Financial Services (Jersey) Law 1998

Transcription

1 Financial Services (Jersey) Law 1998 Investment Business Codes of Practice March 2001 Financial Services (Jersey) Law Investment Business

2 Contents Introduction Page 4-5 Principles:- 1. A registered person must conduct its business with integrity A registered person must have the highest regard for the interests of its clients. 3. A registered person must organise and control its affairs effectively for the proper performance of its business activities Basic standards (3.1). Organisation and competence of partners, directors and senior managers (3.2). Staff qualifications (3.4). Continuing Professional Development (CPD) (3.5). Compliance (3.6) Complaints (3.7). Record - Keeping (3.8). 4. A registered person must be open about its business arrangements. 5. A registered person must maintain, and be able to demonstrate the existence of, both adequate financial resources and adequate risk management systems Financial Resources ( ). Insurance arrangements (5.4). 6. A registered person is expected to deal with the Commission and other authorities in the Bailiwick in an open and co-operative manner Notifications (6.3). 7. Class E registered persons. 8. This section applies to any person, with the exception of a class E application, who has made application in compliance with the Law under paragraph (1) of Article 8 of the Law before 1 July Financial Services (Jersey) Law Investment Business: Issued March

3 Contents continued Page Schedules:- First - Resource Requirement Table Financial Services (Jersey) Law Investment Business: Issued March 2001

4 Introduction The Codes of Practice ( the Codes ) are issued by the Jersey Financial Services Commission ( the Commission ) under powers given to it by Article 19 of the Financial Services (Jersey) Law The Codes have been prepared and issued for the purpose of establishing sound principles for the conduct of investment business. In exceptional circumstances, where strict adherence to the Codes would produce an anomalous result, registered persons may apply to the Commission for variance from the Codes. The Codes are arranged under eight numbered sections. The first six sections apply to all registered persons with the exception of Class E registered persons. Each is captioned by a fundamental principle which is then further described, explained and delimited, as the case may be. A registered person must conduct its business with integrity. A registered person must have the highest regard for the interests of its clients. A registered person must organise and control its affairs effectively for the proper performance of its business activities. A registered person must be open about its business arrangements. A registered person must maintain, and be able to demonstrate the existence of, both adequate financial resources and adequate risk management systems. A registered person is expected to deal with the Commission and other authorities in the Bailiwick in an open and co-operative manner. The seventh section applies to Class E registered persons only. The eighth section sets out certain transitional provisions. It applies to all Class D applicants, where applications were made before 1 July the day appointed under Article 43 (1) of the Law. Each section of the Codes is designed to be understood by reference to its full text including any notes. Where the Commission has reason to believe that at any time there has been a failure on the part of a registered person or an applicant to follow these Codes, it may revoke the registration or refuse to register the applicant. Financial Services (Jersey) Law Investment Business: Issued March 2001

5 Where it appears to the Commission that a person has failed to comply with these Codes, it may issue a public statement concerning that person. As the Codes establish sound principles for the conduct of investment business, a failure to comply with them may support a decision by the Commission that, for example, continued non-compliance or other failure to remedy the circumstances giving rise to the breach may be addressed by the issue of a written direction under Article 23 of the Law. Such a direction might impose requirements on the registered person to do or not to do things, remove persons, or cease operations. In appropriate circumstances that direction can be made public. Failure to follow these Codes shall not of itself render any person liable to civil proceedings, but the Codes shall be admissible in evidence in any proceedings if it appears to the court to be relevant to any question arising in the proceedings and shall be taken into account in determining any such question. Registered persons and applicants are reminded that the conduct of investment business involves the carrying on of any of the activities listed in Article 2(2) of the Law, by way of business in or from within the Bailiwick or, if by a company incorporated in the Bailiwick, in any part of the world. The Codes can be revised after consultation with such persons or bodies as appear to be representative of the interests concerned. Richard Pratt Director General March 2001 Financial Services (Jersey) Law Investment Business: Issued March 2001

6 1. A registered person must conduct its business with integrity Failure to comply with the above principle will be considered amongst the most serious of breaches of the Codes Without limiting the width of the above principle, a registered person may not: act or refrain from acting, or contract or have any other arrangement so as to avoid or seek to avoid any responsibilities it may have under the Codes and the full consequences at law of not following them unless the Codes expressly permit any such avoidance by agreement with any client. Financial Services (Jersey) Law Investment Business: Issued March 2001

