# Commission Delegated Regulation (EU) No 231/2013Show full title

Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament            and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision            (Text with EEA relevance)         

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# Commission Delegated Regulation (EU) No 231/2013                     

# of 19 December 2012

# supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating                        conditions, depositaries, leverage, transparency and supervision                     

# (Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment                           Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010(1), and in particular Article 3(6), Article 4(3), Article 9(9), Article 12(3), Article 14(4), Article 15(5), Article 16(3),                           Article 17, Article 18(2), Article 19(11), Article 20(7), Article 21(17), Article 22(4), Article 23(6), Article 24(6), Article                           25(9), Article 34(2), Article 35(11), Article 36(3), Article 37(15), Article 40(11), Article 42(3) and Article 53(3) thereof,                        

Having regard to the opinion of the European Central Bank,

Whereas:

(1)Directive 2011/61/EU empowers the Commission to adopt delegated acts specifying, in particular, the rules relating to calculation                              of the threshold, leverage, operating conditions for Alternative Investment Fund Managers (hereinafter ‘AIFMs’), including                              risk and liquidity management, valuation and delegation, requirements detailing the functions and duties of depositaries of                              Alternative Investment Funds (hereinafter ‘AIFs’), rules on transparency and specific requirements relating to third countries.                              It is important that all these supplementing rules begin to apply at the same time as Directive 2011/61/EU so that the new                              requirements imposed on AIFMs can be effectively put into operation. The provisions in this Regulation are closely interrelated,                              since they deal with the authorisation, ongoing operation and transparency of AIFMs which manage and, as the case may be,                              or market AIFs in the Union, which are inextricably linked aspects inherent to the taking up and pursuit of the asset management                              business. To ensure coherence between those provisions, which should enter into force at the same time, and to facilitate                              a comprehensive view and compact access to them by persons subject to those obligations, including investors that are non-Union                              residents, it is desirable to include all delegated acts required by Directive 2011/61/EU in a single Regulation.

(2)It is important to ensure that the objectives of Directive 2011/61/EU are achieved uniformly throughout the Member States,                              to enhance the integrity of the internal market and offer legal certainty for its participants, including institutional investors,                              competent authorities and other stakeholders, by adopting a Regulation. The form of a Regulation ensures a coherent framework                              for all market operators and is the best possible guarantee for a level playing field, uniform conditions of competition and                              the common appropriate standard of investor protection. Furthermore it ensures the direct applicability of detailed uniform                              rules concerning the operation of AIFMs, which by their nature are directly applicable and therefore require no further transposition                              at national level. The recourse to a regulation allows, in addition, to avoid a delayed application of Directive 2011/61/EU                              in the Member States.

(3)As the Delegated Regulation specifies the tasks and responsibilities of the ‘governing body’ and of the ‘senior management’                              it is important to clarify the meaning of these terms, in particular the fact that a governing body may be comprised of senior                              managers. Furthermore, as this Regulation introduces also the term ‘supervisory function’ the definition of the governing                              body should make clear that it is the body which comprises the managerial function in case the supervisory and the managerial                              functions are separated in accordance with national company law. Directive 2011/61/EU requires AIFMs to provide certain information                              to competent authorities, including the percentage of the AIF’s assets which are subject to special arrangements arising from                              their illiquid nature. This Regulation clarifies the meaning of special arrangements so that AIFMs know exactly what information                              they should provide to competent authorities.

(4)Directive 2011/61/EU provides for a lighter regime applicable to those AIFMs who manage portfolios of AIFs whose total assets                              under management do not exceed the relevant thresholds. It is necessary to specify clearly how the total value of assets under                              management should be calculated. In this context it is essential to define the steps necessary for calculating the total value                              of assets, to determine clearly which assets are not included in the calculation, to clarify how the assets acquired through                              the use of leverage should be valued and to provide rules for handling of cases of cross-holding among AIFs managed by an                              AIFM.

(5)The total value of assets under management needs to be calculated at least annually and using up-to-date information. The                              value of assets should therefore be determined in the 12 months preceding the date of calculation of the total value of assets                              under management and as close as possible to such a date.

(6)To ensure that an AIFM remains eligible to benefit from the lighter regime provided for in Directive 2011/61/EU, it should                              put in place a procedure making it possible to observe on an ongoing basis the total value of assets under management. The                              AIFM may consider the types of AIFs under management and the different classes of assets invested in order to assess the likelihood                              of breaching the threshold or the need for an additional calculation.

(7)Where an AIFM no longer meets the conditions related to the thresholds it should notify its competent authority and apply                              for an authorisation within 30 calendar days. However, where exceeding or falling below the thresholds occurs only occasionally                              within a given calendar year and such situations are considered as temporary the AIFM should not be obliged to make an application                              for authorisation. In those cases, the AIFM should inform the competent authority of the breach of the threshold, and explain                              why it considers such breach to be of a temporary nature. A situation lasting for more than three months cannot be considered                              as being temporary. When assessing the likelihood of a situation to be temporary, the AIFM should consider anticipated subscription                              and redemption activity or, where applicable, capital draw-downs and distribution. The AIFM should not use anticipated market                              movements as part of this assessment.

(8)Data used by AIFMs to calculate the total value of assets under management do not need to be available to the public or to                              investors. However, competent authorities must be able to verify that the AIFM is correctly calculating and monitoring the                              total value of assets under management, including the assessment of occasions when the total value of assets under management                              temporarily exceeds the relevant threshold and should therefore have access to these data on request.

(9)It is important that AIFMs benefiting from the provisions of the lighter regime in Directive 2011/61/EU provide the competent                              authorities with up-to-date information at the time of registration. Not all types of AIFMs may have updated offering documents                              reflecting the latest developments related to the AIFs they manage and such AIFMs may find it more practical to specify the                              required information in a separate document describing the funds’ investment strategy. This could be the case of private equity                              or venture capital funds which often raise money through negotiations with potential investors.

(10)An AIF which holds only equity shares in listed companies should not be regarded as being leveraged as long as the equity                              shares are not acquired through borrowing. Where the same AIF purchases options on an equity index, it should be regarded                              as being leveraged, since it has increased the exposure of the AIF to a given investment.

(11)In order to ensure a uniform application of AIFM obligations to grant an objective overview of the leverage used, it is necessary                              to provide two methods to calculate the leverage. As it results from market studies, the best results can be achieved by combining                              the so-called ‘gross’ and ‘commitment’ methods.

(12)In order to receive appropriate information for monitoring systemic risks and to gain a complete picture of the use of leverage                              by the AIFM, information about the exposure of an AIF should be provided to competent authorities and investors both on a                              gross and on a commitment method basis and all AIFMs should therefore calculate exposure using both the gross and the commitment                              method. The gross method gives the overall exposure of the AIF whereas the commitment method gives insight in the hedging                              and netting techniques used by the manager; therefore both methods shall be seen in conjunction. Specifically, the degree                              to which overall exposure differs between the gross method and the commitment method may provide useful information. If necessary                              to ensure that any increase of the exposure of AIFs is adequately reflected the Commission may adopt additional delegated                              acts on an additional and optional method for the calculation of leverage.

(13)When calculating the exposure, all positions of the AIF should initially be included, including short and long assets and                              liabilities, borrowings, derivative instruments and any other method increasing the exposure where the risks and rewards of                              assets or liabilities are with the AIF, and all other positions that make up the net asset value.

(14)Borrowing arrangements entered into by the AIF should be excluded if they are temporary in nature and relate to and are fully                              covered by capital commitments from investors. Revolving credit facilities should not be considered being temporary in nature.

(15)In addition to calculating exposure using the gross method, all AIFMs should calculate exposure using the commitment method.                              According to the commitment method financial derivative instruments should be converted into equivalent positions in the underlying                              asset. However, if an AIF invests in certain derivatives in order to off-set the market risk of other assets in which the                              AIF is invested, under certain conditions, those derivatives should not be converted into an equivalent position in the underlying                              assets as the exposures of the two investments balance one another. That should be the case where, for instance, an AIF portfolio                              invests in a certain index and holds a derivative instrument which swaps the performance of that index with the performance                              of a different index, that should be equivalent to holding exposure to the second index in the portfolio and therefore the                              AIF’s net asset value would not depend on the performance of the first index.

(16)When calculating exposure according to the commitment method, derivatives which fulfil the criteria set out in this Regulation                              do not provide any incremental exposure. Thus, if the AIF invests in index future contracts and holds a cash position equal                              to the total underlying market value of future contracts, this would be equivalent to directly investing in index shares and                              therefore the index future contract should not be taken into account for the purpose of calculating the exposure of the AIF.

