AMENDED AND RESTATED SUB-ADVISORY AGREEMENT
AMENDED AND RESTATED SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 30th day of June, 2009, by and between XXXXXX XXXXXXX INVESTMENT
ADVISORS INC., a Delaware corporation (hereinafter referred to as the “Investment Adviser”), and
XXXXXX XXXXXXX INVESTMENT MANAGEMENT LIMITED, a company incorporated under the laws of England
(hereinafter referred to as the “Local Manager”).
WITNESSETH:
WHEREAS, Xxxxxx Xxxxxxx FX Series Funds (the “Trust”) is a Massachusetts business trust
engaged in business as an open-end management investment company with separate portfolios set forth
on Schedule A (each a “Fund”), as may be amended from time to time, and is registered under the
Investment Company Act of 1940, as amended (hereinafter referred to as the “Investment Company
Act”); and
WHEREAS, the Investment Adviser and the Local Manager are engaged principally in rendering
investment advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended (the “Advisers Act”); and
WHEREAS, the Local Manager is regulated by the Financial Services Authority in the United
Kingdom; and
WHEREAS, the Investment Adviser has entered into an investment advisory agreement (the
“Advisory Agreement”) with each Fund, pursuant to which the Investment Adviser provides investment
advisory services to the Funds; and
WHEREAS, the Investment Adviser entered into an investment sub-advisory agreement with the
Local Manager with respect to each Fund, effective as of the effective date set forth in Schedule A
(the “Current Sub-Advisory Agreement”); and
WHEREAS, as of June 30, 2009, the Current Sub-Advisory Agreement was amended and restated
(this “Agreement”) to incorporate amendments thereto and to make other ministerial changes designed
to facilitate the administration of this Agreement; and
WHEREAS, the Local Manager is willing to provide investment advisory services to the
Investment Adviser in connection with the operations of each Fund, on the terms and conditions
hereinafter set forth and including the terms and conditions contained in the Annex to this
Agreement; provided however, that nothing in the Annex to this Agreement shall authorize conduct
prohibited under the Investment Company Act or the Advisers Act;
NOW THEREFORE, in consideration of the premises and the covenants hereinafter contained, the
Local Manager and the Investment Adviser hereby agree as follows:
ARTICLE I
Duties of the Local Manager
The Investment Adviser hereby employs the Local Manager to act as discretionary investment
manager to the Investment Adviser and to furnish the investment management
services described below, subject to the broad supervision of the Investment Adviser and the
Board of Trustees/Directors of each Fund (the “Board”), for the period and on the terms and
conditions set forth in this Agreement. The Local Manager hereby accepts such employment and agrees
during such period, at its own expense, to render, or arrange for the rendering of, such services
and to assume the obligations herein set forth for the compensation provided for herein. The
Investment Adviser and its affiliates shall for all purposes herein be deemed a Professional Client
as defined under the rules and guidance promulgated by the Financial Services Authority
(hereinafter referred to as the “FSA Rules”). The Investment Adviser has the right to request to
be treated as a retail client. Classification as a retail client requires the Local Manager to
exercise a higher level of protective care under the regulatory system. However, the Local Manager
is not obliged to accept any such request. The Investment Adviser should be aware that
professional clients will not be entitled to certain protections afforded by the FSA Rules to
retail clients. For the avoidance of doubt, the Local Manager will, for purposes of the FSA Rules,
only treat the Investment Adviser (but not a Fund) as its customer from both a regulatory and a
contractual perspective. The Local Manager and its affiliates shall for all purposes herein each
be deemed to be an independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent any Fund in any way or otherwise be deemed an
agent of any Fund.
The Local Manager shall have full discretion, power and authority on behalf of each Fund to
buy, sell, retain, exchange or otherwise deal in investments and other assets, make deposits,
subscribe to issues and offers for sale and accept placings of any investments, enter into foreign
currency transactions on a spot or forward basis, effect transactions on any markets, take all day
to day decisions and otherwise act as the Local Manager judges appropriate in relation to the
investment and reinvestment of the portfolio of assets of each Fund. This includes performing all
acts and executing all documents which the Local Manager reasonably considers incidental thereto,
including (without limitation) power to execute and deliver all applications, requests, or claims
for refund, reduction, repayment or credit of, or exemption or relief from, any withholding tax or
similar taxes in any jurisdiction in which such applications, requests or claims may be made.
Subject to guidelines adopted by each Fund, the Local Manager shall also make recommendations or
take action as to the manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio of assets of each Fund shall be exercised. All of the
foregoing is subject always to the restrictions of the Declaration of Trust or Articles of
Incorporation, as applicable, and By-Laws of each Fund, as they may be amended and/or restated from
time to time and as provided to the Local Manager by the Investment Adviser, the provisions of the
Investment Company Act and the statements relating to each Fund’s investment objective(s),
investment policies and investment restrictions as the same are set forth in the then-currently
effective prospectus and statement of additional information relating to the shares of the Fund
under the Securities Act of 1933, as amended (the “Prospectus” and “Statement of Additional
Information,” respectively), as well as to the supervision of the Investment Adviser and the Board.
The Local Manager will not hold money on behalf of the Investment Adviser or a Fund, nor will
the Local Manager be the registered holder of the registered investments of the Investment Adviser
or a Fund or be the custodian of documents or other evidence of title.
The Local Manager may, where reasonable, employ agents (including affiliates) to perform any
administrative, dealing or ancillary services required to enable the Local Manager to perform its
services under this Agreement.
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ARTICLE II
Allocation of Charges and Expenses
The Local Manager assumes and shall pay for maintaining the staff and personnel necessary to
perform its obligations under this Agreement and shall at its own expense provide the office space,
equipment and facilities which it is obligated to provide under Article I hereof.
ARTICLE III
Compensation of the Local Manager
For the services rendered, the facilities furnished and expenses assumed by the Local Manager,
the Investment Adviser shall pay to the Local Manager a fee with respect to each Fund in an amount
to be determined from time to time by the Investment Adviser and the Local Manager, but in no event
in excess of the amount that the Investment Adviser actually received for providing services to
each such Fund pursuant to the Advisory Agreement. The fee currently paid by the Investment
Adviser to the Local Manager in respect to each Fund is set forth on Schedule A, as may be amended
from time to time.
ARTICLE IV
Limitation of Liability of the Local Manager
No warranty is given by the Local Manager as to the performance or profitability of any Fund
or any part thereof.
If a percentage restriction contained in a Fund’s investment objective(s) or investment
restrictions (as the same are set forth in the Fund’s then-currently effective Prospectus and
Statement of Additional Information) is adhered to at the time of investment, a later change in
percentage resulting from a change in values or assets will not constitute a violation of such
restriction.