7 2. A registered person must have the highest regard for the interests of its clients A registered person must act with due skill, care and diligence Where a registered person is responsible for providing advice or exercising discretion for its clients, it must be able to demonstrate in writing that the advice or exercise of discretion is appropriate for a particular client, its stated risk profile and investment requirements Where a registered person is responsible for providing advice or exercising discretion for its clients, it must seek from them information regarding their financial situation, investment experience and objectives as regards the services requested. Documentary evidence should be maintained in respect of this Where a house standard is being followed, complete records must be kept which will enable the transactions for any particular client to be checked against the standard in place or being used at the time of the transactions A registered person must only advise a client to switch investments, or exercise its discretion to switch investments on behalf of a client, in circumstances when it is in the client s interest to do so A registered person should either avoid any conflict of interest arising or, where conflicts arise, should ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, declining to act, or otherwise. A registered person should not unfairly place its interests above those of its customers and, where a properly informed customer would reasonably expect that the firm would place his interest above its own, the firm should live up to that expectation A registered person must deal with clients orders between themselves fairly and in due turn A registered person must execute orders for clients and allocate them promptly and accurately. Financial Services (Jersey) Law Investment Business: Issued March 2001

8 2.9. A registered person may only aggregate an order of a client with the order of another client or of the registered person, where it is in the overall best interests of all the clients concerned For investments other than units in a collective investment fund and longterm insurance products, in dealing with or for a client, a registered person must take reasonable care to ascertain the price which is the best available at the time for transactions of the kind and size concerned and then, unless circumstances require it to do otherwise in the client s interests, deal at a price no less advantageous to the client (excluding any of its disclosed charges). Financial Services (Jersey) Law Investment Business: Issued March 2001

9 3. A registered person must organise and control its affairs effectively for the proper performance of its business activities A registered person must: ensure its directors, senior managers and all other staff are fit and proper for their roles. Staff as identified in this section includes not only employees, but also self-employed representatives and corporate agents such as administration companies have procedures in place to vet and monitor working practices, competence and probity of its directors, senior managers and other staff, as well as, in some cases, their financial position apportion responsibilities among its senior managers and directors in such a way that their individual responsibilities are clear; and the business and affairs of the registered person are adequately monitored and controlled at senior management and board level operate robust arrangements for meeting the standards and requirements of the regulatory system, including adequate supervision of investment employees, dual or multiple authorisations for handling client assets and for guarding against involvement in financial crime (including the detection and prevention of money laundering) keep adequate and orderly records of its business and internal organisation. Organisation and competence of directors and senior managers Financial Services (Jersey) Law Investment Business: Issued March 2001

10 3.2. Paragraph 3.1 demands that registered persons meet certain standards of organisation as set out in the following sub-paragraphs Advisory only businesses which cannot handle clients assets (Class D persons) should effectively be directed by at least two appropriately qualified and experienced individuals (otherwise known as the Four Eyes principle) Businesses which are entitled to handle clients assets should effectively be directed by at least three appropriately qualified and experienced individuals (otherwise known as the Six Eyes principle) The relationship of the individuals must be such as to ensure they can all exercise independent judgement without duress or undue influence from one another in the best interests of clients and so as to secure compliance with the Law, any Orders made under it and these principles. It should be noted that a principal person may not necessarily have a 10% share holding or be appointed a director. Senior employees may be considered by the Commission for designation as a Principal Person where they can demonstrate effective influence on the day to day direction and supervision of the business activities and where the Senior employees accept that they can be held accountable as a Principal Person. Note: Paragraph 3.2 deals with prudential issues referring as it does, to the direction of the business of the registered person itself. As such, this is not a provision that directly governs, for instance, appropriate signatory arrangements for the execution of a specific transaction for a particular client Without limiting paragraph 3.1.1, directors and senior managers who do not deal directly with clients or individual transactions will be expected to hold appropriate professional qualifications and have significant experience. Staff qualifications 3.4. Paragraph requires a registered person to assess the competence of staff. The following sub-paragraphs set out the minimum examinations and experience requirements expected of investment employees. Where Financial Services (Jersey) Law Investment Business: Issued March 2001

11 complex financial instruments are transacted, for example, derivatives, more specialised qualifications, experience and other competencies may be required to ensure the registered person can demonstrate that staff are competent and adequately supervised Minimum examination requirements expected from all investment employees under the Codes are: Advisory business and discretionary investment management business:- Financial Planning Certificate (FPC) - Chartered Insurance Institute Certificate for Financial Advisers (CeFA) - Chartered Institute of Bankers; Professional Investment Certificate (PIC) - Chartered Institute of Bankers; Fellow of the Securities Institute by examination (FSI); Investment Advice Certificate (IAC) - Securities Institute; Investment Management Certificate (IMC) - Institute of Investment Management and Research (see note below); or Registered representative exams - (See note below) ACI Dealing Certificate - (see note below) ACI Diploma - (See note below) Note: Although the above examinations are shown as alternative, the Commission would expect investment employees to have taken an appropriate qualification for the role they fulfil. For example, for purely discretionary investment managers, appropriate examinations would include FSI or IMC. In addition, the Securities Representative exam (one of the Registered Representative examinations) would only be appropriate for discretionary investment management and investment advice ancillary to the business of dealing in regular exchange traded instruments but not Financial Services (Jersey) Law Investment Business: Issued March 2001