(17)When calculating exposure according to the commitment method, AIFMs should be allowed to consider hedging and netting arrangements                              provided they fulfil the criteria relating to the commitment method.

(18)The requirement that netting arrangements refer to the same underlying asset should be interpreted strictly so that assets                              which the AIFM considers as equivalent or highly correlated, such as different share classes or bonds issued by the same issuer,                              should not be considered as identical for the purposes of netting arrangements. The definition of netting arrangements aims                              to ensure that only those trades which offset the risks linked to other trades, leaving no material residual risk, are taken                              into account. Combinations of trades which aim to generate a return, however small, by reducing some risks while keeping others                              should not be considered as netting arrangements, as with arbitrage investment strategies which aim to generate a return by                              taking advantage of pricing discrepancies between derivative instruments with the same underlying but different maturities.

(19)A portfolio management practice which aims to reduce the duration risk by combining an investment in a long-dated bond with                              an interest rate swap or to reduce the duration of an AIF bond portfolio by concluding a short position on bond future contracts                              representative of the interest rate risk of the portfolio (duration hedging) should be considered as a hedging arrangement                              provided that it complies with the hedging criteria.

(20)A portfolio management practice, which aims to offset the significant risks linked to an investment in a well diversified                              portfolio of shares by taking a short position on a stock market index future, where the composition of the equity portfolio                              is very close to that of the stock market index and its return highly correlated to that of the stock market index and where                              the short position on the stock market index future allows an unquestionable reduction of the general market risk related                              to the equity portfolio and the specific risk is insignificant, such as a beta-hedging of a well-diversified equity portfolio                              where the specific risk is considered to be insignificant, should be considered as complying with the hedging criteria.

(21)A portfolio management practice which aims to offset the risk linked to an investment in a fixed interest rate bond by combining                              a long position on a credit default swap and an interest rate swap which swaps that fixed interest rate with an interest rate                              equal to an appropriate money market reference rate plus a spread should be considered as a hedging arrangement where all                              the hedging criteria of the commitment method are in principle complied with.

(22)A portfolio management practice which aims to offset the risk of a given share by taking a short position through a derivative                              contract on a share that is different to but strongly correlated with that first share should not be considered as complying                              with the hedging criteria. Although such a strategy relies on taking opposite positions on the same asset class, it does not                              hedge the specific risk linked to the investment in a certain share. Therefore, it should not be considered as a hedging arrangement                              as laid down in the criteria related to the commitment method.

(23)A portfolio management practice which aims to keep the alpha of a basket of shares (comprising a limited number of shares)                              by combining the investment in that basket of shares with a beta-adjusted short position on a future on a stock market index                              should not be considered as complying with the hedging criteria. Such a strategy does not aim to offset the significant risks                              linked to the investment in that basket of shares but to offset the beta (market risk) of that investment and keep the alpha.                              The alpha component of the basket of shares may dominate over the beta component and as such lead to losses at the level of                              the AIF. For that reason, it should not be considered as a hedging arrangement.

(24)A merger arbitrage strategy is a strategy that combines a short position on a stock with a long position on another stock.                              Such a strategy aims to hedge the beta (market risk) of the positions and generate a return linked to the relative performance                              of both stocks. Similarly, the alpha component of the basket of shares may dominate over the beta component and as such lead                              to losses at the level of the AIF. It should not be considered as a hedging arrangement as laid down in the criteria related                              to the commitment method.

(25)A strategy, which aims to hedge a long position in a stock or bond with purchased credit protection on the same issuer, relates                              to two different asset classes and therefore should not be considered as a hedging arrangement.

(26)When using methods which increase the exposure of an AIF, the AIFM should observe general principles such as considering the                              substance of the transaction in addition to its legal form. Specifically with respect to repurchase transactions, the AIFM                              should consider whether the risks and rewards of the assets involved are passed or retained by the AIF. The AIFM should also                              look through derivative instruments or other contractual arrangements to the underlying assets to determine the possible future                              commitments of the AIF resulting from those transactions.

(27)As the commitment method leads to interest rates with different maturities being considered as different underlying assets,                              AIFs that according to their core investment policy primarily invest in interest rate derivatives may use specific duration                              netting rules in order to take into account the correlation between the maturity segments of the interest rate curve. When                              setting out its investment policy and risk profile, an AIF should be able to define the level of the interest rate risk and                              consequently to determine its target duration. The AIF should take into account the predefined target duration when making                              its investment choices. When the portfolio duration diverges from the target duration, the strategy should not be considered                              as a duration netting arrangement as laid down in the criteria related to the commitment method.

(28)The duration netting rules allow long positions to be netted with short positions whose underlying assets are different interest                              rates. The maturities serving as the thresholds of the maturity ranges are two years, seven years and 15 years. Within each                              maturity range, netting positions should be allowed.

(29)Netting positions between two different maturity ranges should be partially allowed. Penalties have to be applied to the netted                              positions to allow only partial netting. They should be expressed by means of percentages relying on the average correlations                              between the maturity ranges for two years, five years, 10 years and 30 years of the interest rate curve. The longer the difference                              between the maturities of the positions, the more their netting must be subject to a penalty, and therefore the percentages                              must increase.

(30)Positions whose modified duration is much longer than the whole portfolio’s modified duration are not in line with the investment                              strategy of the AIF and fully matching them should not be allowed. Thus, it should not be acceptable to match an 18 months                              maturity short position (set in maturity range 1) with a 10 years maturity long position (set in maturity range 3), if the                              target duration of the AIF is around two years.

(31)When calculating the exposure, AIFs can firstly identify the hedging arrangements. The derivatives involved in these arrangements                              are then excluded from the global exposure calculation. AIFs should use an exact calculation in hedging arrangements. AIFs                              should not use duration netting rules in the hedging calculation. The duration-netting rules may be used to convert the remaining                              interest rate derivatives into their equivalent underlying asset positions.

(32)Pursuant to Directive 2011/61/EU, an AIFM has to ensure that the potential professional liability risks resulting from its                              activities are appropriately covered either by way of additional own funds or by way of professional indemnity insurance.                              Uniform application of this provision requires a common understanding of the potential professional liability risks to be                              covered. The general specification of the risks arising from an AIFM’s professional negligence should determine the features                              of the relevant risk events and identify the scope of potential professional liability, including damage or loss caused by                              persons who are directly performing activities for which the AIFM has legal responsibility, such as the AIFM’s directors,                              officers or staff, and persons performing activities under a delegation arrangement with the AIFM. In line with the provisions                              of Directive 2011/61/EU, the liability of the AIFM should not be affected by delegation or sub-delegation and the AIFM should                              provide adequate coverage for professional risks related to such third parties for whom it is legally liable.

(33)To ensure a common understanding of the general specification, a list of examples should serve as benchmark for identifying                              potential professional liability risk events. That list should include a wide range of events resulting from negligent actions,                              errors or omissions, such as the loss of documents evidencing title to investments, misrepresentations, or breach of the various                              obligations or duties incumbent on the AIFM. It should also include the failure to prevent, by means of adequate internal                              control systems, fraudulent behaviour within the AIFM’s organisation. Damage resulting from failure to carry out sufficient                              due diligence on an investment that turned out to be fraudulent would trigger the AIFM’s liability for professional liability                              and should be appropriately covered. However, losses incurred because an investment has lost value as a result of adverse                              market conditions should not be covered. The list should also include valuations that are improperly carried out, which should                              be understood as a valuation failure breaching Article 19 of Directive 2011/61/EU and the corresponding delegated acts.

(34)In line with their risk management obligations, AIFMs should have appropriate qualitative internal control mechanisms to avoid                              or mitigate operational failures, including professional liability risks. Therefore, an AIFM should have, as part of its risk                              management policy, adequate policies and procedures for operational risk management, appropriate to the nature, scale and                              complexity of its business. Such procedures and policies should in any event enable an internal loss database to be built                              up to serve for the purpose of assessing the operational risk profile.

(35)To ensure that additional own funds and professional liability insurance appropriately cover potential professional liability                              risks, quantitative minimum benchmarks should be established for determining the proper level of coverage. Such quantitative                              benchmarks should be determined by the AIFM as a specific percentage of the value of portfolios of AIFs managed, calculated                              as the sum of the absolute value of all assets of all AIFs managed, irrespective of whether they are acquired through use                              of leverage or with investors’ money. In this context, derivative instruments should be valued at their market price as they                              could be replaced at that price. As coverage through professional indemnity insurance is by nature more uncertain than coverage                              provided through additional own funds, different percentages should apply to the two different instruments used for covering                              professional liability risk.