The Local Manager will not be responsible to the Investment Adviser or a Fund for the
solvency, actions or omissions of any counterparty, broker, dealer, market-maker, bank, custodian
or sub-custodian, with whom it transacts business on the Investment Adviser’s behalf, other than
affiliates of the Local Manager.
Nothing in this Agreement will exclude or restrict any liability which the Local Manager has
under the Financial Services and Markets Xxx 0000, FSA Rules or Regulatory System (as defined by
FSA Rules) in relation to the Investment Adviser and which may not be excluded or restricted
thereunder.
The Local Manager shall not be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in the performance of investment
advisory services rendered with respect to a Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of reckless disregard of its
obligations and duties hereunder. The exception in the previous sentence shall apply to each
limitation of the Local Manager’s liability contained in this Article IV. As used in this Article
IV, the Local Manager shall include any affiliates of the Local Manager performing
3
services for
the Local Manager contemplated hereby and directors, officers and employees of the Local
Manager and such affiliates.
It is understood and agreed that in furnishing the investment advice and other services as
herein provided, the Local Manager shall use its best professional judgment to perform its
obligations hereunder which will provide favorable results for each Fund. The Local Manager shall
not be liable to a Fund or to any shareholder of a Fund to any greater degree than the Investment
Adviser, and the Investment Adviser shall indemnify and hold the Local Manager harmless against any
loss, liability or cost incurred by the Local Manager towards each Fund or to any shareholder of a
Fund except to the extent that such loss, liability or cost arises from the Local Manager’s fraud,
willful misfeasance, bad faith or gross negligence in the performance of the Local Manager’s duties
hereunder.
Each Fund shall be severally (and not jointly) liable for its own fees, costs, expenses and
other liabilities attributable to such Fund, and no Fund shall be responsible for any liabilities
in connection with any other Fund.
ARTICLE V
Activities of the Local Manager
The services of the Local Manager to the Investment Adviser in connection with the operations
of each Fund are not to be deemed to be exclusive, the Local Manager and any person controlled by
or under common control with the Local Manager (for purposes of this Article V referred to as
“affiliates”) being free to render services to others. It is understood that the Board and any
officers, employees and shareholders of a Fund are or may become interested in the Local Manager
and its affiliates, as directors, officers, employees and shareholders or otherwise and that
directors, officers, employees and shareholders of the Local Manager and its affiliates are or may
become similarly interested in a Fund, and that the Local Manager and directors, officers,
employees, partners and shareholders of its affiliates may become interested in a Fund as
shareholders or otherwise.
ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective with respect to each Fund for an initial period of up to
two years from the effective date set forth opposite such Fund’s name on Schedule A hereto, and
thereafter, but only so long as such continuance is specifically approved at least annually by (i)
the Fund’s Board or by the vote of a majority of the outstanding voting securities of the Fund and
(ii) a majority of those Trustees/Directors of the Fund who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the purpose of voting
on such approval.
This Agreement may be terminated at any time with respect to a Fund, without the payment of
any penalty, by the Investment Adviser, by the Board of that Fund, or by vote of a majority of the
outstanding voting securities of such Fund, or by the Local Manager, on sixty days’ written notice
to the other party. This Agreement shall automatically terminate with respect to a Fund in the
event of its assignment or in the event of the termination of the Advisory Agreement of such Fund.
Any termination shall be without prejudice to the completion of transactions already initiated.
4
ARTICLE VII
Amendments to this Agreement
This Agreement may be amended with respect to a Fund by the parties only if such amendment is
specifically approved by (i) the Fund’s Board or by the vote of a majority of outstanding voting
securities of the Fund and (ii) a majority of those Trustees/Directors of the Fund who are not
parties to this Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms “vote of a majority of the outstanding voting securities,” “assignment,” “affiliated
person” and “interested person” used in this Agreement, shall have the respective meanings
specified in the Investment Company Act and the rules and regulations thereunder, subject, however,
to such exemptions as may be granted by the Securities and Exchange Commission under said Act.
ARTICLE IX
Governing Law
This Agreement shall be construed in accordance with the laws of the State of New York and the
applicable provisions of the Investment Company Act. To the extent that the applicable laws of the
State of New York, or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
ARTICLE X
Limited Liability
With respect to all Funds that are organized as Massachusetts business trusts, as designated
on Schedule A, the Declaration of Trust, together with all amendments thereto establishing each
such Fund (the “Declaration”), is on file in the office of the Secretary of the Commonwealth of
Massachusetts, provides that the name of such Fund refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of such Fund shall be held to any personal liability, nor shall resort
be had to their private property for the satisfaction of any obligation or claim or otherwise, in
connection with the affairs of such Fund, but such Fund only shall be liable.
5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the
date first above written.
| XXXXXX XXXXXXX INVESTMENT ADVISORS INC. |
||||
| By: | /s/ Xxxxx Xxxxxx | |||
| Name: | Xxxxx Xxxxxx | |||
| Title: | President | |||
| XXXXXX XXXXXXX INVESTMENT MANAGEMENT LIMITED |
||||
| By: | /s/ Xxxxxx Onslow | |||
| Name: | Xxxxxx Onslow | |||
| Title: | Director | |||
6
SCHEDULE A
as of June 30, 2009
| Effective Date of | ||||
| Agreement and any | ||||
| amendments entered into | ||||
| Name of Fund | prior to June 30, 2009 | Fee | ||
Xxxxxx Xxxxxxx FX Series Funds: |
||||
The FX Alpha Strategy Portfolio
|
Effective Date: 02/20/07 | The Investment Adviser will pay the Local Manager on a monthly basis an aggregate amount equal to 54% of the net advisory fees the Investment Adviser receives from the Fund during such period, after taking into account any fee waivers. | ||
The FX Alpha Plus Strategy
Portfolio
|
Effective Date: 02/20/07 | The Investment Adviser will pay the Local Manager on a monthly basis an aggregate amount equal to 54% of the net advisory fees the Investment Adviser receives from the Fund during such period, after taking into account any fee waivers. |
Sch. A-1
ANNEX
| 1. | REGULATORY STATUS |
The Local Manager is authorised and regulated by the Financial Services Authority (the
“FSA”), the UK supervisory authority whose registered office is at 25 The North Colonnade,
Canary Xxxxx, Xxxxxx, Xxxxxx Xxxxxxx X00 0XX.
| 2. | ORDER EXECUTION |
The Local Manager acknowledges its duty under the FSA Rules to take all reasonable steps to
obtain the best possible result for the Investment Adviser (taking into account the factors
prescribed in the FSA Rules) when executing orders resulting from decisions to deal in
designated investments (as defined in the FSA Rules) and to act in accordance with the
Investment Adviser’s best interests when placing orders in respect of designated
investments with other persons for execution or when receiving and transmitting orders to
other persons for execution. Information concerning the Local Manager’s policy for meeting
those obligations (the “Order Execution Policy Disclosure Statement”) is included as
Schedule 1. The Investment Adviser acknowledges receipt of the Order Execution Policy
Disclosure Statement and confirms its consent to the matters described in it. For the
avoidance of doubt and as set out in the Order Execution Policy Disclosure Statement, the
Investment Adviser acknowledges that specific instructions from the Investment Adviser in
relation to the execution of orders may prevent the Local Manager from following its
execution policy in relation to such orders in respect of the elements of execution covered
by the instructions.