12 specialised areas such as Futures and Options, Derivatives etc. or longterm insurance products. Further qualifications would be required by any investment employee dealing or advising in these specialised areas. The ACI Dealing Certificate is the minimum requirement to conduct forward forex activities caught within the meaning of paragraph 7 of the first schedule of the Law and the following guidelines apply to investment employees whose main role is in this particular activity :- New entrants (the first two years) should at all times work under the supervision of a properly qualified senior and should pass the ACI Dealing Certificate during their first year in employment For execution only, the minimum requirement is the ACI Dealing Certificate plus two years experience in an active trading environment For the giving of investment advice to the merits of buying or selling a particular currency, the minimum requirement is the ACI Dealing Certificate plus five years experience in an active trading environment As with the ACI Dealing Certificate, the ACI Diploma is designed specifically for staff employed within a banks treasury operation and accordingly this qualification would only apply to products associated with this type of financial operation i.e. Forward Forex, Certificates of Deposit etc. and will not be acceptable for any investment business relating to the dealing of stocks and shares, discretionary investment management or long-term insurance products. No time scales or supervision requirements will be imposed on any investment employee who holds this qualification in the conduct of forward forex activities regulated under the Law Dealing:- Registered representative exams (please see note above) Fellow of the Securities Institute by examination (FSI) Financial Services (Jersey) Law Investment Business: Issued March 2001

13 Investment Management Certificate (IMC) - Institute of Investment Management and Research ACI Dealing Certificate/ACI Diploma (For Forward Forex activities only) The Commission may, on application, grant exemptions from the requirements to take the examinations under above, where individuals meet one or more of the following requirements: Over 55 years old on 1 July 1999 with at least 10 years relevant experience and certification of competence by chief executive/ managing partner; Membership of the Securities Institute (MSI) designation, at least 10 years relevant experience and certification of competence by chief executive/ managing partner; Associate of the Chartered Institute of Bankers (ACIB) where examinations taken have included the Investment Module. Associate of the Chartered Institute of Bankers Trustee Diploma (ACIB (Trustee Dip.)) where examinations taken have included the Investment module (post 1988); the Investment module prior to 1988 is only appropriate for advice ancillary to the business of discretionary investment management. Fellow or Associate of the Institute of Chartered Accountants in England and Wales where the Institutes Initial Test of Competence (ITC) for retail investment business has been gained. This relates to long-term insurance products only Qualifications considered equivalent or higher to the above by the Commission; In exceptional circumstances on application to the Commission. For the purposes of the Code, investment employee means a person employed by the registered person, whether employed under a service contract or a contract for services as: Financial Services (Jersey) Law Investment Business: Issued March 2001

14 advisors and their immediate supervisors; discretionary investment managers and their immediate supervisors; and dealers and their immediate supervisors. Note : Supervisor means a person who is responsible, either alone or jointly with one or more other persons, for the management, supervision and control of any investment employee who is not himself a supervisor. Continuing professional development 3.5. Paragraph also requires staff to undergo Continuing Professional Development (CPD) CPD is a compulsory requirement for investment employees and the compliance officer. Registered persons are required to maintain CPD records for all such staff A minimum of 35 hours per year of relevant CPD is required It is acceptable to utilise relevant professional body CPD schemes The onus is on each registered person to demonstrate the adequacy of its CPD regime. Notes: 1. In addition to attending training courses, there are a number of other acceptable ways to attain the minimum CPD requirement, including:- inhouse training, seminars, conferences, further qualifications, product presentations, computer-based training, one-to-one tuition etc. 2. Management of the registered person is responsible for ensuring that CPD is appropriate for relevant employees and this consideration must take into account the employees job description, current duties and future development needs. Compliance Financial Services (Jersey) Law Investment Business: Issued March 2001