(36)To ensure that professional indemnity insurance is effective in covering losses that result from insured events, it should                              be taken out from an insurance undertaking which is authorised to provide professional indemnity insurance. This includes                              EU insurance undertakings and non-EU undertakings to the extent that they are permitted to provide such insurance service                              by Union law or by national law.

(37)In order to allow some flexibility when devising appropriate professional indemnity insurance, it should be possible for the                              AIFM and the insurance undertaking to agree on a clause providing that a defined amount will be borne by the AIFM as the first                              part of any loss (defined excess). Where such a defined excess is agreed, the AIFM should provide own funds corresponding                              to the defined amount of loss to be borne by the AIFM. Such own funds should be in addition to the initial capital of the                              AIFM and to the own funds to be provided by the AIFM pursuant to Article 9(3) of Directive 2011/61/EU.

(38)As a matter of principle, the adequacy of coverage through additional own funds or professional indemnity insurance should                              be reviewed at least once a year. However, the AIFM should have procedures in place that ensure ongoing monitoring of the                              total value of AIF portfolios managed and ongoing adjustments to the amount of coverage of professional liability risks should                              there be significant mismatches identified. Furthermore, the competent authority of the home Member State of an AIFM may lower                              or increase the minimum requirement for additional own funds, after taking into account the risk profile of the AIFM, its                              loss history and the adequacy of its additional own funds or professional indemnity insurance.

(39)Directive 2011/61/EU requires AIFMs to act in the best interests of AIFs, the investors in the AIFs and the integrity of the                              market. AIFMs should therefore apply appropriate policies and procedures which allow them to prevent malpractices such as                              market timing or late trading. Market timers take advantage of out of date or stale prices for portfolio securities that impact                              the calculation of AIF’s net asset value (NAV) or buy and redeem units of the AIF within a few days, thereby exploiting the                              way the AIF calculates its NAV. Late trading involves placing of orders to buy or redeem units of AIFs after a designated                              cut off point but the price received is the one of the cut off point. Both malpractices harm the interests of long term investors                              as they dilute their return and have detrimental effects on AIF’s returns as they increase transaction costs and disrupt portfolio                              management. AIFMs should also establish appropriate procedures to ensure that the AIF is managed efficiently and should act                              in such a way as to prevent undue costs being charged to the AIF and its investors.

(40)In line with the approach applied to UCITS managers, AIFMs should ensure a high standard of diligence in the selection and                              monitoring of investments. They should have appropriate professional expertise and knowledge of the assets in which AIFs are                              invested. In order to ensure that investment decisions are carried out in compliance with the investment strategy and, where                              applicable, risk limits of the AIFs managed, AIFMs should establish and implement written policies and procedures on due diligence.                              These policies and procedures should be reviewed and updated on a regular basis. When AIFMs invest in specific types of assets                              for a long duration, less liquid assets such as real estate or partnership interests, due diligence requirements should apply                              also to the negotiation phase. The activities performed by the AIFM before closing an agreement should be well documented                              in order to demonstrate that they are consistent with the economic and financial plan and therefore with the duration of the                              AIF. AIFMs should maintain minutes of the relevant meetings, the preparatory documentation and the economic and financial                              analysis conducted for assessing the feasibility of the project and the contractual commitment.

(41)The requirement that AIFMs act with due skill, care and diligence should also apply where the AIFM appoints a prime broker                              or counterparty. The AIFM should select and appoint only those prime brokers and counterparties, which are subject to ongoing                              supervision, are financially sound and have the necessary organisational structure appropriate to the services to be provided                              to the AIFM or the AIF. In order to ensure that investors’ interests are adequately protected, it is important to clarify                              that one of the criteria against which financial soundness should be assessed is whether or not prime brokers or counterparties                              are subject to relevant prudential regulation, including adequate capital requirements, and effective supervision.

(42)In line with Directive 2011/61/EU, which requires AIFMs to act honestly, fairly and with due skill, persons who effectively                              direct the business of the AIFM, who are members of the governing body or of the senior management, in the case of entities                              which do not have a governing body, should possess sufficient knowledge, skills and experience to exercise their tasks, in                              particular to understand the risks associated with the activity of the AIFM. In line with the Commission’s Green Paper on                              corporate governance in the financial sector(2), persons who effectively direct the business of the AIFM should also commit sufficient time to perform their functions in                              the AIFM and act with honesty, integrity and independence of mind to, inter alia, effectively assess and challenge the decisions                              of the senior management.

(43)To ensure that the relevant activities are performed properly, AIFMs should employ personnel with the necessary skills, knowledge                              and expertise to carry out tasks assigned to them.

(44)AIFMs that provide the service of individual portfolio management have to comply with inducement rules laid down in Commission                              Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as                              regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that                              Directive(3). For reasons of consistency, those principles should extend to AIFMs that provide the service of collective portfolio management,                              and marketing. The existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained,                              the method of calculating the amount, should be disclosed in the AIFM’s annual report.

(45)Investors in AIFs should benefit from protection similar to that of AIFM clients to whom AIFMs provide the service of individual                              portfolio management, as in such a case they have to comply with the best execution rules laid down in Directive 2004/39/EC                              of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives                              85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive                              93/22/EEC(4) and Directive 2006/73/EC. However, the differences between the various types of assets in which AIFs are invested should                              be taken into account, since best execution is not relevant, for instance, when the AIFM invests in real estate or partnership                              interests and the investment is made after extensive negotiations on the terms of the agreement. Where there is no choice                              of different execution venues, the AIFM should be able to demonstrate to the competent authorities and auditors that there                              is no choice of different execution venues.

(46)For reasons of consistency with requirements applying to UCITS managers, rules on handling of orders and on aggregation and                              allocation of trading orders should apply to AIFMs when providing collective portfolio management. However, such rules should                              not apply where the investment in assets is made after extensive negotiations on the terms of the agreement, such as investment                              in real estate, partnership interests or non-listed companies as in such cases no order is executed.

(47)It is important to specify the situations where conflicting interests are likely to occur, in particular where there is a                              prospect of financial gain or avoidance of financial loss or where financial or other incentives are provided to steer the                              behaviour of the AIFM in such a way that it favours particular interests at the expense of interests of other parties, such                              as another AIF, its clients, undertakings for collective investments in transferable securities (UCITS) or other clients of                              the AIFM.

(48)The conflicts of interest policy established by the AIFM should identify situations in which activities carried out by the                              AIFM could constitute conflicts of interest that do or do not lead to potential risks of damage to the AIF’s interests or                              the interests of its investors. To identify them the AIFM should take into account not only the activity of collective portfolio                              management but also other activities it is authorised to carry out, including activities of its delegates, sub-delegates,                              external valuer or counterparty.

(49)In line with the approach considered in Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009                              on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment                              in transferable securities (UCITS)(5) for UCITS management companies and in Directive 2004/39/EC for investment firms, AIFMs should adopt procedures and measures                              to ensure that relevant persons engaged in different business activities that could involve conflicts of interest carry out                              these activities at an independent level, appropriate to the size and activities of the AIFM.

(50)It is essential to provide for a general framework according to which conflicts of interest, if they occur, should be managed                              and disclosed. The detailed steps and procedures to be followed in such situations should be clarified in the conflicts of                              interest policy to be established by the AIFM.

(51)One of the central components of a risk management system is a permanent risk management function. In the interest of consistency,                              its tasks and responsibilities should be similar in nature to those assigned by Commission Directive 2010/43/EU of 1 July                              2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements,                              conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management                              company(6) to the permanent risk management function in UCITS management companies. This function should have a primary role in shaping                              the risk policy of the AIF, risk monitoring and risk measuring in order to ensure that the risk level complies on an ongoing                              basis with the AIF’s risk profile. The permanent risk management function should have the necessary authority, access to all                              relevant information and regular contacts with the senior management and the governing body of the AIFM in order to provide                              them with updates so that they can take prompt remedial action where needed.

(52)The risk management policy forms another pillar of the risk management system. That policy should be appropriately documented                              and should explain, in particular, measures and procedures employed to measure and manage risks, the safeguards for independent                              performance of the risk management function, the techniques used to manage risks and the details of the allocation of responsibilities                              within the AIFM for risk management and operating procedures. In order to ensure its effectiveness, the risk management policy                              should be reviewed at least annually by the senior management.

(53)As required by Directive 2011/61/EU, the function of risk management should be functionally and hierarchically separated from                              the operating units. It should thus be clarified that such separation should be ensured up to the governing body of the AIFM                              and that those in the risk management function should not carry out any conflicting tasks or be supervised by someone who                              is in charge of conflicting functions.