The Local Manager will act in good faith and with due diligence in its choice and use of
brokers or dealers (“Broker”) to place client orders or execute client transactions.
Subject thereto and to the FSA Rules, the Local Manager may execute or arrange for the
execution of transactions for the Investment Adviser on such markets or exchanges
(including markets or exchanges that are not Regulated Markets or MTFs) and with or through
such Brokers (but excluding any Affiliate) as it thinks fit. All transactions will be
effected in accordance with the rules and regulations of the relevant market or exchange,
and the Local Manager may take all such steps as may be required or permitted by such rules
and regulations and/or by appropriate market practice. For purposes of this Agreement,
“Multilateral Trading Facility” (also “MTF”) has the meaning given in the FSA Rules (in
summary, an investment exchange or multilateral trading platform other than a Regulated
Market); and “Regulated Market” has the meaning given in the FSA Rules (in summary, an
investment exchange or multilateral trading platform which, in either case, is regulated
within the EEA as a “regulated market” under the Markets in Financial Instruments
Directive).
The Investment Adviser expressly instructs the Local Manager not to make public immediately
any limit order relating to transactions in respect of a Fund which is not immediately
executed under prevailing market conditions where the Local Manager believes it is in the
Investment Adviser’s interests not to do so.
Annex-1
The Local Manager may aggregate transactions for a Fund with transactions of other clients
of the Local Manager and of its employees and of clients of its affiliate and its employees
and will promptly allocate such aggregated transactions among the participating accounts on
a fair and equitable basis in accordance its order allocation policy established in
compliance with the requirements of the FSA Rules. The Investment Adviser recognises that
the Local Manager will aggregate transactions only where it reasonably believes that it is
likely that the aggregation will operate overall to the advantage of such Fund. However,
on occasion the aggregation may operate to the disadvantage of a Fund in relation to a
particular order. The Local Manager will provide a copy of its order allocation policy to
the Investment Adviser upon request.
| 3. | DEALING ARRANGEMENTS |
The Local Manager’s policy regarding its Dealing Arrangements, including details of the
goods and services that relate to the execution of trades and those that relate to the
provision of research are set out in Schedule 2. The Local Manager shall provide the
Investment Adviser with details of its Dealing Arrangements with the frequency required by
the FSA Rules. For purposes of this Agreement, “Dealing Arrangements” means arrangements
entered into by the Local Manager as permitted by the FSA Rules for the receipt or payment
of money, goods or services that relate to the execution of trades or the provision of
research under which the Local Manager executes or arranges for the execution of orders in
designated investments.
| 4. | MATERIAL INTERESTS |
The Local Manager and any of its affiliates (an “Affiliate”) may, subject to the
limitations of the U.S. Investment Company Act of 1940, as amended, and to the overriding
principles of suitability and best execution and without prior reference to the Investment
Adviser, effect transactions in which the Local Manager or Affiliate has, directly or
indirectly, a material interest or a relationship of any description with another party,
which may involve a potential conflict with the Local Manager’s duty to the Investment
Adviser. Neither the Local Manager nor any Affiliate shall be liable to account to the
Investment Adviser for any profit, commission or remuneration made or received from or by
reason of such transactions or any connected transactions nor will the Local Manager’s
fees, unless otherwise provided, be abated. For example, such potential conflicting
interests or duties may arise because:
| • | any of the Local Manager’s or Affiliate’s directors or employees is a director of, holds or deals in securities of, or is otherwise interested in any company whose securities are held or dealt in on behalf of the Investment Adviser; | ||
| • | the transaction is in the securities of a company for which an Affiliate has provided corporate finance advice, underwritten, managed or arranged an issue or offer for sale; | ||
| • | the Local Manager may act as agent for the Investment Adviser in relation to transactions in which it is also acting as agent for the account of other clients and/or an Affiliate; |
Annex-2
| • | the transaction is in units or shares of a collective investment scheme (regulated or unregulated) of which the Local Manager or any Affiliate is the manager, operator, banker, adviser, custodian or trustee; or | ||
| • | The Local Manager may act as agent for a counterparty and also act as agent on behalf of the Investment Adviser and in the course of so acting may charge a commission to either the counterparty or the Investment Adviser. |
| Nothing in the Agreement shall oblige the Local Manager or any Affiliate to accept responsibilities more extensive than those set out in the Agreement or shall give rise to any fiduciary or equitable duties which would prevent or hinder either: (i) the Local Manager or any Affiliate performing investment management or other services for any person or entity other than the Investment Adviser or from making investments on their own behalf and the performance of such services for others or investment on their own behalf will not be deemed to violate or give rise to any duty or obligation to the Investment Adviser; or (ii) the Local Manager effecting any transaction with or for the Investment Adviser with an Affiliate; or (iii) such Affiliate acting both as market-maker and broker, principal or agent, dealing with other Affiliates and other clients and generally effecting transactions as provided above nor from retaining any remuneration received in respect thereof. | ||
| 5. | RECORDS AND REPORTS | |
| 5.1 | The Local Manager will keep accurate and detailed records with respect to all receipts, investments, sales, disbursements and other transactions carried out by the Local Manager for the Investment Adviser or with a Fund. | |
| 5.2 | All records held pursuant to this clause by the Local Manager shall be open to inspection by the Investment Adviser or each Fund and the Local Manager will provide the Investment Adviser and each Fund with such access as it itself has to records held by any relevant third party, in each case at reasonable times during business hours and upon the giving of reasonable notice by the Investment Adviser or a Fund. | |
| 5.3 | The Local Manager shall, not later than 10 working days following the end of each calendar month, furnish to the Investment Adviser a statement showing all transactions that have occurred in each Fund and a monthly listing of all investments and cash balances held as of the end of such month. | |
| 5.4 | The monthly statement will show the cost or amount realised (in the case of any relevant new purchase or sale) and, where available, the current value (where applicable) of each investment held in each Fund and any income arising on each Fund’s account during the relevant calendar month, and will also include a statement showing the measure of the performance of the assets of each Fund. The basis of all valuations will be as stated in the first monthly statement, unless otherwise agreed. | |
| 5.5 | The Local Manager will not provide the Investment Adviser with an individual trade confirmation of each portfolio transaction unless the Investment Adviser has specifically requested the Local Manager to do so. |
Annex-3
| 6. | FORCE MAJEURE | |