15 3.6. In order to comply with paragraph there is a requirement for a registered person to designate an appropriately qualified individual, by experience and/or examination, as its compliance officer Duties can be delegated either internally or externally The compliance officer is responsible for: ensuring the registered person has robust arrangements for compliance with the Law, any Orders made under it and the Codes; securing appropriate monitoring of operational performance and promptly instigating action to remedy any deficiencies; and providing the principal point of contact on regulatory matters The Commission must be informed of any change of the designated Compliance Officer and a Personal Questionnaire forwarded to the Commission accordingly. Note: There is no specific requirement for a registered person to be subject to an internal audit review. However, the Commission will recognise and take comfort from those registered persons that have effective internal audit controls, or, where such functions are provided from elsewhere within a group. The Commission requires access to internal audit reports and that such reports will be available to external auditors. Complaints 3.7. Compliance with also requires the registered person to establish effective complaints-handling systems and procedures and in particular to: Maintain adequate records of complaints, including a central register; Provide an initial response within 14 days, and in writing unless expressly agreed by the client to the contrary; and Notify the Commission if: Financial Services (Jersey) Law Investment Business: Issued March 2001

16 a complaint is not satisfactorily resolved within 3 months; the registered person considers it to be in the interests of the public or investors; the complaint results in a payment of a claim on a PII policy; or litigation commences. Record-keeping 3.8. Paragraph requires a registered person to keep adequate and orderly records, not only of business transacted, but also of its internal organisation. For example, the apportionment of responsibilities among senior managers and controls and compliance procedures. Accounting records and records of directors and staff own account dealings are included within this provision Every registered person is expected to maintain such books and records at an appropriate location in the Bailiwick, and if kept otherwise than in legible form, so as to be readable at a terminal in the Bailiwick and produced in legible form without any delay. Records must be kept for at least 10 years. Note: In special circumstances or where compliance is otherwise clearly impracticable, the Commission reserves the right to waive the requirement for registered persons to maintain books and records at an appropriate location in the Bailiwick. Financial Services (Jersey) Law Investment Business: Issued March 2001

17 4. A registered person must be open about its business arrangements A registered person must inform its clients that it is regulated by the Commission in the carrying on of investment business A registered person must communicate information to clients in a way that is adequate, fair and not misleading. This will include explaining whether the registered person is acting as a principal or as the agent of the client or any other person. A registered person must also provide confirmation, in legible form, of any transaction effected for the client A registered person that provides advice about investments from a restricted range of the available providers of investments of the same type, must inform its clients of the nature and extent of that restriction in writing. The specific wording is at the discretion of individual businesses, but the onus will be on each registered person to demonstrate that the nature and extent of such restrictions have been communicated clearly to the client A registered person is required to demonstrate that the client has been made aware of all associated fees and charges including commissions (both initial and recurring) and any payments to or from third parties (such as introductory fees or commission sharing arrangements) - effectively a no surprises policy. Any implications in relation to cancellation, failure to meet premiums and the ability and effect of making changes should also be made clear to the client. Financial Services (Jersey) Law Investment Business: Issued March 2001

18 5. A registered person must maintain and be able to demonstrate the existence of, both adequate financial resources and adequate risk management systems. Financial resources 5.1. For a registered person within Classes A, B or C, adequate financial resources means (subject to paragraph 5.3): A minimum of 25,000 paid up share capital (or evidenced net assets for non-incorporated entities) and A surplus of Adjusted Net Liquid Assets over Total Requirements (see the financial resource requirements in the First Schedule for the definitions of these and the appropriate calculations) For a registered person within Class D, adequate financial resources means: A minimum of 10,000 paid up share capital (or evidenced net assets for non-incorporated entities) and The maintenance of sufficient assets to meet liabilities as they fall due 5.3. Registered persons within Classes A, B, or C are required to notify the Commission (in addition to any notification obligation under the Law or these Codes): If their Adjusted Net Liquid Assets fall below 110% of their Total Requirements Of any single significant contingency, financial commitment or large exposure exceeding 25% of its Adjusted Net Liquid Assets Of any instrument, transaction or situation that appears not to be catered for in, or where the application of, the First Schedule might give a misleading impression of the adequacy of the financial resources. Financial Services (Jersey) Law Investment Business: Issued March 2001

19 Insurance arrangements 5.4. Paragraph 5 also requires the maintenance of certain professional indemnity insurance (PII): PII cover and extensions must include negligence and errors and omissions by the registered person and employee dishonesty Specifically, so far as lawful, extensions must include legal defence costs; retroactive cover in respect of claims arising from work carried out in the past by the registered person; loss of documents (liability and costs of replacement, restoration or reconstruction); self-employed or contract hire persons engaged in the registered person s business; indemnity to employees, former employees and/or consultants. A registered person must inform the Commission of any limitations in cover which may apply to any territory in which business may be conducted The minimum aggregate cover must exceed the greater of: three times relevant fees and commissions /10 th of controlled assets; or ,000,000 (one million) but registered persons shall not be required by the above tests to have aggregate cover exceeding 5,000,000 (five million) Any excess per claim on the policy should not exceed the total of 5,000 plus (0.75% of the aggregate cover in excess of 1,000,000) With the consent of the Commission, registered persons may self insure provided they are, or are owned, by an institution of stature. Financial Services (Jersey) Law Investment Business: Issued March 2001

