Volcker rule targets a covered fund, which includes an issuer that would be an investment company, but for the exclusions contained in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, as amended (the “1940 Act”).

Source : http://www.iflr.com/pdfs/A-users-guide-to-the-Volcker-Rule.pdf

Description of section 3©(1) and 3©(7) of the US investment company act of 1940 :

https://www.strictlybusinesslawblog.com/2017/09/21/3c1-funds-vs-3c7-funds/

After the description of the Volcker Rule, let’s determine if the fund FIRST SENTIER INVESTORS GLOBAL UMBRELLA FUND PLC – FSSA ASIAN EQUITY PLUS FUND I (CAPITALISATION) USD shall be considered as a covered fund or not.

4.2. Exclusions of Volcker Rule

To determine if a fund is a covered fund, let’s look about the exclusions of the law:

  • Foreign public funds
  • Wholly-owned subsidiaries
  • Joint ventures
  • Acquisition vehicles
  • Securitization related vehicles
  • Funds regulated under the 1940 Act
  • Other excluded entities

In addition, permitted activities and market-making are allowed:

“The prohibition against proprietary trading does not apply to permitted underwriting activities and market making-related activities. (…) To engage in either permitted activity, a banking entity must comply with three overall conditions:

  • the banking entity must maintain an internal compliance program required by Subpart D (and discussed below) to ensure that the banking entity complies with the conditions permitting the activity;
  • the compensation arrangements of people involved in these activities must not be designed to reward or incentivize prohibited proprietary trading
  • the banking entity must be licensed or registered to engage in the permitted activity.

In addition, the following specific conditions apply.

  • Underwriting: “Underwriting activities are permitted only if the trading desk’s underwriting position is related to a “distribution” of securities for which the banking entity is acting as underwriter.”
  • Market-making: “Market making-related activities are permitted only if the relevant trading desk routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase or sell those types of financial instruments for its own account in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity and depth of the market for the relevant types of financial instruments”
  • Permitted risk-mitigating hedging activities: “The prohibition on proprietary trading does not apply to certain risk-mitigating hedging activities.”

The Volcker 2.0 “(…) add four new exclusions to the definition of “covered fund” — credit funds, venture capital funds, family wealth management vehicles and customer facilitation vehicles — thereby exempting them from the scope of the Volcker Rule.”

https://www.lexology.com/library/detail.aspx?g=9646f9cd-cb61-46c1-8515-cffaaf2fcb77

4.3. Volcker Rule analysis

Before checking any exclusion or exemption, we must determine is the fund can be sold or not to any U.S. person.

“The  Shares  have  not  been  and  will  not  be  registered  under  the  US  Securities  Act  of  1933,  as  amended (the “Securities Act’’) or the securities laws of any of the states of the US nor is such a registration contemplated. The Shares may not be offered, sold or delivered directly or indirectly within the U.S. or to, or for the account or benefit of, any U.S. Persons.”

As mentioned above, the fund is open to retail investors.

Based on the extract from the prospectus, we can determine that:

–        The fund is a Non-US issuer

–        It is sold outside of the US

–        the subscription is not permitted for US investors

–        the fund be authorized to offer and sell ownership interests, and such interests be offered and sold, through one or more public offerings (See Type of Eligible investors).

We could conclude that this fund shall not be considered as a Covered Fund as described in the 1940 Investment Company Act.

While other exclusions may apply, FIRST SENTIER INVESTORS GLOBAL UMBRELLA FUND PLC – FSSA ASIAN EQUITY PLUS FUND I (CAPITALISATION) USD shall not be considered as a Covered Fund, relying on the exclusion from the Investment Company Act of 1940: Foreign Public Fund.

 

Sources :

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000YIL6&tab=4

https://www.sicavonline.fr/index.cfm?action=fiche&code=0000X009159

https://citywire.fr/news/quels-fonds-dactions-asie-ex-japon-ont-le-plus-collect%C3%A9-en-france-sur-3-ans/a1524789?re=86723&ea=1524906&utm_source=BulkEmail_International+France+Weekly&utm_medium=BulkEmail_International+France+Weekly&utm_campaign=BulkEmail_International+France+Weekly#i=19

https://www.lafinancepourtous.com/pratique/placements/produits-de-gestion-collective-opc/que-sont-les-opc/

https://www.journaldunet.fr/patrimoine/guide-des-finances-personnelles/1201825-sicav-definition/

https://epargne.ooreka.fr/astuce/voir/492561/code-isin

https://www.amf-france.org › Epargne-et-prestataires › OPCVM

https://www.boursedeparis.fr/centre-d-apprentissage/les-fonds-de-placement/types-de-fonds-de-placement

 

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