| The Local Manager shall not be responsible or liable to the Investment Adviser or a Fund for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities; computer (hardware or software) or communications services; accidents; labor disputes; acts of civil or military authority or governmental actions; it being understood that the Local Manager shall use reasonable efforts which are consistent with accepted practices in the investment management industry to resume performance as soon as practicable under the circumstances. | ||
| 7. | COMPLAINTS | |
| The Local Manager maintains procedures in accordance with FSA Rules for the effective consideration and handling of client complaints. Complaints will be considered promptly by the appropriate supervisory manager who is not personally involved in the subject matter of the complaint. Where appropriate, the complaint will be passed to the Compliance Officer. | ||
| 8. | RECORDING OF TELEPHONE INSTRUCTIONS | |
| All instructions received from the Investment Adviser by telephone will be binding as if received in writing. The Local Manager may record telephone conversations with the Investment Adviser and produce such recordings in evidence if the Local Manager sees fit to do so. In some circumstances, when the Investment Adviser is dealing with the Local Manager, data may be collected about the Investment Adviser and the Investment Adviser’s officers or employees indirectly from monitoring devices or other means (for example, telephone logs and recordings). In these circumstances, the data are not accessed on a routine basis but access is possible. Access could occur, for instance, in situations where the data are needed to clarify or confirm instructions provided by the Investment Adviser, for compliance or billing purposes. | ||
| 9. | CONFIDENTIALITY AND DISCLOSURE | |
| The Local Manager and the Investment Adviser undertake to keep private and confidential all information acquired in connection with this Agreement, and not to disclose such information to any person except to the extent that: |
| (a) | the other party gives prior consent; or | ||
| (b) | the Local Manager is required to disclose the information by the FSA, the Bank of England, the London Stock Exchange or any other recognised investment exchange, the City Panel on Takeovers and Mergers or any other regulatory authority having jurisdiction over the Local Manager or the performance by it of its obligations under this Agreement or by English Law; or | ||
| (c) | disclosure to a counterparty to a transaction effected for a Fund is required as a condition to such transaction; or |
Annex-4
| (d) | disclosure is necessary to enable the Local Manager to perform its obligations under this Agreement. |
| 10. | DATA PROTECTION | |
| 10.1 | The Local Manager will, in connection with the Sub-Advisory Agreement, comply (where applicable) with the UK Data Protection Xxx 0000 and other applicable data protection laws and regulations (together, the “Data Protection Laws”). | |
| 10.2 | The Investment Adviser will comply (where applicable) with the Data Protection Laws and (where applicable) take all reasonable steps to ensure that it has obtained all necessary consents for the Local Manager to process any personal data for the purposes of the Agreement. | |
| 11. | RISK DISCLOSURE | |
| 11.1 | The Investment Adviser’s attention is drawn to Schedule 3 which provides important information as to the nature and risks of certain investments which may comprise a Fund and a description of certain provisions of the industry standard master agreements and their consequences. The Investment Adviser represents and warrants to the Local Manager that it has read, understood, and accepts the provisions of Schedule 3. |
Annex-5
Schedule 1
ORDER EXECUTION POLICY DISCLOSURE STATEMENT
Transaction Execution Arrangements
Xxxxxx Xxxxxxx Investment Management Limited (the “Local Manager”) has established and implemented
transaction execution arrangements that are designed to allow the Local Manager to take all
reasonable steps to obtain the best possible result when executing or placing orders as portfolio
manager on behalf of its clients in relation to financial instruments that form part, or may become
part, of one or more investment portfolios managed by the Local Manager for that or those clients
(each a “Transaction”). For the purposes of this document: any reference to the Local Manager
“executing an order” is a reference to the Local Manager, as agent, entering into a Transaction on
behalf of a client with another person that acts as principal to that Transaction, any reference to
the Local Manager “placing an order” is a reference to the Local Manager, as agent, arranging for a
Transaction to be entered into by another person that acts as agent on behalf of a client when
entering into that Transaction, and any reference to the Local Manager “effecting a Transaction” is
a reference to the Local Manager either placing or executing an order.
As part of its transaction execution arrangements, the Local Manager has an order execution policy
in place that is designed to ensure that the Local Manager complies with its duty to obtain the
best possible result when effecting a Transaction for one or more clients (the “Order Execution
Policy”).
This document is intended to provide the Local Manager’s clients with a summary of the Local
Manager’s Order Execution Policy. Nothing herein is intended to place upon the Local Manager
fiduciary or other duties or responsibilities over and above the specific obligations provided for
in the investment management agreement between the Local Manager and a client.
The quality of execution
Where the Local Manager effects a Transaction for its professional clients, subject to any specific
instructions received from a client, the Local Manager will determine the best possible result
taking the following factors into account: (a) price; (b) costs; (c) speed; (d) likelihood of
execution or settlement; (e) size of the Transaction; (f) nature of the Transaction; and (g) any
other consideration relevant to the Transaction, including availability of liquidity, the impact on
the market of the Transaction and the Local Manager’s operational costs.
Price is normally judged with reference to normal market size for the relevant financial
instrument. Where trades are outside of normal market size and in sizeable volume or made on an
over the counter basis, it is not generally possible to source a quote for price from Brokers
because a declaration of intention to deal could result in market/security price sensitivity. As a
result, the Local Manager must then determine what is likely to be the best execution venue without
being able to get firm quotes, but there can be no guarantee that it will be.
In certain circumstances, the relevant execution venue may not be able to provide sufficient
immediately available liquidity to carry the contemplated Transaction out in full at the time
required. In addition, other circumstances may dictate that the best immediately available price
for a Transaction may not be the best possible result for that Transaction. Where, in the Local
Manager’s opinion, those circumstances occur the Local Manager may need to split the Transaction up
into multiple Transactions with a view to obtaining the best possible result in relation to the
original Transaction by completing that Transaction over a period of time using a
Sch. 1-1
variety of execution venues.
The Local Manager will determine the relative importance of each factor using the following
criteria: (a) the characteristics of the Investment Adviser; (b) the characteristics and nature of
the Transaction, including whether any specific instructions are given by the Investment Adviser;
(c) the characteristics of the financial instruments that are the subject of the Transaction; and
(d) the characteristics of the execution venues to which the Transaction can be directed.
While the Local Manager will take all reasonable steps, based on the resources available to it, to
satisfy itself that it has processes in place that can reasonably be expected to lead to the
delivery of the best possible result, the Local Manager does not guarantee that it will always be
able to obtain the best possible result in relation to each Transaction.
