Default Inclusion
By default, rules will correctly calculate and account for all two-levelled assets (e.g., Option > Equity) and three-levelled assets (e.g., Future > Index > Equity) with exposure to equities held within an underlying Index, Structured Product, or ETF (Composite asset class) instrument.
Extended Support
Some rules correctly calculate and include or exclude more complex derivatives than those referenced above. The scope of this extended support is:
Three levelled assets (e.g. Option > ADR > Equity).
Four levelled assets if the third layer is a Convertible Preferred Equity (e.g. Option > ADR > PreferredEquity > Equity).
Any number of levels of derivative asset classes (Option, Future, Swap, Forward, CFD) existing as parents to a Composite asset class which has Equity or Preferred Equity components (e.g. Future > Option > Index > Equity).
No conditionality will be checked on Derivative or Convertible (i.e. Convertible, Warrant, DRs) instruments held within composite asset classes (e.g. Future > Index > Subscription Right > Equity). If a rule includes a composite look-through to Equity or Preferred Equity, then all instruments held in a Composite (e.g. ADR, Convertible) that ultimately reference Equity or Preferred Equity will be included. For example, FundApps wouldn't check if Subscription Rights held within a Composite should be included or excluded in the rule but will include them as they reference equity.
The only consideration of multi-levelled assets where an underlying/child instrument's asset class conforms to what is listed as “Valid Underlyings” (in our service documentation) for its direct parent instrument and all parent instruments in the construction. For example:
Warrant > Convertible > Equity is NOT considered because a Convertible is not a Valid Underlying of a Warrant.
Convertible > ADR > Preferred Equity is NOT considered because a Preferred Equity is a Valid Underlying of an ADR but not a Convertible.
To identify if a rule accounts for all in-scope derivatives, you can look at the Asset Inclusion section of every rules General tab, and it will show Multilevel Support: True.
Regulatory Interpretation
Given the regulatory guidance doesn't go into specific detail on which multi-levelled assets should or should not be included in shareholding disclosure rules, FundApps will generally employ the following heuristic when deciding whether the supported multi-levelled assets are in scope for a given rule/regime: it will be considered in-scope if the asset classes of all instruments in the multi-levelled asset construction are in-scope and any conditions related to each asset class are satisfied.
For example:
Swap > Right > Equity. For a given rule, this construction will be in scope if the legal information indicates that Swaps, Subscription Rights, and Equity are individually in scope. If a rule excludes Rights, then this multi-levelled asset will be out of scope.
Option > Convertible (IsCoveredConvertible = ‘True’) > Equity. For a given rule, this construction will be in scope if the legal information indicates that Options, Convertibles (covered), and Equity are in scope. If a rule excludes Uncovered Convertibles (i.e. IsCoveredConvertible = ‘False’), then this asset will be out of scope.
In certain cases, FundApps might deviate from this rule but will include an explanation when this is done. As always, we remain open to input from our client community if one can provide explanatory arguments to the contrary based on wording from (in order of preference: 1) the aosphere memorandum or 2) other official or legal sources.
For practical purposes, FundApps has decided to limit our coverage of multi-levelled assets to those outlined above in “Extended support.” This entails that Derivatives on Composites (e.g., Indices) with components that are not Equity or Preferred Equity may not be conditioned correctly to be accurately included or excluded. In such relatively infrequent cases, the rule could be overinclusive.
Further Questions
If you have any questions on the scope of inclusion or if there are rules you are aware of that should be updated to correctly account for multi-levelled assets (which haven't been), please get in touch with our FundApps Support team.