20 Financial Services (Jersey) Law Investment Business: Issued March 2001

21 6. A registered person is expected to deal with the Commission and other authorities in the Bailiwick in an open and co-operative manner There is a need for candour and co-operation in a registered person s relationship with the Commission. Registered persons are required to advise the Commission promptly of any matter that might reasonably be expected to affect their registration or be in the interests of investors to disclose. This principle extends to the provision of information and notification of events concerning non-regulated activities and other members of the corporate group, where appropriate, (for example, in relation to money laundering issues and market abuse) When a registered person has failed to comply with other parts of the Codes, its observance or non-observance of this principle will be relevant to the question of mitigation or aggravation. Notifications (in addition to obligations under the Law) 6.3. Certain notifications will always be expected from a registered person: A registered person must notify the Commission in writing not less than 28 days before the change is implemented, of a change in the name of the registered person; any business name under which the registered person carries on investment business; the address of the principal office of the registered person; the address of the registered office of the registered person; and any address which is treated as the proper address of the registered person by Article 40 (6) of the Law. Financial Services (Jersey) Law Investment Business: Issued March 2001

22 A registered person must notify the Commission immediately in writing of any of the following the presentation of any application to the court for désastre, or the winding up of the registered person or of a company which is a subsidiary or holding company of the registered person, or the summoning of any meeting to consider a resolution to wind-up a registered person, or a company which is a subsidiary, or holding company of the registered person; the application by any person for the commencement of any insolvency proceedings, appointment of any receiver, administrator or provisional liquidator under the law of any country, in relation to the registered person the making or any proposals for the making of a composition or arrangement with creditors of the registered person; where the registered person is a partnership, an application to wind up or dissolve the partnership; the imposition of disciplinary measures or disciplinary sanctions on the registered person in relation to its investment business by any relevant supervisory authority (or any investment exchange or clearing house); the conviction of the registered person for any offence under legislation of any country relating to banking or other financial services, building societies, companies, credit unions, consumer credit, friendly societies, insolvency, insurance and industrial and provident societies, or for any offence involving fraud or dishonesty, or the imposition of any penalties for deliberate tax evasion; the re-registration of a registered person incorporated with unlimited liability as a limited liability company; a general partner in a registered person becoming a limited partner; the granting or refusal of any application for, or revocation of, authorisation to carry on investment, banking or insurance business in any country or territory outside the Bailiwick; Financial Services (Jersey) Law Investment Business: Issued March 2001

23 the granting, withdrawal or refusal of an application for, or revocation of, membership by the registered person of any investment exchange or clearing house; the appointment of inspectors (howsoever named) by a statutory or other regulatory authority to investigate the affairs of the registered person; any matter which would be material to the requirements of the registered person, any of its principal persons, or any of its investment employees to be fit and proper and ; any other matter which would be material to the Commission s supervision of the registered person or any of its investment employees. Note: The duty in and arises immediately the registered person knows, or has reasonable grounds for believing, that any of the above matters may have been or may be about to be committed A registered person must give written notice within seven days to the Commission of the following matters (subject to any general or specific waiver from the Commission) : in relation to any principal person who is an individual, changes in the information originally provided to the Commission on the form of application for registration relating to his name, good reputation or character; where a registered person is a body corporate, the formation, acquisition, disposal or dissolution of a subsidiary specifying the subsidiary s name and its principal business where a registered person is not a body corporate, when it acquires or disposes of a holding of more than half in nominal value of the equity share capital of a company, specifying the name of the company and its principal business A registered person must submit a written report to the Commission within seven days specifying any changes in the information originally submitted under the following headings: branch offices anywhere in the world from which the registered person carries on investment business; Financial Services (Jersey) Law Investment Business: Issued March 2001

24 insurance arrangements; and the countries outside the Bailiwick in which the registered person on investment business indicating whether this is done through a branch office, a subsidiary or otherwise. Note: The Commission may, on the application of a registered person, alter any requirement under 6.3 so as to adapt them to the circumstances of that person or to any particular kind of business on or to be carried on by it. The Commission shall exercise such powers conferred above where it appears that compliance with the requirement in question would be unduly burdensome having regard to the benefit which compliance could confer. Financial Services (Jersey) Law Investment Business: Issued March 2001