Specific Instructions
Where a client provides the Local Manager with a specific instruction in relation to a proposed
Transaction or any particular aspect of that Transaction (including, but not limited to, a
direction to execute on a particular venue) the Local Manager will effect that Transaction in
accordance with those instructions. Specific instructions may prevent the Local Manager from
following some or all of the steps provided for in the Order Execution Policy which are designed to
obtain the best possible result in respect of the elements covered by those instructions.
In following such instructions, the Local Manager will be deemed to have taken all reasonable steps
to provide the best possible result in respect of the relevant Transaction or aspect of that
Transaction covered by the specific instructions. To the extent that specific instructions are not
comprehensive, the Local Manager will determine any non-specified components in accordance with its
Order Execution Policy.
Selection of Execution Venues
The Local Manager includes in its Order Execution Policy those execution venues (sources of
liquidity) that enable the Local Manager to obtain on a consistent basis the best possible result
in relation to the Transactions. the Local Manager may use one or more of the following venues
types: (a) Regulated Markets; (b) Multilateral Trading Facilities; (c) Systematic Internalisers;
(d) third party investment firms; and/or (e) non-EU entities performing similar functions. In this
document, the terms “Regulated Market”, “Multilateral Trading Facility” and “Systematic
Internaliser” have the meaning given to them in the Markets in Financial Instruments Directive.
Certain Transactions may be effected outside a Regulated Market or a Multilateral Trading Facility
where the Local Manager believes it can achieve the best possible result by doing so.
The Local Manager assesses product-by-product which venues are likely to provide the best possible
result, it also monitors the execution of all Transactions on that venue if an order has been
placed with another person and keeps informed of relevant market information. For certain financial
instruments, there may be only one execution venue available and in such circumstances, the Local
Manager will presume that it has obtained the best possible result if it effects a Transaction in
that venue.
If a Transaction is effected by placing an order with another person for execution, the Local
Manager will either determine the ultimate execution venue itself and instruct the other person
accordingly, or the Local Manager will use all reasonable efforts to satisfy itself that the other
person has arrangements in place to enable the Local Manager to comply with the Local Manager’s
obligation to obtain the best possible result in relation to the relevant Transaction.
Sch. 1-2
Approval of brokers, monitoring and review
The Local Manager’s Order Execution Policy provides for a broker approval procedure. Apart from a
broker’s commission/commission equivalent rates, the Local Manager will consider the following
matters when selecting and approving a broker: (a) reliability, integrity and reputation in the
industry; (b) execution capabilities, including block positioning, speed of execution and quality
and responsiveness of its trading desk; (c) knowledge of, and access to, the markets for the
securities being traded; (d) ability to obtain price improvement; (e) ability to maintain
confidentiality; (f) ability to handle non-traditional trades; (g) technology infrastructure; and
(h) clearance and settlement capabilities.
In addition, in certain circumstances and in some markets, a broker’s research capabilities may be
considered relevant factors in connection with the selection and approval of a broker. This may
include a broker’s coverage of certain industries in which the Local Manager may seek to invest on
behalf of its clients, the quality of the broker’s research, as well as the reputation and standing
of the broker’s analysts, their investment strategies, timing, accuracy of statistical information
and idea generation.
The Local Manager monitors the quality of the execution services provided by approved brokers and
reviews each broker’s performance on a regular basis, taking the above factors into account. the
Local Manager meets with the most significant brokers periodically to review the service and
performance levels provided.
Commission Rates
The Local Manager effects Transactions on the basis of standard commission rates for specific
markets. The rates are negotiated from time to time with each broker to ensure competitiveness,
taking into account market trends whilst seeking a commercial balance so as to ensure the quality
of services provided by the brokers.
Sch. 1-3
Schedule 2
INFORMATION ABOUT XXXXXX XXXXXXX INVESTMENT MANAGEMENT LIMITED’S USE OF DEALING COMMISSIONS AND
ACCEPTANCE OF NON-MONETARY BENEFITS FROM BROKERS
Xxxxxx Xxxxxxx Investment Management Limited’s use of dealing commissions and non-monetary
benefits
Xxxxxx Xxxxxxx Investment Management Limited (the “Local Manager”) will from time to time execute
or place orders with selected brokers as portfolio manager on behalf of its professional clients in
relation to financial instruments that form part, or may become part, of one or more investment
portfolios managed by the Local Manager for its clients (each so executed or placed order a
“Transaction”).
Although the Local Manager’s investment decisions and the corresponding Transactions are primarily
based upon fundamental analysis and a variety of primary and secondary information sources,
external research and market intelligence from analysts employed by the brokers the Local Manager
may engage to effect Transactions is valuable in helping to make informed investment decisions and
in those circumstances, will enhance the quality of the Fund management service provided by the
Local Manager to its clients. The available research covers sectors and markets in detail and may
generate and stimulate new ideas and discussions. Some research services will be produced for all
clients of the relevant broker, but the analysts may also provide research that has been tailored
to the Local Manager’s specific request, including the ability to discuss corporate developments in
the immediate aftermath of their announcement (together “Research Services”).
This document is intended to provide the Local Manager’s professional clients with information
about the manner in which the Local Manager, when effecting Transactions, may make payments on
behalf of its client to certain providers of Research Services and about certain non-monetary
benefits that the Local Manager may receive from certain brokers in the course of its dealings with
such brokers.
The conditions upon which dealing commissions will be paid to providers of Research
Services
The Local Manager will only make payments to a broker in consideration of the provision of Research
Services when it is satisfied using its reasonable judgement that the Research Services received in
return for the payments will reasonably assist the Local Manager in the provision of its portfolio
management services to the investment advisers on whose behalf the relevant Transactions are being
effected and do not, and are not likely to, impair compliance with the duty of the Local Manager to
act in the best interests of its clients (including, without limitation, its obligation to take all
reasonable steps to obtain the best possible result when effecting a Transaction).
The manner in which dealing commissions are paid to providers of research services
If the conditions for payment have been satisfied, the eligible providers of Research Services may
be remunerated for the provision of Research Services as part of the Local Manager’s commission
sharing arrangements. Under the commission sharing arrangements, the Local Manager will instruct
participating brokers to record a certain portion of dealing commission that is received pursuant
to the completion of a Transaction, based upon a previously agreed allocation, as research credits
(each a “Pool”). Each of the participating brokers has undertaken to the Local Manager,
periodically, subject to an instruction from the Local Manager, to make payments from their Pool to
providers of Research Services (including the administering broker
Sch. 2-1
itself) as the Local Manager may specify in the instruction(s). Any balance that may remain after
allocation instructions have been carried out will be carried forward to the next period.