(54)It is essential to specify the safeguards to be employed by the AIFM in any event in order to ensure the independent performance                              of the risk management function, and in particular, that those performing the risk management function should not be entrusted                              with conflicting duties, that they should make decisions on the basis of the data which they can appropriately assess and                              that the decision making process should be capable of being reviewed.

(55)Although Directive 2011/61/EU does not impose any investment restrictions on AIFs, the risks incurred by each AIF cannot be                              managed effectively if the risk limits have not been set in advance by AIFMs. The risk limits should be in line with the risk                              profile of the AIF, and should be disclosed to investors in accordance with Directive 2011/61/EU.

(56)For consistency reasons, the requirements relating to identification, measuring and monitoring of risk are built on similar                              provisions of Directive 2010/43/EU. AIFMs should deal appropriately with the possible vulnerability of their risk measurement                              techniques and models by carrying out stress tests, back tests and scenario analysis. Where stress tests and scenario analysis                              reveal particular vulnerability to a given set of circumstances, AIFMs should take prompt steps and corrective actions.

(57)Directive 2011/61/EU requires the Commission to specify the liquidity management systems and procedures enabling the AIFM                              to monitor the liquidity risk of the AIF, except where the AIF is an un-leveraged closed-ended AIF, and ensure that the liquidity                              profile of the AIF’s investments complies with its underlying obligations. Therefore, it is important to set out fundamental                              general requirements addressed to all AIFMs, the application of which should be adapted to the size, structure and nature                              of the AIFs managed by the AIFM concerned.

(58)AIFMs should be able to demonstrate to their competent authorities that appropriate and effective liquidity management policies                              and procedures are in place. That requires due consideration to be given to the nature of the AIF, including the type of underlying                              assets and the amount of liquidity risk to which the AIF is exposed, the scale and complexity of the AIF or the complexity                              of the process to liquidate or sell assets.

(59)Liquidity management systems and procedures can allow AIFMs to apply the tools and arrangements necessary to cope with illiquid                              assets and related valuation problems in order to respond to redemption requests. Such tools and arrangements may include,                              where allowed under national law, gates, partial redemptions, temporary borrowings, notice periods and pools of liquid assets.                              ‘Side pockets’ and other mechanisms where certain assets of the AIF are subject to similar arrangements between the AIF and                              its investors should be regarded as ‘special arrangements’ as they impact the specific redemption rights of investors in the                              AIF. The suspension of an AIF should not be considered as a special arrangement as this applies to all of the AIF’s assets                              and all of the AIF’s investors. The use of tools and special arrangements to manage liquidity should be made dependent on                              concrete circumstances and should vary according to the nature, scale and investment strategy of the AIF.

(60)The requirement to monitor the liquidity management of underlying collective investment undertakings in which AIFs invest,                              along with the requirements to put in place tools and arrangements to manage liquidity risk and identify, manage and monitor                              conflicts of interest between investors should not apply to AIFMs managing AIFs of the closed-ended type regardless of whether                              they are deemed to be employing leverage. The exemption from those redemption-related liquidity management requirements should                              reflect the differences in the general redemption terms of investors in a closed-ended AIF compared to those in an open-ended                              AIF.

(61)The use of minimum limits regarding the liquidity or illiquidity of the AIF could provide an effective monitoring tool for                              certain types of AIFMs. Exceeding a limit may not of itself require action by the AIFM as this depends on the facts and circumstances                              and the tolerances set by the AIFM. Limits could thus be used in practice in relation to monitoring average daily redemption                              versus fund liquidity in terms of days over the same period. That could also be used to monitor investor concentration to                              support stress testing scenarios. Those limits could provide triggers for continued monitoring or remedial action depending                              on the circumstances.

(62)The stress tests should, where appropriate, simulate shortage of liquidity of the assets as well as atypical redemption requests.                              Recent and expected future subscriptions and redemptions should be taken into consideration together with the impact of anticipated                              AIF performance relative to peers on such activity. The AIFM should analyse the period of time required to meet redemption                              requests in the stress scenarios simulated. The AIFM should also conduct stress tests on market factors such as foreign exchange                              movements which could materially impact the credit profile of the AIFM or that of the AIF and as a result collateral requirements.                              The AIFM should account for valuation sensitivities under stressed conditions in its approach to stress testing or scenario                              analysis.

(63)The frequency with which stress tests should be conducted should depend on the nature of the AIF, the investment strategy,                              liquidity profile, type of investor and redemption policy of the AIF. However, it is expected that those tests will be conducted                              at least on an annual basis. Where stress tests suggest significantly higher than expected liquidity risk, the AIFM should                              act in the best interest of all AIF investors taking into consideration the liquidity profile of the AIF’s assets, the level                              of redemption requests and where appropriate the adequacy of the liquidity management policies and procedures.

(64)Directive 2011/61/EU requires the Commission to specify how the investment strategy, liquidity profile and redemption policy                              are to be aligned. The consistency between those three elements is ensured if investors are able to redeem their investments                              in accordance with the AIF redemption policy, which should cover conditions for redemption in both normal and exceptional                              circumstances, and in a manner consistent with the fair treatment of investors.

(65)Directive 2011/61/EU requires cross-sectoral consistency and the removal of misalignment between the interests of originators                              that repackage loans into tradable securities and AIFMs that invest in those securities or other financial instruments on                              behalf of AIFs. To achieve that aim, the relevant provisions of Directive 2006/48/EC of the European Parliament and of the                              Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions(7) that lay down the quantitative and qualitative requirements to be met by investors exposed to the credit risk of a securitisation,                              by originators and by sponsors have been taken into account. As the same objective of aligning the interests of the originator                              or sponsor and the interests of investors are pursued by this Regulation and the relevant provisions of Directive 2006/48/EC                              it is essential that the terminology is used consistently in both legal acts, therefore the definitions given in Directive                              2006/48/EC are taken as reference. Given that the Committee of European Banking Supervisors, the predecessor of the European                              Banking Authority, has provided detailed Guidelines for interpreting the relevant provisions of Directive 2006/48/EC(8), achieving cross-sectoral consistency requires the current provisions seeking to align interests between originators, sponsors                              and AIFMs to be interpreted in light of those Guidelines.

(66)It is important that transactions that re-package loans into tradable securities are not structured in such a way as to avoid                              the application of the requirements relating to investments in securitisation positions. Therefore, the reference to an investment                              in tradable securities or other financial instruments based on repackaged loans should not be interpreted strictly as a legally                              valid and binding transfer of title with respect to such instruments, but as an investment made in a material economic sense                              so that any other forms of synthetic investments should be covered and subject to the specific requirements. To avoid misunderstandings                              and align the language with that used in the banking legislation, the terms ‘assumption of exposure to the credit risk of                              a securitisation’ should be used instead of ‘investment in tradable securities or other financial instruments based on repackaged                              loans’.

(67)The requirements that need to be met by institutions acting as originators, sponsors or original lenders of a securitisation                              are directly imposed on them by way of Directive 2006/48/EC. It is therefore important to prescribe the corresponding duties                              of an AIFM assuming exposure to securitisations. Consequently, the AIFM should assume exposure to securitisations only if                              the originator, sponsor or original lender has explicitly disclosed to the AIFM the retention of a significant economic interest                              in the underlying asset, known as retention requirement. Furthermore, the AIFM should ensure that various qualitative requirements                              imposed on the sponsor and originator through Directive 2006/48/EC are met. In addition, the AIFM should itself meet qualitative                              requirements in order to have a comprehensive and thorough understanding of the securitisation investment and its underlying                              exposure. To achieve that, AIFMs should make their investment decision only after having conducted careful due diligence from                              which they should have adequate information on and knowledge of the securitisations concerned.

(68)There are circumstances in which entities meet the definition of originator or sponsor, or fulfil the role of original lender;                              however, another entity that neither meets the definition of sponsor or originator, nor fulfils the role of original lender                              — but whose interests are most optimally aligned with those of investors — may seek to fulfil the retention requirement. For                              the sake of legal certainty, such other entity should not be required to fulfil the retention requirement if the retention                              requirement is fulfilled by the originator, sponsor or original lender.

(69)In case of a breach of the retention requirement or the qualitative requirements the AIFM should consider taking some corrective                              action, such as hedging, selling or reducing the exposure or approaching the party in breach of the retention requirement                              with a view to reinstating compliance. Such corrective action should always be in the interest of the investors and should                              not involve any direct obligation to sell the assets immediately after the breach has become apparent, therefore avoiding                              a ‘fire sale’. The AIFM should take the breach into account when considering making another investment in a further transaction                              in which the party in breach of the requirement is involved.