25 7. Class E registered persons 7.1. This section of the Codes applies to Class E registered persons only Such persons are expected to carry on investment business with integrity and to pay due regard to the interests of its clients Such persons are also expected to organise and control their affairs effectively; and maintain and be able to demonstrate the existence of, both adequate financial resources and adequate risk management systems and keep adequate and orderly records, not only of business transacted, but also of its internal organisation. For example, the apportionment of responsibilities among senior managers and controls and compliance procedures. Accounting records and records of directors and staff own dealings are included within this provision Every registered person is expected to maintain such books and records at an appropriate location in the Bailwick, and if kept otherwise than in legible form, so as to be readable at a terminal in the Bailwick and produced in legible form without any delay. Records must be kept for at least 10 years 7.4. Such persons must also deal with the Commission and other authorities in the Bailiwick in an open and co-operative manner In special circumstances or where compliance is otherwise clearly impracticable, the Commission reserves the right to waive the requirement for registered persons to maintain books and records at an appropriate location in the Bailwick Class E persons should remember that the Law and its subordinate legislation apply. Financial Services (Jersey) Law Investment Business: Issued March 2001

26 8. This section applies to any person, with the exception of a class E applicant, who has made application in compliance with the Law under paragraph (1) of Article 8 of the Law before 1 July In this Part: a person who has made application in compliance with the Law under paragraph (1) of Article 8 of the Law before 1 July 1999 (the day appointed for the purposes of Article 43(1) of the Law) is known as an applicant the period between the date of application, by an applicant, and its being granted or refused under Article 9 of the Law, is known as the transitional period Subject to paragraph 8.3 and 8.4 below, during the transitional period, an applicant must follow the Codes as issued under Article 19 as if references to a registered person were to an applicant, and to registered persons entitled to do a specific class of investment business were to an applicant seeking to be registered as a person entitled to do that class of investment business During the transitional period, an applicant must not inform its clients that it is regulated by the Commission as envisaged by paragraph 4.1; rather it may state that it has applied to be registered by the Commission for carrying on investment business During the transitional period, an applicant need not follow a provision of the Codes which is identified in Column 1 of the table below before the date specified in the entry in Column 2 of that table relating to that provision (such date being the compliance date ) Where an applicant wishes to rely upon paragraph 8.4 above in not following a provision of the Codes, it must have informed the Commission in its application, or otherwise in writing beforehand and thereafter it must take all reasonable steps to follow the provision by the compliance date. Financial Services (Jersey) Law Investment Business: Issued March 2001

27 The table referred to in Paragraph 8.4 Column 1 Column 2 Where a registered person is a Class D 30 June 2002 sole practitioner and cannot comply with of the Codes, the Commission has agreed a further transitional provision to extend to 30 th June 2002 providing :- The applicant has a satisfactory record No adverse information is held on Commission files A satisfactory initial compliance visit has taken place A locum agreement is in place with another Financial Services (Jersey) Law 1998 authorised entity to conduct investment business Central client and agency lists are in place within offices It should be noted that for persons to continue to take advantage of this transitional period they must continue to have acceptable compliance reports and submit satisfactory audited accounts. For the avoidance of doubt, the provisions in this section 8. are without prejudice to the exercise of any power by the Commission, including the imposition or varying of conditions to particular applicants and the exclusion of particular applicants from carrying on investment business during the application period. Financial Services (Jersey) Law Investment Business: Issued March 2001

28 The First Schedule (Paragraphs 5.1. and 5.3.) The following table (the Resource Requirement Table) sets out the methodology for calculating the Adjusted Net Liquid Assets and Total Requirements. The next pages set out the applicable definitions and calculations. Frequency of calculations - A firm must calculate risk requirements at least once every business day; and it may use prices of investments and physical commodities as at the close of business on the previous day. Resource Requirement Table Total assets X Less: illiquid assets (X) Less: Adjusted total assets X Total liabilities (X) add back : liabilities due>3yrs X allowable undrawn credit facilities X eligible subordinated loans X Adjusted total liabilities (X) Less: Adjusted net liquid assets (ANLA) X Expenditure Requirement (X) Position Risk Requirement (X) Counterparty Risk Requirement Foreign Currency Risk Requirement (X) (X) Total Requirement (TR) (X) Surplus/(deficit) of Adjusted Net Liquid Assets over Total Requirement (ANLA less TR) X(X) Financial Services (Jersey) Law Investment Business: Issued March 2001