The Local Manager allocates the Pools based on a periodic assessment of the quality of the Research
Services provided to the Local Manager by the participating brokers during that period. the Local
Manager tends to consider, without limitation, the quality of the analyst service, the sales
service, and the company meetings that have been arranged with senior management of companies in
which the Local Manager invests for its clients. Decisions are being taken based on a voting
system in which the Local Manager equity portfolio managers participate. As part of a relationship
management effort, the Local Manager will meet periodically with those providers of Research
Services that the Local Manager deems most significant.
The conditions upon which the Local Manager employees may accept non-monetary benefits from
brokers
The Local Manager’s employees that interact with brokers may from time to time receive certain
non-monetary benefits in the form of gifts. The Local Manager has detailed compliance procedures
relating to the standard of conduct expected from employees in these circumstances which are
designed to achieve that receipt of such gifts does not, and is not likely to, impair compliance
with the duty of the Local Manager and its employees to act in the best interests of its clients.
Most gifts are received during the holiday season and depending on the number received gifts are
either put into a raffle or allocated between employees. Employees are allowed to accept
invitations to attend sporting, artistic or entertainment events from suppliers and counterparties
in accordance with guidelines and limits that are detailed in the policy.
Sch. 2-2
Schedule 3
Information on the Nature and Risks of Certain Investments
The information contained in this notice cannot disclose everything about the nature and risks of
all financial instruments in each Fund. Rather it is a general description of the nature and risks
of financial instruments, which explains the nature of the specific types of instruments which the
Investment Adviser may include in each Fund’s investment guidelines (the “Investment Guidelines”),
as well as the risks particular to those instruments. The Investment Adviser should not include
these financial instruments in the Investment Guidelines unless the Investment Adviser understand
the nature of the financial instruments the Investment Adviser is permitting Xxxxxx Xxxxxxx
Investment Management Limited (the “Local Manager”) to enter into on the Investment Adviser’s
behalf and the extent of the Investment Adviser’s exposure to risk. The Investment Adviser should
also be satisfied that such financial instruments are suitable for each Fund in light of the
Investment Adviser’s circumstances and financial position. Certain strategies, such as a spread
position or “straddle”, may be as risky as a simple “long” or “short” position. While financial
instruments can be utilised for the management of investment risk, certain financial instruments
are unsuitable for certain investors. Different financial instruments involve different levels of
exposure to risk, and in deciding whether to include such instruments in the Investment Guidelines,
the Investment Adviser should be aware of the following points.
1. GENERAL
1.1 Returns
The value of investments and the income from them may fluctuate and go down as well as up. There
is no guarantee that the investment objective will actually be achieved or that the Investment
Adviser will get back the amount initially invested. The value of investments may be affected by a
variety of factors, including economic and political developments, interest rates and foreign
exchange rates, as well as issuer-specific events.
1.2 Currency Risk
Investments denominated in currencies other than the Investment Adviser’s base currency carry the
risk of exchange-rate movements. A movement in exchange rates may have a separate effect,
unfavourable as well as favourable, on gains and losses in a Fund. Hedging techniques may, in
certain circumstances, be limited or not be successful.
1.3 Investments which are not Readily Realisable
The market for some investments may be restricted or illiquid. Subject to the Investment
Guidelines, the Local Manager may effect transactions in such investments for a Fund. There may be
no readily available market and from time to time there may be difficulty in dealing in such
investments or obtaining reliable information about the value and extent of risks associated with
such investments.
2. EQUITY SECURITIES AND DEBT SECURITIES
Buying equity securities (the most common form of which are shares) will mean that the Investment
Adviser will become a member of the issuer company and participate fully in its economic risk.
Holding equity securities will generally entitle the Investment Adviser to receive any dividend
distributed each year (if any) out of the issuer’s profits made during the reference period.
Sch. 3-1
On the other hand, buying debt securities (such as bonds and certificates of deposit) will mean
that the Investment Adviser is, in effect, a lender to the company or entity that has issued the
securities. Holding debt securities will entitle the Investment Adviser to receive specified
periodic interest payments, as well as repayment of the principal at maturity.
Generally, holdings in equity securities will expose the Investment Adviser to more risk than debt
securities since remuneration is tied more closely to the profitability of the issuer. In the
event of insolvency of the issuer, the Investment Adviser’s claims for recovery of the Investment
Adviser’s equity investment in the issuer will generally be subordinated to the claims of both
preferred or secured creditors and ordinary unsecured creditors of the issuer.
There is an extra risk of losing money when shares are bought in some smaller companies, such as
xxxxx shares. There is a usually big difference between the buying price and the selling price of
these shares. If they have to be sold immediately, the Investment Adviser may get back much less
than was paid for them. The price may change quickly and it may go down as well as up.
Holdings in debt securities, on the other hand, generally risk not being remunerated only if the
issuer is in a state of financial distress. Moreover, in the event of insolvency of the issuer,
the Investment Adviser is likely to be able to participate with other creditors in the allotment of
the proceeds from the sale of the company’s assets in priority to holders of equity securities.
If the Investment Guidelines allow the Local Manager to buy equity or debt securities the
Investment Adviser will be exposed to both the specific risks associated with individual securities
held (and the financial soundness of their issuers), as well as the systemic risks of the equity
and debt securities markets.
3. DERIVATIVES
3.1 Futures
Transactions in futures involve the obligation to make, or to take, delivery of the underlying
asset of the contract at a future date, or in some cases to settle the Investment Adviser’s
position with cash from a Fund or elsewhere. Transactions in futures carry a high degree of risk.
The “gearing” or “leverage” often obtainable in futures trading means that a small deposit or down
payment can lead to large losses as well as gains. It also means that a relatively small market
movement can lead to a proportionately much larger movement in the value of the Investment
Adviser’s investment, and this can work against the Investment Adviser as well as for the
Investment Adviser. Futures transactions have a contingent liability, and the Investment Adviser
should be aware of the implications of this, in particular the margining requirements, which are
described in paragraph 7.2 below.
3.2 Options
There are many different types of options with different characteristics subject to different conditions:
3.2.1 Buying Options:
Allowing the Local Manager to buy options involves less risk than allowing the Local Manager to
sell options because, if the price of the underlying asset moves against the Investment Adviser,
the Local Manager can simply allow the option to lapse. The maximum loss is limited to the
premium, plus any commission or other transaction charges. However, if the Local Manager buys a
call option on a futures contract for the Investment Adviser and later exercises the option, the
Investment Adviser will acquire the
Sch. 3-2
future. This will expose the Investment Adviser to the risks described under “futures” and
“contingent liability transactions”.