(70)In order to comply with the requirements of Directive 2011/61/EU to specify internal procedures and organisational arrangements,                              which each AIFM should apply, AIFMs should be required to establish a well-documented organisational structure that clearly                              assigns responsibilities, defines control mechanisms and ensures a good flow of information between all parties involved.                              AIFMs should also establish systems to safeguard information and ensure business continuity. When establishing those procedures                              and structures, AIFMs should take into account the principle of proportionality which allows procedures, mechanisms and organisational                              structure to be calibrated to the nature, scale and complexity of the AIFM’s business and to the nature and range of activities                              carried out in the course of its business.

(71)Disclosure to investors is of paramount importance to protect those investors, so AIFMs should implement appropriate policies                              and procedures to ensure that the redemption terms applicable to a particular AIF are disclosed in sufficient detail and with                              sufficient prominence to investors before they invest and in the event of material changes. That could include disclosure                              of notice periods in relation to redemptions, details of lock-up periods, an indication of circumstances in which normal redemption                              mechanisms might not apply or may be suspended, and details of any measures that may be considered by the governing body,                              such as gates, side pocketing, as they have an impact on the specific redemption rights of investors in the particular AIF.

(72)To ensure that the relevant activities are performed properly, AIFMs, in particular, should use suitable electronic systems                              in order to fulfil the recording requirements with regard to portfolio transactions or subscription and redemption orders                              and establish, implement and maintain accounting policies and procedures to ensure that the calculation of the net asset value                              is carried out as required in Directive 2011/61/EU and this Regulation.

(73)In order to ensure consistency with the requirements imposed on UCITS managers by Directive 2009/65/EC, the governing body,                              the senior management, or, where relevant the supervisory function of the AIFM should be entrusted with similar types of tasks                              to which adequate responsibilities should be allocated. However, such allocation of responsibilities should be consistent                              with the role and responsibilities of the governing body, the senior management and the supervisory function under applicable                              national law. Senior management may include some or all of the members of the governing body.

(74)The requirement to establish a permanent and effective compliance function should always be fulfilled by the AIFM, irrespective                              of the size and complexity of its business. However, details of the technical and personnel organisation of the compliance                              function should be calibrated to the nature, scale and complexity of the AIFM’s business and the nature and range of its services                              and activities. The AIFM should not have to establish an independent compliance unit if such a requirement would be disproportionate                              in view of the size of the AIFM or the nature, scale and complexity of its business.

(75)Valuation standards differ across jurisdictions and asset classes. This Regulation should supplement the common general rules                              and establish benchmarks for AIFMs when developing and implementing appropriate and consistent policies and procedures for                              the proper and independent valuation of the assets of AIFs. The policies and procedures should describe the obligations, roles                              and responsibilities pertaining to all parties involved in the valuation, including external valuers.

(76)The value of assets can be determined, in different ways, such as by reference to observable prices in an active market or                              by an estimate using other valuation methodologies according to national law, the AIF rules or its instruments of incorporation.                              As the value of individual assets and liabilities can be determined by different methodologies and can be taken from different                              sources, the AIFM should determine and describe the valuation methodologies it uses.

(77)Where a model is used for valuing assets, the valuation procedures and policies should indicate the main features of the model.                              Before it is used, that model should be subject to a validation process conducted by an internal or external individual who                              was not involved in the process of building the model. A person should be considered qualified to conduct a validation process                              in respect of the model used to value assets if he is in possession of adequate competence and experience in the valuation                              of assets using such models; such person could be an auditor.

(78)Since AIFs operate in a dynamic environment where investment strategies may change over time, valuation policies and procedures                              should be reviewed at least yearly and in any event before AIFs engage with a new investment strategy or a new type of asset.                              Any change in the valuation policies and procedures, including the valuation methodologies, should follow a predetermined                              process.

(79)The AIFM has to ensure that the individual assets of an AIF have been valued properly, in line with the valuation policies                              and procedures. For some assets, especially complex and illiquid financial instruments, there is a higher risk of inappropriate                              valuation. To address this type of situation, the AIFM should put in place sufficient controls to ensure that an appropriate                              degree of objectivity can be attached to the value of the AIF’s assets.

(80)Calculation of the net asset value per unit or share is subject to national law and, as the case may be, or the fund rules                              or instruments of incorporation. This Regulation covers only the procedure for the calculation, and not the methodology of                              the calculation. The AIFM may itself carry out the calculation of the net asset value per unit or share as part of the administration                              functions it performs for the AIF. Alternatively, a third party may be appointed to perform administration, including calculation                              of the net asset value. A third party that carries out the calculation of the net asset value for an AIF should not be considered                              an external valuer for the purposes of Directive 2011/61/EU, as long as it does not provide valuations for individual assets,                              including those requiring subjective judgement, but incorporates into the calculation process values which are obtained from                              the AIFM, pricing sources or an external valuer.

(81)There are valuation procedures that can be performed on a daily basis such as the valuation of financial instruments, but                              there are also valuation procedures that cannot be carried out with the same frequency as issues, subscriptions, redemptions                              and cancellations take place, for instance the valuation of real estate. The frequency of valuation of the assets held by                              an open-ended fund should take into account the differences in the valuation procedures with respect to the types of assets                              held by the AIF.

(82)The strict requirements and limitations which have to be complied with when an AIFM intends to delegate the task of carrying                              out functions are set out in Directive 2011/61/EU. The AIFM remains at all times fully responsible for the proper performance                              of the delegated tasks and their compliance with Directive 2011/61/EU and its implementing measures. The AIFM should therefore                              ensure that the delegate performs and applies the quality standards which would be applied by the AIFM itself. Also, if necessary                              to ensure that delegated functions are performed to a consistently high standard, the AIFM has to be able to terminate the                              delegation and the delegation arrangement should therefore confer flexible termination rights on the AIFM. The delegation                              limitations and requirements should apply to the management functions set out in Annex I to Directive 2011/61/EU, whereas                              supporting tasks like administrative or technical functions assisting the management tasks such as logistical support in the                              form of cleaning, catering and procurement of basic services or products, should not be deemed to constitute delegation of                              AIFM functions. Other examples of technical or administrative functions are buying standard software ‘off-the-shelf’ and relying                              on software providers for ad hoc operational assistance in relation to off-the-shelf systems or providing human resources                              support such as sourcing of temporary employees or processing of payroll.

(83)To ensure a high level of investor protection in addition to the increase of the efficiency of the conduct of the business                              of the AIFM the entire delegation should be based on objective reasons. When assessing these reasons, competent authorities                              should consider the structure of the delegation and its impact on the structure of the AIFM and the interaction of the delegated                              activities with the activities remaining with the AIFM.

(84)In order to assess whether the person who effectively conducts the business of the delegate is of sufficiently good repute,                              the person’s conduct of business should be verified as well as whether he has committed offences regarding financial activities.                              Any other relevant information concerning personal qualities which might adversely affect the person’s conduct of business                              such as doubts in relation to his honesty and integrity should be considered when assessing the requirement of sufficient                              good repute.

(85)Investment companies authorised under Directive 2009/65/EC are not deemed to be undertakings which are authorised or registered                              for the purposes of asset management and subject to supervision because they are not allowed to engage in activities other                              than collective portfolio management under that Directive. Similarly, an internally managed AIF should not be deemed to be                              classified as such an undertaking because it should not engage in activities other than the internal management of the AIF.

(86)Where the delegation concerns portfolio management or risk management, which are the core business of the AIFM and therefore                              of high relevance with respect to investor protection and systemic risk, in addition to the requirements of Article 20(1)(c)                              of Directive 2011/61/EU the competent authority of the home Member State of the AIFM and the supervisory authority of the                              third country undertaking should have concluded a cooperation arrangement based on a written agreement. The arrangement should                              be in place prior to the delegation. The details of this agreement should take international standards into consideration.

(87)Written arrangements should confer on competent authorities the right to carry out on-site inspections, including where they                              request the third-country supervisory authority of the undertaking, to which functions were delegated, to carry out on-site                              inspections and where they request permission from the third-country supervisory authority to carry out the inspection themselves,                              or to accompany staff of the third-country supervisory authority in order to assist them in carrying out on-site inspections.

(88)Based on the obligations laid down in Directive 2011/61/EU, AIFMs should always act in the best interests of the AIFs or the                              investors in the AIFs they manage. Therefore, delegation should be admissible only if it does not prevent the AIFM from acting                              or managing the AIF in the best interests of the investors.

