Rules Testing – Test Script (Rule 1 – Rule 10)

Rule 1: Assets Must Be Eligible Asset Types

This is a high level rule which considers the eligible asset types for UCITS and checks that there are direct no investments into Property or Commodities. More detailed monitoring of asset eligibility will be dealt with within the other eligible asset rules.

	Testing performed	Test completed Satisfactorily	Notes
1	Review the Rule text and the list of assets that have been set as not being UCITS eligible asset rules. Confirm that this appears correct.
2	Assuming that there will be no Property or Commodities, we test this rule functionality by including changing the rule to include an eligible asset type (e.g. cash or an investment into a CIS) within the list of ineligible assets. Assuming an asset of this type is held, once re-processed the rule should breach. The rule should then be set back to its original state.
3	Check that by default a new investment into a CIS defaults to be: Non-UCITS UCITS Equivalent = False Hence by default, this rule will flag as a breach until the above attributes are properly considered by the client and updated in the Fund master.

Rule 2. Securities Must Be Eligible Transferable Securities

Within FundWare, a Rule Custom Attribute is used to define when an attribute is / is not a transferable security – including by reference to it being on a proved market etc. You can also manually set an instrument to be a transferable security using a custom attribute which then feeds into the Rule Custom Attribute. Rule 2 then works by providing that there should be no securities where the security is classified within the custom attribute as not being a transferable security.

	Testing performed	Test completed Satisfactorily	Notes
1	Review the Rule Custom Attribute Definition for not being a transferable security and confirm that it appears satisfactory
2	Download a holdings report which includes all the stocks where the custom attribute definitions flags these as being not transferable. Review the holdings to confirm that the classification seem appropriate.
3	Take an example of a security that is flagging as not being transferable. In the equity/debt/fund master, manually set the security as being transferable. Re-process the rules and confirm that this now overrides the rule so that the instrument no longer flags.
4	Download a governance report or holding report which includes identification of whether the security has been manually set as being transferable. Confirm that these overrides are being kept to a minimum and seem appropriate.

Rule 3. CIS must be UCITS or Equivalent Non-UCITS CIS

Where a UCITS invests into another CIS, that CIS invested into must be a UCITS or a non-UCITS which is equivalent to a UCITS. This assessment needs to be made by the client.

The client then specifies within FundWare, in the Fund Master, whether:

The CIS invested into is a UCITS, UK NURS, QIS etc.
Whether the fund is equivalent to a non-UCITS

	Testing performed	Test completed Satisfactorily	Notes
1	Test that the attributes in the Fund master work satisfactorily for specifying: The CIS invested into is a UCITS, UK NURS, QIS etc Whether the CIS invested into is equivalent to a non-UCITS This should include reviewing the Governance Report: “Open end Funds – Overview”
2	For a selected investment into another CIS, change how the attributes above are populated for a number of different combinations and re-process this a number of times and confirm that breaches and passes arise as and when expected.

Rule 4: CIS must invest max. 10% in other CIS

Where a UCITS invests into another CIS, that CIS invested into must restrict its investment in other CIS to less than 10% NAV. This needs to be identified by the client and populated in the Fund Master.

	Testing performed	Test completed Satisfactorily	Notes
1	Test that the attributes in the Fund master work satisfactorily for specifying: The CIS invested into restricts its investment to max 10% in other CIS This should include reviewing the Governance Report: “Open end Funds – Overview”
2	For a selected investment into another CIS, change how the attribute above is populated and re-process this a number of times and confirm that breaches and passes arise as and when expected.
3	Check that by default a new investment into a CIS defaults to be 100% in other CIS and hence by default flags as a breach until the percentage is properly considered by the client and updated in the Fund master.

Rule 5: Deposits must have a maturity of less than 12 months

Where a UCITS invests into a Deposit (as opposed to Cash) that deposit must have a maturity of within 12 months (365 days) or must be repayable on demand.

	Testing performed	Test completed Satisfactorily	Notes
1	Test that the attributes in the Fund master work satisfactorily for defaulting and for specifying whether: Days to maturity Whether Deposit is repayable on demand This should include reviewing the Governance Report: “Deposits - Overview”
2	Review a holdings report and ensure that Deposits are being correctly identified as being distinct from cash – e.g. ensure that they have a separate asset type of, for example, “Deposit”
3	Test that maturity is mapping in correctly against deposits as part of the security set-up process.
4	Test that where the maturity date is not available for a deposit, that the date is defaulting to 31/12/2049 (and hence will cause a breach unless overridden)
5	For several test instruments, amend the maturity date and the field ”is repayable upon demand” and confirm that breach / pass results occur as expected.

Rule 6: Deposits must be made with acceptable credit institutions

Deposits must be with acceptable credit institutions. We also include Cash within this rule. Margin is not included within this Rule.
This rule relies on the Deposit taker being correctly identified as the Issuer of the deposit / cash. Then within the Company Master, the client specifies whether that particular Issuer is an Acceptable Deposit Taker.

