Multi-levelled Assets in Rules
FundApps account for a wide variety of multi-levelled assets in our rules.
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, StructuredProduct, or ETF (“Composite” asset class) instrument.
Some rules correctly calculate and include/exclude more complex derivatives than these. 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 > PrefEquity > 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 (ie. convertible, warrant, DR) instruments held within Composite asset classes (e.g Future > Index > Subscription Right > Equity). If a rule includes 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/excluded in the rule, but will include them as they reference equity.
- Only consideration of multi-levelled assets where an underlying/child instrument's asset class conforms to what is listed as “Valid Underlyings” (in our property documentation) for its direct parent instrument and all parent instruments in the construction. For example:
- Warrant > Convertible > Equity is NOT considered as Convertible is not a Valid Underlying of a Warrant.
- Convertible > ADR > PreferredEquity is NOT considered as PreferredEquity is a Valid Underlying of an ADR but not a Convertible.
To identify if a rule accounts for all in scope derivatives, you can see the Asset Inclusion section in the rule will be updated to say "Multilevel Support: True". The DataViews used in rules will also explicitly describe which constructions are in-scope.
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.
- 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 have made the decision 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 which 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.
Questions and Requests
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 asset (which haven't been), please get in touch with firstname.lastname@example.org and our Regulatory Content team will review your request.