29 Ratio of ANLA/TR (notify FSC if<110%) XX% Financial Services (Jersey) Law Investment Business: Issued March 2001

30 Definitions used in the First Schedule Total assets Illiquid assets Total liabilities Allowable undrawn credit facilities Expenditure Requirement Relevant Annual Expenditure bonuses Position Risk Requirement (PRR) Counterparty Risk Requirement (CRR) As disclosed in the current balance sheet. For example, land, intangibles (goodwill, intellectual property etc) and debtors which are more than 30 days overdue. As disclosed in the current balance sheet. By prior written consent the Commission may allow the inclusion of a guaranteed overdraft facility ¼ x (relevant annual expenditure) Total annual expenditure (based on audited annual results where available) less those items of expenditure that could be quickly reduced or eliminated if necessary (e.g. staff and directors or profit shares which are not fixed or guaranteed, interest paid on clients money/to counterparties, fees, brokerage and other similar charges etc), together with any exceptional item of expenditure with the Commission s consent. Registered persons which maintain positions in investments (either long or short) are exposed to the risk that the price of such investments may move against them in the future. A registered person shall calculate each of its position risk requirements as a percentage of the market value or realisable value of the investment (see Table 1 for the appropriate treatment of such), and the total position risk requirement, which is the sum of the requirements for each category, for entry in the Resource Requirement Table. Registered persons acting as dealers or brokers bear the risk that their customers or other counterparties may not meet their contractual obligations or complete their side of a transaction. Calculated as the sum of individual CRRs for each type of transaction (see Table 2). In addition, registered persons with a large exposure to a single counterparty bear a greater risk as a result of that large exposure. (see paragraph 5 of Table 2). Foreign Currency Risk Requirement (FCRR) 1. For each non-reporting currency (that is, each currency other than that in which the registered person s books of accounts are maintained) in which the registered person has monetary assets or liabilities or any off balance sheet contracts which would give rise to a position in that currency, the registered person should Financial Services (Jersey) Law Investment Business: Issued March 2001

31 calculate the net open position (netting assets and liabilities). This should be converted into the reporting currency. Where the price of an investment is quoted in more than one currency, a position in the investment shall be treated as an asset or a liability in the currency of the country in which the main or principal market in the investment is based. (Options included in the position risk requirement are to be excluded from these calculations). 2. The registered person should sum the net open positions for each non-reporting currency (in reporting currency equivalent) to give a balancing item for the reporting currency. The balancing item should be calculated such that the sum of net long positions in other currencies less the sum of the net short positions in other currencies plus the balancing item in the reporting currency (which could be positive or negative) equals zero. (Note that all the positions will have been converted into the reporting currency). 3. The net open foreign currency position is the sum of all the net long positions in foreign currencies and the balancing item in the reporting currency if it is positive. The Foreign Currency Risk requirement is 10% of the net open foreign currency position. Price difference Where the registered person has purchased securities for or sold securities to another party (ie a securities debtor), the price difference is the excess of the contract value over the current midmarket price of the securities. The price difference is taken as nil if there is no excess. Where a registered person has sold securities for or purchased securities from another party (ie a securities creditor), the price difference is the excess of the mid-market value of the security over the contract value. The price difference is taken as nil if there is no excess. Free delivery amount If the registered person has delivered securities to a counterparty and has not received payment, the free delivery amount is the full amount due to the firm. If the registered person has made payment to a counterparty for securities and not received the certificates or good title, the free delivery amount is the current mid-market value. Financial Services (Jersey) Law Investment Business: Issued March 2001

32 Table 1: Position Risk Requirement A. Debt <90 days 90 days - 1 year 1-5 yrs >5 years UK 2% x MV 2% x MV 5% x MV 10% x MV Government or local authority B. Equities Issued or 2% x MV accepted by an approved bank Other marketable 10% x MV 10% x MV 20% x MV 30% x MV investments FRNs <20 yrs 5% x MV >20 yrs 10% x MV Listed on a regulated investment exchange Traded on a regulated investment exchange Other 35% x MV 100% x MV 25% x MV C. Commodities Stock positions in physical commodities associated 30% of realisable value with a registered person s investment business D. Futures, options and contracts for difference Exchange traded futures and written options 4 x initial margin requirement Off exchange futures and written options Purchased options Contracts for differences The appropriate percentage shown in A, B and C above should be applied to the value of the underlying position. As for off exchange written options but limited to the current value of the option. 20% of the market value of the contract. Financial Services (Jersey) Law Investment Business: Issued March 2001

33 E. Other investments Single premium unit linked bonds and units 25% of realisable value. in a regulated collective investment scheme unless covered below Units in a regulated scheme which is a geared futures and options fund, or a property fund, or a warrant fund With profit life policies Any other investments 50% of realisable value. 20% of surrender value. 100% of amount of asset. Table 2: Counterparty Risk Requirement (CRR) A registered person must calculate the net CRR under each of the category headings below. Categories in which there is no entry or the net CRR is negative are to be treated as nil. The overall CRR is the aggregate of all such sub-totals. The Commission may consent to these calculations being based on an internationally recognised standard. 1. Cash against document transactions Where a registered person has unsettled bargains in any securities it must calculate the price difference to which it is exposed and then multiply this by the appropriate percentage below to calculate the CRR for each separate unsettled bargain. 2. Free deliveries Calendar days after settlement Percentage 0-15 Nil % % % Over % Where a registered person makes payment or delivers securities to a counterparty without receiving the certificate/good title or payment respectively, it must calculate a CRR for each free delivery by applying the appropriate percentage below or for such payment without receipt, under paragraph 8 below: Financial Services (Jersey) Law Investment Business: Issued March 2001