3.2.2 Writing Options:
If the Investment Guidelines allow the Local Manager to write an option for the Investment Adviser,
the risk involved is considerably greater than buying options. The Investment Adviser may be
liable for margin to maintain its position and a loss may be sustained well in excess of any
premium received. By allowing the Local Manager to write an option on the Investment Adviser’s
behalf, the Investment Adviser accepts a legal obligation to purchase or sell the underlying asset
if the option is exercised against the Investment Adviser, however far the market price has moved
away from the exercise price. If the Investment Adviser already owns the underlying asset which
the Local Manager has contracted on the Investment Adviser’s behalf to sell as part of a Fund
(known as “covered call options”) the risk is reduced. If the Investment Adviser does not own the
underlying asset (known as “uncovered call options”) the risk can be unlimited. Only experienced
persons should contemplate authorising the Local Manager to write uncovered options, and then only
after securing full details of the applicable conditions and potential risk exposure.
3.2.3 Traditional Options:
A particular type of option (called a “traditional option”) is written by certain London Stock
Exchange firms under special exchange rules. These may involve greater risk than other options.
Two way prices are not usually quoted and there is no exchange market on which to close out an open
position. It may be difficult to assess the value of a traditional option or for the seller of
such an option to manage his exposure to risk. Again, the Investment Adviser should only provide
for the Investment Guidelines to permit the Local Manager to invest in “traditional options” if the
Investment Adviser is fully aware of the risks involved.
3.2.4 Margin:
Certain options markets operate on a margined basis, under which buyers do not pay the full premium
on their option at the time they purchase it. In this situation a Fund (or the Investment Adviser
if there are insufficient assets in the Fund) may subsequently be called upon to pay margin on the
option up to the level of the Investment Adviser’s premium. If the Investment Adviser fails to do
so as required, the Investment Adviser’s position may be closed or liquidated in the same way as a
futures position.
3.3 Contracts for Differences:
A contract for difference is a contract between two parties, buyer and seller, stipulating that the
seller will pay to the buyer the difference between the current value of an asset and its value at
contract time. Contracts for differences allow investors to take long or short positions, and
unlike futures contracts have no fixed expiry date or contract size. Trades are conducted on a
leveraged basis and these contracts can only be settled in cash. Investing in a contract for
differences carries the same risks as investing in a future or option and the Investment Adviser
should be aware of these as set out in paragraphs 3.1 and 3.2 respectively. Transactions in
contracts for differences may also have a contingent liability and the Investment Adviser should be
aware of the implications of this as set out in paragraph 7.2 below. As with many leveraged
products, maximum exposure is not limited to the initial investment; it is possible to lose more
than one put in.
3.4 Off-Exchange Transactions in Derivatives:
It may not always be apparent whether or not a particular derivative is on or off-exchange.
Sch. 3-3
While some off-exchange markets are highly liquid, transactions in off-exchange or non transferable
derivatives may involve greater risk than investing in on-exchange derivatives because there is no
exchange market on which to close out an open position. It may be impossible to liquidate an
existing position, to assess the value of the position arising from an off-exchange transaction or
to assess the exposure to risk. Bid and offer prices need not be quoted, and even where they are,
they will be established by dealers in these instruments and consequently it may be difficult to
establish what a fair price is. The Investment Adviser should only permit the Local Manager in the
Investment Guidelines to invest a Fund in off-exchange derivatives transactions if the Investment
Adviser is fully aware of the risks involved.
3.5 ISDA Master Agreement
Where the Investment Adviser permits the Local Manager under the Investment Guidelines to enter
into derivative transactions, these may be of the type that may be governed by the ISDA Master
Agreement. The ISDA Master Agreement is a standard agreement commonly used in the derivatives
market which sets forth key provisions governing the contractual relationship between the parties
to such agreement, including each of their rights, liabilities and obligations. If the Local
Manager enters into derivative transactions on the Investment Adviser’s behalf, the Local Manager
may also enter into a Credit Support Annex. The Credit Support Annex is an annex to the ISDA
Master Agreement and is used to document bilateral credit support arrangements between parties for
transactions governed by an ISDA Master Agreement.
On each date on which a derivatives transaction is entered into, the Investment Adviser will be
deemed to have given various representations and undertakings to each counterparty with whom the
Local Manager enters into an ISDA Master Agreement on the Investment Adviser’s behalf.
In certain circumstances, the Investment Adviser may be required to pay an additional amount or
receive a payment from which an amount is required to be deducted or withheld, in each case in
respect of any deduction or withholding for on account of any tax, or be required to pay any stamp
tax levied or imposed in respect of the execution or performance of the ISDA Master Agreement.
Markets and exchanges require that anyone trading in derivatives must advance collateral as
security for initial and variation margin requirements. The Local Manager has been authorised to
instruct the Investment Adviser’s custodian to advance cash or other collateral acceptable to the
counterparty or broker to meet margin payments as required by the rules and regulations of any
market or exchange on which derivatives are dealt by the Local Manager as the Investment Adviser’s
agent. If, under the rules and regulations of any exchange or market, adverse price movements
occur and margin calls are made and insufficient funds are available in the Portfolio to meet such
margin calls, the Local Manager may request that the Investment Adviser make additional funds
immediately available until assets can be realised to cover the related margin call. If the
Investment Adviser fails to makes such funds available, the Investment Adviser’s positions may be
closed out and liquidated, resulting in a loss to the Portfolio for which the Local Manager shall
not be liable.
4. WARRANTS
If the Investment Guidelines so permit, the Local Manager may effect transactions in warrants for a
Fund.
4.1 Warrants:
A warrant is a time-limited right to subscribe for shares, debentures, loan stock or government
securities, and is exercisable against the original issuer of the securities. Warrants often
involve a high degree of gearing, so that a relatively small movement in the price of the
underlying security results in a
Sch. 3-4
disproportionately large movement, favourable or unfavourable in the price of the warrant. The
prices of warrants can therefore be volatile. The Investment Adviser should not include warrants
in the Investment Guidelines unless the Investment Adviser is prepared for a Fund to sustain a
total loss of the money the Investment Adviser has invested plus any commission or other
transaction charges. Some other instruments are also called warrants but are actually options (for
example, a right to acquire securities which is exercisable against someone other than the original
issuer of the securities, often called a “covered warrant”).
If the Investment Adviser is considering including warrants in the Investment Guidelines, it is
essential to understand that the right to subscribe which a warrant confers is invariably limited
in time. Therefore, if the Investment Adviser fails to exercise this right within the
pre-determined time scale, the investment becomes worthless.
4.2 Off-Exchange Transactions:
Transactions in off-exchange warrants may involve greater risk than dealing in exchange traded
warrants because there is no exchange market through which to liquidate the Investment Adviser’s
position or to assess the value of the warrant or the exposure to risk. Bid and offer prices need
not be quoted, and even where they are, they will be established by dealers in these instruments
and consequently it may be difficult to establish what a fair price is. The Investment Adviser
should only permit the Local Manager in the Investment Guidelines to invest a Fund in off-exchange
warrants if the Investment Adviser is fully aware of the risks involved.