(89)To maintain a high standard of investor protection possible conflicts of interest have to be taken into account for any delegation.                              Several criteria should set benchmarks for identifying situations which would result in a material conflict of interest. Those                              criteria should be understood as non-exhaustive and meaning that non-material conflicts of interest are also relevant for                              the purposes of Directive 2011/61/EU. Thus, the carrying out of compliance or audit functions should be deemed as conflicting                              with portfolio management tasks, whereas market making or underwriting should be understood as conflicting with portfolio                              or risk management. That obligation is without prejudice to the obligation of the delegate to separate functionally and hierarchically                              the tasks of portfolio and risk management from each other according to the provisions of Article 15 of Directive 2011/61/EU.

(90)The requirements applying to the delegation of the task of carrying out functions on behalf of the AIFM should apply *mutatis mutandis* where the delegate sub-delegates any of the functions delegated to it and also in the case of any further sub-delegation.

(91)To ensure that in any event the AIFM performs investment management functions, the AIFM should not delegate its functions                              to the extent that, in essence, it can no longer be considered to be the manager of the AIF and to the extent that it becomes                              a letter-box entity. The AIFM should at all times keep sufficient resources to supervise the delegated functions efficiently.                              The AIFM has to perform itself investment management functions, to have the necessary expertise and resources, to keep the                              power to take decisions which fall under senior management responsibility and to perform senior management functions, which                              could include implementation of the general investment policy and investment strategies.

(92)The assessment of a delegation structure is a complex exercise that has to be based on a series of criteria in order for the                              competent authorities to form their judgement. The combination is necessary to take into account the variety of fund structures                              and investment strategies across the Union. ESMA may develop guidelines to ensure a consistent assessment of delegation structures                              across the Union.

(93)The Commission shall monitor how the criteria are applied and their impact on the markets. The Commission shall review the                              situation after two years and, should it prove necessary, shall take appropriate measures to further specify the conditions                              under which the AIFM shall be deemed to have delegated its functions to such an extent that it becomes a letter box entity                              and can no longer be considered to be the manager of the AIF.

(94)Directive 2011/61/EU lays down an extensive set of requirements regarding the depositary of an AIF in order to ensure a high                              standard of investor protection. The respective concrete rights and obligations of the depositary, the AIFM and, as the case                              may be, or the AIF and third parties should therefore be set out clearly. The written contract should comprise all details                              necessary for the appropriate safe-keeping of all the AIF’s assets by the depositary or a third party to whom safe-keeping                              functions are delegated in accordance with Directive 2011/61/EU and for the depositary to properly fulfil its oversight and                              control functions. In order to allow the depositary to assess and monitor custody risk, the contract should provide sufficient                              detail on the categories of assets in which the AIF may invest and cover the geographical regions in which the AIF plans to                              invest. The contract should also contain details of an escalation procedure. Thus, the depositary should alert the AIFM to                              any material risk identified in a particular market’s settlement system. With respect to the termination of the contract,                              it should reflect the fact that the termination of the contract is the depositary’s last resort if it is not satisfied that                              the assets are sufficiently protected. It should also prevent moral hazard whereby the AIFM would make investment decisions                              irrespective of custody risks on the basis that the depositary would be liable in most cases. In order to maintain a high                              standard of investor protection, the requirement laying down the details for the monitoring of third parties should be applied                              in relation to the whole custody chain.

(95)A depositary established in a third country should be subject to public prudential regulation and to prudential supervision                              performed by a supervisory authority which is competent for ongoing supervision, undertaking investigations and imposing sanctions.                              Where that supervision of the depositary involves multiple supervisory authorities, one supervisory authority should act as                              the contact point for the purposes of Directive 2011/61/EU and all delegated and implementing measures adopted pursuant to                              it.

(96)The assessment of the law of the third country according to Article 21(6) last subparagraph of Directive 2011/61/EU should                              be made by the European Commission by comparing the authorisation criteria and the ongoing operating conditions applicable                              to the depositary in the third country with the corresponding requirements applicable under Union law to credit institutions                              and, as the case may be, or to investment firms for access to the depositary business and performance of the depositary functions,                              with a view to ascertaining whether the local criteria have the same effect as those established under Union law. A depositary                              which is subject to prudential oversight and licensed in the third country under a local category other than a credit institution                              or an investment firm may be assessed by the European Commission with a view to ascertaining whether the relevant provisions                              of the law of the third country have the same effect as those established by the law of the Union for credit institutions                              and, as the case may be, or for investment firms.

(97)In order for the depositary to have a clear overview of all inflows and outflows of cash of the AIF in all instances, the                              AIFM should ensure that the depositary receives without undue delay accurate information related to all cash flows, including                              from any third party with which an AIF’s cash account is opened.

(98)In order for the AIF’s cash flows to be properly monitored the depositary’s obligation consists of making sure that there                              are procedures in place and effectively implemented to appropriately monitor the AIF’s cash flows and that these procedures                              are periodically reviewed. In particular, the depositary should look into the reconciliation procedure to satisfy itself that                              the procedure is suitable for the AIF and performed at appropriate intervals taking into account the nature, scale and complexity                              of the AIF. Such a procedure should for example compare one by one each cash flow as reported in the bank account statements                              with the cash flows recorded in the AIF’s accounts. Where reconciliations are performed on a daily basis as for most open-ended                              AIFs, the depositary should perform its reconciliation also on a daily basis. The depositary should in particular monitor                              the discrepancies highlighted by the reconciliation procedures and the corrective measures taken in order to notify without                              undue delay the AIFM of any anomaly which has not been remedied and to conduct a full review of the reconciliation procedures.                              Such a review should be performed at least once a year. The depositary should also identify on a timely basis significant                              cash flows and in particular those which could be inconsistent with the AIF’s operations, such as changes in positions in                              AIF’s assets or subscriptions and redemptions, and it should receive periodically cash account statements and check the consistency                              of its own records of cash positions with those of the AIFM. The depositary should keep its record up to date in accordance                              with Article 21(8)(b) of Directive 2011/61/EU.

(99)The depositary has to ensure that all payments made by or on behalf of investors upon the subscription of shares or units                              of an AIF have been received and booked in one or more cash accounts in accordance with Directive 2011/61/EU. The AIFM should                              therefore ensure that the depositary is provided with the relevant information it needs to properly monitor the receipt of                              investors’ payments. The AIFM has to ensure that the depositary obtains this information without undue delay when the third                              party receives an order to redeem or issue shares or units of an AIF. The information should therefore be transmitted at the                              close of the business day from the entity which is responsible for the subscription and redemption of shares or units of an                              AIF to the depositary in order to avoid any misuse of investors’ payments.

(100)Depending on the type of assets to be safe-kept, assets are either to be held in custody, as with financial instruments which                              can be registered in a financial instruments account, or which can be physically delivered to the depositary in accordance                              with Directive 2011/61/EU, or to be subject to ownership verification and record-keeping. The depositary should hold in custody                              all financial instruments of the AIF or of the AIFM acting on behalf of the AIF that could be registered or held in an account                              directly or indirectly in the name of the depositary or a third party to whom custody functions are delegated, notably at                              the level of the central securities depositary. In addition to these situations those financial instruments are to be held                              in custody that are only directly registered with the issuer itself or its agent in the name of the depositary or a third                              party to whom custody functions are delegated. Those financial instruments that in accordance with applicable national law                              are only registered in the name of the AIF with the issuer or its agent, such as investments in non-listed companies by private                              equity and venture capital funds, should not be held in custody. All financial instruments which could be physically delivered                              to the depositary should be held in custody. Provided that the conditions on which financial instruments are to be held in                              custody are fulfilled, financial instruments which are provided as collateral to a third party or are provided by a third                              party for the benefit of the AIF have to be held in custody too by the depositary itself or by a third party to whom custody                              functions are delegated as long as they are owned by the AIF or the AIFM acting on behalf of the AIF. Also, financial instruments                              owned by the AIF or by the AIFM on behalf of the AIF, for which the AIF, or the AIFM on behalf of the AIF, has given its consent                              to re-use by the depositary, remain in custody as long as the right of re-use has not been exercised.

(101)Financial instruments which are held in custody should be subject to due care and protection at all times. To ensure that                              the custody risk is properly assessed, in exercising due care, the depositary should in particular know which third parties                              constitute the custody chain, ensure that the due-diligence and segregation obligations have been maintained throughout the                              whole custody chain, ensure that it has an appropriate right of access to the books and records of third parties to whom custody                              functions are delegated, ensure compliance with these requirements, document all of these duties and make these documents                              available to and report to the AIFM.