34 Business days since delivery Where free delivery has been made to: >15 A manager, underwriter or member of a 0% 0% 100% selling syndicate to whom payment for securities has been made A regulated financial institution or regulated 15% 15% 100% banking institution to whom securities have been delivered or payment has been made with the expectation that market practice will result in a settlement date longer than 3 days from delivery date. Any other counterparty 0% 100% 100% 3. Options purchased for a counterparty Where a registered person has purchased an option on behalf of a counterparty on terms which do not impose on the purchaser any actual or contingent margin requirement or liability to make any payment other than the initial purchase price of the option, and the counterparty has not paid the price by 3 days after trade date, the CRR is the amount by which the purchase price exceeds the current realisable value of the option. Where a registered person has purchased a traditional option for its own account or on behalf of a counterparty who has not paid the registered person, then, if the registered person has paid the option premium to the writer. It must calculate a CRR equal to the option premium. Financial Services (Jersey) Law Investment Business: Issued March 2001

35 4. Amounts owed in respect of exchange traded margined transactions a) Where, as a result of an exchange traded margined transaction, a counterparty of the registered person has an initial margin and/or variation margin requirement and has not met it fully with cash, acceptable collateral or a positive equity balance not used to meet variation margin, a registered person must calculate a CRR by multiplying the shortfall (or the relevant part of the shortfall) by the appropriate percentage contained in the table below. Initial and variation margin percentage table Business days since shortfall occurred 0-3 days 4 days & over Where the shortfall is for the account of: A. A market counterparty who has been 5% 5% granted a credit line under an adequate credit management policy available to cover the relevant category of margin and to the extent that it is sufficient to cover the shortfall. B. A customer who has been granted a 10% 10% credit line under an adequate credit management policy available to cover the relevant category of margin and to the extent that it is sufficient to cover the shortfall. C. A market counterparty or customer not 0% 100% within A or B above, or to the extent that he is not within A or B (the shortfall then being limited to the excess). (Note: A and C, or B and C may both apply in some cases.) b) Local or traded option market makers. A registered person must calculate a 100% CRR for amounts of initial and variation margin not met with acceptable collateral or a positive equity balance and owed to it by a local (or by a traded option market maker) in respect of an exchange traded margined transaction from the date of any shortfall, unless the registered person treats the local s (or market maker s) position as if it were its own (in which case the PRR rules will apply instead). c) Sums owed on closed out exchange traded margined transactions. When, as a result of an exchange traded margined transaction which has been closed out, a counterparty of the registered person owes any amounts to it arising out of losses on those transactions, Financial Services (Jersey) Law Investment Business: Issued March 2001

36 and has not fully met that amount through the deposit of cash, acceptable collateral or a positive equity balance not otherwise used, the registered person must after three days from the date of crystallisation of the loss calculate a CRR equal to the unpaid amount. d) Margin percentages. A registered person may opt to calculate the CRR using a higher or the highest initial margin or variation margin percentage, in order to avoid undue complication. 5. Concentrated risk to one counterparty If the total amount due to a registered person for free deliveries or other debts attracting a CRR from a single counterparty (treating as one counterparty several counterparties grouped together by the firm for margin or credit treatment) exceeds 25% of the registered person s ANLA it must calculate CRR by applying the appropriate percentage below: Amount of ANLA Additional CRR 0-25% Nil % 15% (or the entire excess if less) Over 50% 40% (or the entire excess if less) 6. Repurchase and reverse repo transactions, including sale and buy back and securities lending A registered person shall notify the Commission if it has counterparty exposures in these investments. 7. Swaps, forward contracts, OTC options, contracts for differences and off-exchange futures A registered person shall notify the Commission if it has counterparty exposures in these investments. 8. Loans to counterparties (including free delivery payments under paragraph 2 above) A registered person must calculate a 100% CRR on the amount by which a loan to a counterparty is not properly secured, or offset against an amount owed by the registered person to the counterparty (provided there is an agreement in writing that the registered person believes to be legally enforceable and effective to secure such set-off). 9. Other receivables and accrued income Other receivables and accrued income not covered elsewhere in this Table 2 attract 100% CRR from the time that they become due. Financial Services (Jersey) Law Investment Business: Issued March 2001