5. COLLECTIVE INVESTMENT SCHEMES
Collective investment schemes (such as investment funds and open-ended investment companies) invest
funds paid by purchasers of units or shares in the collective investment scheme in the various
types of asset provided for in their rules or investment plans. As such, collective investment
schemes generally allow unit holders and shareholders to achieve a high degree of diversification
at a relatively low cost. Open-ended investment funds, for example, allow savers to invest or
disinvest by buying or selling fund units on the basis of the value of a unit, plus or minus
relevant commissions (the value of the unit being obtained by dividing the value of the entire
portfolio managed by a Fund, calculated at market prices, by the number of units in circulation).
Allowing the Local Manager to purchase units or shares in a collective investment scheme will
expose the Investment Adviser to the risks associated with the nature of the financial instruments
in which the collective investment scheme invests and, where relevant, their concentration in a
particular sector, country, region or asset class. Before allowing the Local Manager to invest in
collective investment schemes, the Investment Adviser should make itself fully aware of the risks
associated with collective investment schemes, including without limitation, the general risks
identified in paragraph 1 above.
6. EXCHANGE TRADED FUNDS
Exchange traded funds (“ETFs”) are closed-ended collective investment schemes, traded as shares on
stock exchanges, and typically replicate a stock market index, market sector, commodity or basket
of assets. As such, they generally combine the flexibility and tradeability of a share with the
diversification of a collective investment scheme. Where the Investment Guidelines permit the
Local Manager to purchase ETFs, the Investment Adviser will be exposed to similar risks as detailed
in respect of equity securities and collective investment schemes, as well as the general risks
detailed in paragraph 1.
7. MISCELLANEOUS
Sch. 3-5
7.1 Overseas Markets:
Overseas markets may involve different risks to the Investment Adviser’s home markets. In some
cases the risks will be greater. In drafting the Investment Guidelines to permit the Local Manager
to invest in overseas markets the Investment Adviser should make itself fully aware of the risks
and protections (if any) which will operate in any relevant overseas markets. The potential for
profit or loss from transactions on overseas markets or in contracts denominated other than in a
Fund’s base currency will be affected by fluctuations in overseas exchange rates against the Fund’s
base currency.
7.2 Contingent Liability Investments:
Contingent liability investments are derivatives under the terms of which the Client will or may be
liable to make further payments (other than charges, and whether or not secured by margin) when the
transaction falls to be completed or upon the earlier closing out of the Investment Adviser’s
position. Contingent liability investments which are margined require a Fund (or the Investment
Adviser if there are insufficient assets in the Fund) to make a series of payments against the
purchase price, instead of paying the whole purchase price immediately.
If the Investment Adviser permits the Local Manager, as part of the Investment Guidelines, to trade
for a Fund in futures, contracts for differences or write or otherwise deal on margin in options
for the Fund, the Investment Adviser may sustain a total loss of the margin which the Local
Manager, on the Investment Adviser’s behalf, deposits with a broker to establish or maintain a
position. If the market moves against the Investment Adviser, the Investment Adviser may be called
upon to pay out of the Fund (or the Investment Adviser’s other assets if there are insufficient
assets in the Fund) substantial additional margin at short notice to maintain the position. If the
Investment Adviser fails to do so within the time required, the Investment Adviser’s position may
be liquidated at a loss and the Investment Adviser will be liable for any resulting deficit.
Even if a transaction is not margined, it may still carry an obligation to make further payments in
certain circumstances over and above any amount paid when the contract was entered into.
Contingent liability investments which are not traded on or under the rules of a regulated market
may expose the Investment Adviser and the Fund to substantially greater risks.
7.3 Collateral:
If the Investment Adviser permits the Local Manager as part of the Investment Guidelines to enter
into transactions which require the Investment Adviser to deposit collateral as security with a
broker, the way in which such collateral will be treated will vary according to the type of
transaction and where it is traded. There could be significant differences in the treatment of the
Investment Adviser’s collateral depending on whether the trading is on a regulated market, with the
rules of that market (and associated clearing house) applying, or is off-exchange. Deposited
collateral may lose its identity as the Investment Adviser’s property once dealings on the
Investment Adviser’s behalf are undertaken. Even if the Investment Adviser’s dealings should
ultimately prove profitable, the Investment Adviser may not get back the same assets which the
Local Manager deposited on the Investment Adviser’s behalf and may have to accept payment in cash.
7.4 Commissions:
The Investment Adviser is liable for all commissions and it may be the case that charges are not
expressed in money terms (but for example, as a percentage of contract value). In the case of
futures, when commission is charged as a percentage, it will normally be as a percentage of the
total contract value, and not simply as a percentage of the Investment Adviser’s initial payment.
Sch. 3-6
7.5 Suspensions of Trading:
Under certain trading conditions or the application of certain rules in force in some markets (such
as circuit breakers) it may be difficult or impossible for the Local Manager to liquidate a
position held for the Investment Adviser. This may occur, for example, at times of rapid price
movement if the price of an investment rises or falls in one trading session to such an extent that
under the rules of the relevant exchange trading of that investment is suspended or restricted.
Further, the Local Manager placing a stop-loss order on the Investment Adviser’s behalf will not
necessarily limit losses to the intended amounts because market conditions may make it impossible
to execute such an order at the stipulated price. Most electronic and auction trading systems are
supported by computerised systems for order routing and trade checking, recording and clearing.
Like all automated procedures, these systems are subject to the risk of stoppages and malfunctions,
which may result in the Investment Adviser’s orders not being executed in accordance with the Local
Manager’s instructions or remaining unexecuted.
7.6 Clearing House Protections:
On many exchanges, the performance of a transaction by a broker (or the third party with whom he is
dealing on the Investment Adviser’s behalf) is “guaranteed” by the exchange or its clearing house.
However, this guarantee is unlikely in most circumstances to cover the Investment Adviser and may
not protect the Investment Adviser if the broker or another party defaults on its obligations to
the Investment Adviser. There is no clearing house for traditional options, nor normally for
instruments which are not traded under the rules of a recognised or designated investment exchange.
7.7 Insolvency:
A derivative broker’s insolvency or default, or that of any other brokers involved with the
Investment Adviser’s transaction, may lead to positions being liquidated or closed out without the
Investment Adviser’s or the Local Manager’s consent or knowledge. In certain circumstances, the
Investment Adviser may not get back the actual assets which the Investment Adviser lodged as
collateral and the Investment Adviser may have to accept any available payment in cash.
Sch. 3-7