(102)In order to avoid circumvention of the requirements of Directive 2011/61/EU, the depositary should apply the safe-keeping                              duties to the underlying assets of financial structures and, as the case may be, or legal structures controlled directly or                              indirectly by the AIF or by the AIFM acting on behalf of the AIF. That look-through provision should not apply to funds of                              funds or master-feeder structures provided they have a depositary which safe-keeps the fund’s assets appropriately.

(103)The depositary should at all times have a comprehensive overview of all assets that are not financial instruments to be held                              in custody. Those assets would be subject to the obligation to verify the ownership and maintain a record under Directive                              2011/61/EU. Examples of such assets are physical assets which do not qualify as financial instruments under Directive 2011/61/EU                              or could not be physically delivered to the depositary, financial contracts such as derivatives, cash deposits or investments                              in privately held companies and interests in partnerships.

(104)To achieve a sufficient degree of certainty that the AIF or the AIFM acting on behalf of the AIF is indeed the owner of the                              assets, the depositary should make sure it receives all information it deems necessary to be satisfied that the AIF or the                              AIFM acting on behalf of the AIF holds the ownership right over the asset. That information could be a copy of an official                              document evidencing that the AIF or the AIFM acting on behalf of the AIF is the owner of the asset or any formal and reliable                              evidence that the depositary considers appropriate. If necessary, the depositary should request additional evidence from the                              AIF or the AIFM or as the case may be from a third party.

(105)The depositary should keep a record of all assets for which it is satisfied that the AIF holds ownership. It may set up a                              procedure to receive information from third parties, whereby procedures which ensure that the assets could not be transferred                              without the depositary or the third party to whom safe-keeping functions are delegated having been informed of such transactions                              may be feasible in the case of AIFs with infrequent transactions and, as the case may be, or transactions which are subject                              to pre-settlement negotiation. The requirement to have access to documentary evidence of each transaction from a third party                              could be appropriate for AIFs with more frequent portfolio trading, such as investments in listed derivatives.

(106)In order to ensure that the depositary is able to conduct its duties, it is necessary to clarify the tasks provided for in                              Article 21(9) of Directive 2011/61/EU, and in particular the second layer controls to be undertaken by the depositary. Such                              tasks should not prevent the depositary from conducting *ex-ante* verifications where it deems appropriate, and in agreement with the AIFM. In order to ensure that it is able to conduct its                              duties, the depositary should establish its own escalation procedure to address situations where irregularities have been                              detected. That procedure should ensure the notification of competent authorities of any material breaches. The oversight responsibilities                              of the depositary towards third parties specified by this Regulation are without prejudice to the responsibilities incumbent                              on the AIFM under Directive 2011/61/EU.

(107)The depositary should check the consistency between the number of units or shares issued and the subscription proceeds received.                              Moreover, to ensure that payments made by investors upon subscription have been received, the depositary should further ensure                              that another reconciliation is conducted between the subscription orders and the subscription proceeds. The same reconciliation                              should be performed with regard to redemption orders. The depositary should also verify that the number of units or shares                              in the AIF’s accounts matches the number of outstanding units or shares in the AIF’s register. The depositary should adapt                              its procedures accordingly, taking into account the frequency of subscriptions and redemptions.

(108)The depositary should take all necessary steps to ensure that appropriate valuation policies and procedures for the assets                              of the AIF are effectively implemented, through the performance of sample checks or by comparing the consistency of the change                              in the NAV calculation over time with that of a benchmark. When setting up its procedures, the depositary should have a clear                              understanding of the valuation methodologies used by the AIFM or the external valuer to value the AIF’s assets. The frequency                              of such checks should be consistent with the frequency of the AIF’s asset valuation.

(109)By virtue of its obligation of oversight under Directive 2011/61/EU, the depositary should set up a procedure to verify on                              an *ex-post* basis the AIF’s compliance with applicable law and regulations and its rules and instruments of incorporation. This covers                              areas such as checking that the AIF’s investments are consistent with its investment strategies as described in the AIF’s                              rules and offering documents and ensuring that the AIF does not breach its investment restrictions, if any. The depositary                              should monitor the AIF’s transactions and investigate any unusual transactions. If the limits or restrictions set out in the                              applicable national law or regulations or the AIF rules and instruments of incorporation are breached, the depositary should,                              for example, obtain an instruction from the AIFM to reverse the transaction that was in breach at its own costs. This Regulation                              does not prevent the depositary from adopting an *ex ante* approach where it deems it appropriate and in agreement with the AIFM.

(110)The depositary should ensure that the income is calculated accurately in accordance with Directive 2011/61/EU. In order to                              achieve this the depositary has to ensure that the income distribution is appropriate and, where it identifies an error, that                              the AIFM takes appropriate remedial action. Once the depositary has ensured this, it should verify the completeness and accuracy                              of the income distribution and in particular of the dividend payments.

(111)When delegating safe-keeping functions related to other assets according to Directive 2011/61/EU, delegation is likely to                              concern administrative functions in most cases. Where the depositary delegates record-keeping functions, it would therefore                              be required to implement and apply an appropriate and documented procedure to ensure that the delegate complies with the requirements                              of Article 21(11)(d) of Directive 2011/61/EU at all times. In order to ensure a sufficient level of protection of assets,                              it is necessary to set out certain principles that should be applied in relation to the delegation of safekeeping. For the                              delegation of custody duties it is important to set out some key principles which have to be effectively applied throughout                              the delegation process. Those principles should not be taken to be exhaustive, either in terms of setting out all details                              of the depositary’s exercise of due skill care and diligence, or in terms of setting out all the steps that a depositary should                              take in relation to these principles themselves. The obligation to monitor on an ongoing basis the third party, to whom safekeeping                              functions have been delegated should consist of verifying that this third party correctly performs all the delegated functions                              and complies with the delegation contract. The third party should act honestly, in good faith with a view to the best interests                              of the AIF and its investors, in compliance with regulatory and supervisory requirements, and should exercise care, diligence                              and skill that are normally expected from a highly prudent operator of that financial profession in comparable circumstances.                              The depositary should review, inter alia, elements assessed during the selection and appointment process and put these elements                              into perspective by comparing them with the development of the market. The form of the regular review should reflect circumstances,                              so that the depositary is in a position to appropriately assess the risks related to the decision to entrust assets to the                              third party. The frequency of the review should be adapted so as to always remain consistent with market conditions and associated                              risks. For the depositary to effectively respond to a possible insolvency of the third party, it should undertake contingency                              planning, including the design of alternative strategies and the possible selection of alternative providers as may be relevant.                              While such measures may reduce the custody risk faced by a depositary, they do not alter the obligation to return the financial                              instruments or pay the corresponding amount should they be lost, which depends on whether or not the requirements of Article                              21(12) of Directive 2011/61/EU are fulfilled.

(112)When delegating safe-keeping functions, the depositary should ensure that the requirements of Article 21(11)(d)(iii) of Directive                              2011/61/EU are fulfilled and that the assets of the AIF clients of the depositary are properly segregated. This obligation                              should particularly ensure that assets of the AIF are not lost due to insolvency of the third party to whom safekeeping functions                              are delegated. In order to minimise that risk in countries where the effects of segregation are not recognised by insolvency                              law, the depositary should take further steps. The depositary could make a disclosure to the AIF and the AIFM acting on behalf                              of the AIF so that such aspects of the custody risk are properly taken into account in the investment decision or take such                              measures as are possible in the local jurisdictions to make the assets as insolvency-proof as possible according to local                              law. Furthermore, the depositary could prohibit temporary deficits in client assets, use buffers or put in place arrangements                              prohibiting the use of a debit balance for one client to offset a credit balance for another. While such measures may reduce                              the custody risk faced by a depositary when delegating custody functions, they do not alter the obligation to return the financial                              instruments or pay the corresponding amount where these are lost, which depends on whether or not the requirements of Directive                              2011/61/EU are fulfilled.

(113)The depositary’s liability under Article 21(12) second subparagraph of Directive 2011/61/EU is triggered in the event of the                              loss of a financial instrument held in custody by the depositary itself or by a third party to whom the custody has been delegated,                              provided that the depositary does not demonstrate that the loss results from an external event beyond reasonable control,                              the consequences of which would have been unavoidable despite all reasonable efforts to the contrary. That loss should be                              distinguished from an investment loss for investors resulting from a decrease in the value of assets as a consequence of an                              investment decision.