	Testing performed	Test completed Satisfactorily	Notes
1	Check that the deposit taker is being properly captured as the Issuer against the Instrument.
2	In the Company master, for a selected Deposit Taker, change how the attribute for Is Acceptable Deposit Taker is populated and re-process the rules a number of times and confirm that breaches and passes arise as and when expected. This should include reviewing the Governance Report: “Deposit Takers - Overview”
3	Check that by default a new Issuer set up defaults to be Acceptable Deposit Taker = False, and hence this rule will breach for any new deposits / cash until this attribute is properly considered by the client and updated in the Company Master.

Rule 7: FDI must have eligible underlyings

This is a high level rule which considers the derivative types held within a portfolio to check that there are no derivatives types where the underlying is not an eligible asset for a UCITS – e.g. derivatives on gold, commodities, property (other than eligible indices).

	Testing performed	Test completed Satisfactorily	Notes
1	Review the Rule text and the list of derivative types that have been set as not being UCITS eligible asset rules. Confirm that this appears correct and complete.
2	We test this rule functionality by including changing the rule to include a derivative type that is an eligible derivative type for a UCITS (e.g. CDS, Index future etc) within the list of ineligible derivative types. Assuming a derivative of this type is held, once re-processed the rule should breach. The rule should then be set back to its original state.

Rule 8: OTC derivatives must be with acceptable counterparties

OTC derivatives must be with acceptable counterparties. These can be either acceptable 5% counterparties or acceptable 10% counterparties. We also include Margin within this Rule.

This rule relies on the Counterparty being correctly captured against the derivative and Margin. Then within the Counterparty Master, the client specifies whether that particular Counterparty is an eligible 5% counterparty or 10% counterparty, with a default that the counterparty is not an eligible counterparty.

	Testing performed	Test completed Satisfactorily	Notes
1	Check that the Counterparty is being properly captured against OTC derivatives
2	In the Counterparty master, for a selected derivative, change how the attribute for Acceptable counterparty type (e.g. not eligible, 5% and 10% counterparty) is populated and re-process the rules a number of times and confirm that breaches and passes arise as and when expected. This should include reviewing the Governance Report: “Eligible Counterparties - Overview”

Rule 9: OTC derivatives must be capable of reliable valuation

OTC Derivatives must be capable of reliable valuation. We also include Exchange traded derivatives within this rule.

This rule relies on the client considering this and then specifying in the Derivative Master whether the Derivative is capable of reliable valuation.

	Testing performed	Test completed Satisfactorily	Notes
1	In the Derivative Master, for a selected Derivative, change how the attribute for “Reliable Valuation” is populated (e.g. true or false) and re-process the rules a number of times and confirm that breaches and passes arise as and when expected. This should include reviewing the Governance Report: “Deposit Overview”.
2	Check that by default a new Derivatives when set up defaults to be Reliable Valuation = False, and hence this rule will breach for any new Derivative until this attribute is properly considered by the client and updated in the Derivative Master.
3	Test that if the DDddmmyy.xls spreadsheet is re-uploaded for a derivative already in the system, that the attributes of Reliable Valuation (and also the attribute re. Cash settlement) are not overridden.

Rule 10: 10% max. in unapproved securities and MMI

This rule considers the percentage of assets which are held in securities which are not on an approved market.

As a practical step, we set up the rule not to include Government securities. This is not in keeping with the regulations, but reflects a practical decision to assume that trading in government bonds is performed on an approved market.

The key driver for the rule is whether the exchange has been set-up as an Eligible Exchange in either:

Exchanges Master (general for all schemes)
Scheme Mandate (specific to an individual scheme)

Where a stock flags as not being on an approved market, this can be overridden by virtue of the stock being included on the “Rule 10 White list.” This should be kept to a minimum.

Corporate bonds pose a challenge as they are commonly OTC and a practical response needs to be taken to this. One step we commonly take is that Trace and ICMA may be flagged as the trading venue (although they are actually reporting mechanism) and we would accept this as being an eligible market.

	Testing performed	Test completed Satisfactorily	Notes
1	Review the rule text and confirm that is reflects the above commentary.
2	Download a holding report which includes identifying which exchange each instrument is on.

	Identify those which are not on “approved markets”.

	Insert a pivot report to sum the percentage of assets. Test that this tallies with the results being displayed on FundWare.
3	Test that marking an exchange as an eligible / ineligible exchange in the Exchanges Master has the expected effect of causing a breach / pass
4	Test that marking an exchange as an eligible / ineligible exchange in the Scheme Mandate has the expected effect of causing a breach / pass
5	Test that inclusion on the Rule 10 White List has the effect of stopping a security flagging as not being on an approved market


6	Review the contents of the Rule 10 White List and confirm that it is being kept at a minimum and looks appropriate.