(114)To be ascertained as such, it is important that the loss is definitive, and there is no prospect of recovering the financial                              asset. Thus, situations where a financial instrument is only temporarily unavailable or frozen should not count as losses                              within the meaning of Article 21(12) of Directive 2011/61/EU. In contrast, three types of situations can be identified where                              the loss should be deemed to be definitive: where the financial instrument no longer exists or never did exist; where the                              financial instrument exists but the AIF has definitively lost its right of ownership over it; and where the AIF has the ownership                              right but can no longer transfer title of or create limited property rights in the financial instrument on a permanent basis.

(115)A financial instrument is deemed no longer to exist for instance when it has disappeared following an accounting error that                              cannot be corrected, or if it never existed, when the AIF’s ownership was registered on the basis of falsified documents.                              Situations where the loss of financial instruments is caused by fraudulent conduct should be deemed a loss.

(116)No loss can be ascertained when the financial instrument has been substituted by or converted into another financial instrument,                              for example in situations where shares are cancelled and replaced by the issue of new shares in a company reorganisation.                              An AIF should not be considered as permanently deprived of its right of ownership over the financial instrument if the AIF                              or the AIFM acting on behalf of the AIF has legitimately transferred ownership to a third party. Where there is a distinction                              between the legal ownership and the beneficial ownership of the assets, the definition of loss should refer to loss of the                              beneficial ownership right.

(117)Only in the case of an external event beyond the reasonable control of the depositary, the consequences of which are unavoidable                              despite all reasonable efforts to the contrary, could the depositary avoid to be held liable under Article 21(12) of Directive                              2011/61/EU. The cumulative fulfilment of these conditions should be proven by the depositary in order for it to be discharged                              of liability.

(118)It should first be determined whether the event which led to the loss was external. The depositary’s liability should not                              be affected by delegation and therefore an event should be deemed external if it does not occur as a result of any act or                              omission of the depositary or the third party to whom the custody of financial instruments held in custody has been delegated.                              Then, it should be assessed whether the event is beyond the reasonable control, by verifying that there was nothing a prudent                              depositary could reasonably have done to prevent the occurrence of the event. Under these steps both natural events and acts                              of a public authority may be considered as external events beyond reasonable control. Thus, in the context of the insolvency                              of a third party to whom custody was delegated, the law of the country where the instruments are held in custody, which does                              not recognise the effects of an appropriately implemented segregation, is deemed to be an external event beyond reasonable                              control. In contrast, a loss caused by failure to apply the segregation requirements laid down in Article 21(11)(d) (iii)                              of Directive 2011/61/EU or the loss of assets because of disruption in the third party’s activity in relation to its insolvency                              cannot be seen as being external events beyond reasonable control.

(119)Finally, the depositary should prove that the loss could not have been avoided despite all reasonable efforts to the contrary.                              In this context, the depositary should inform the AIFM and take appropriate action depending on the circumstances. For instance,                              in a situation where the depositary believes the only appropriate action is to dispose of the financial instruments, the depositary                              should duly inform the AIFM, which must in turn instruct the depositary in writing whether to continue holding the financial                              instruments or to dispose of them. Any instruction to the depositary to continue holding the assets should be reported to                              the AIF’s investors without undue delay. The AIFM or the AIF should give due consideration to the depositary’s recommendations.                              Depending on the circumstances, if the depositary remains concerned that the standard of protection of the financial instrument                              is not sufficient, despite repeated warnings, it should consider further possible action, such as termination of the contract                              provided the AIF is given a period of time to find another depositary in accordance with national law.

(120)To ensure the same standard of investor protection, the same considerations should also apply to the delegate to whom a depositary                              has contractually transferred its liability. Therefore, in order to be discharged of liability under Article 21(12) of Directive                              2011/61/EU the delegate should prove that it fulfils cumulatively the same conditions.

(121)A depositary is allowed under certain circumstances to discharge itself of liability for the loss of financial instruments                              held in custody by a third party to which custody was delegated. For such liability discharge to be permitted there must be                              an objective reason for contracting such discharge that is accepted by both the depositary and the AIF or the AIFM acting                              on behalf of the AIF. An objective reason should be established for each discharge of liability taking into account the concrete                              circumstances in which custody has been delegated.

(122)When considering an objective reason, the right balance should be established to ensure that the contractual discharge can                              be effectively relied upon if needed and that sufficient safeguards are put in place to avoid any misuse of the contractual                              discharge of liability by the depositary. The contractual discharge of liability should under no circumstances be used to                              circumvent the depositary’s liability requirements under Directive 2011/61/EU. The depositary should demonstrate that it was                              forced by the specific circumstances to delegate custody to a third party. Contracting a discharge should be always in the                              best interest of the AIF or its investors, and the AIF or the AIFM acting on behalf of the AIF should make it explicit that                              they act in such best interest. Examples of scenarios should indicate the situations where a depositary may be considered                              as not having other options but to delegate custody to third parties.

(123)It is important for competent authorities to obtain appropriate and sufficient information in order to supervise activities                              of AIFMs and the risks related to them appropriately and consistently. Also, since the activities of AIFMs could have effects                              across borders and on the financial markets, competent authorities should monitor AIFMs and AIFs closely in order to take                              appropriate action to avoid the build-up of systemic risks. The increased transparency and consistency through provisions                              on reporting and disclosing relevant information as outlined in the implementing measures should make it possible for competent                              authorities to detect and respond to risks in the financial markets.

(124)It is essential for investors to obtain the minimum information necessary with respect to particular AIFMs and AIFs and their                              structure in order to be able to take the right investment decision tailored to their needs and risk appetite. That information                              should be clear, reliable, readily understandable and clearly presented, whereas the usefulness of the information is enhanced                              when it is comparable from AIFM to AIFM and AIF to AIF and from one period to the next. An AIFM should not engage in activities                              which might be detrimental to the objective understanding and practical use of the information to investors prior to its disclosure                              such as window dressing.

(125)It is necessary to set out a framework which provides for minimum standards with respect to annual reporting requirements,                              including key elements and a non-exhaustive list of items. Material changes in the information as referred to in Article 22(2)(d)                              of Directive 2011/61/EU should be disclosed in the annual report within the financial statements. In addition to the non-exhaustive                              list of underlying line items additional line items, headings and sub totals may be included where the presentation of these                              items is relevant for the understanding of an AIF’s overall financial position or performance. Items of a dissimilar nature                              or function could be aggregated provided such items are individually not materially relevant. Those items could be aggregated                              under ‘other category’ such as ‘other assets’ or ‘other liabilities’. Where line items do not apply to a particular AIF at                              all, they do not need to be presented. Regardless of the accounting standards followed in accordance with Directive 2011/61/EU,                              all assets should be valued at least once a year. The balance sheet or the statement of assets and liabilities under Directive                              2011/61/EU should include, inter alia, cash and cash equivalents. Thus, cash equivalents should be considered highly liquid                              investments for the purpose of calculating the exposure of an AIF.

(126)With respect to the content and format of the report on activities for the financial year which has to be part of the annual                              report under Directive 2011/61/EU, the report should include a fair and balanced review of the activities of the AIF with                              a description of the principal risks and investments or economic uncertainties that it faces. That disclosure should not result                              in the publication of proprietary information of the AIF which would be to the detriment of the AIF and its investors. Therefore,                              if the publication of particular proprietary information would have such effect, it could be aggregated to a level that would                              avoid the detrimental effect and would not need to capture, for example, the performance or statistics of an individual portfolio                              company or investment that could lead to the disclosure of proprietary information of the AIF. This information should form                              part of the management report in so far as this is usually presented alongside the financial statements.

(127)With respect to the content and format of the disclosure of remuneration where information is presented at the level of the                              AIFM, further information should be provided by disclosing an allocation or breakdown of the total remuneration as it relates                              to the relevant AIF. This could be achieved through disclosure of the total AIFM remuneration data split into fixed and variable                              components, a statement that these data relate to the entire AIFM, and not to the AIF, the number of AIFs and UCITS funds                              managed by the AIFM and the total assets under management of such AIFs and UCITS with an overview of the remuneration policy                              and a reference to where the full remuneration policy of the AIFM is available at the request of investors. Further details                              may be provided by disclosure of the total variable remuneration funded by the AIF through payment by it of performance fees                              or carried interest, as the case may be. In addition to the remuneration disclosure, it may be appropriate for AIFMs to provide                              information relating to the financial and non-financial criteria of the remuneration policies and practices for relevant categories                              of staff to enable investors to assess existing incentives created.

(128)Where the AIF issues units, transfers of any assets to side pockets should be calculated, at the time of transfer, based on                              the number of units allocated on transfer of assets multiplied by the price per unit. The valuation basis should be clearly                              disclosed in all circumstances and include the date at which the valuation was performed.

(129)In order to manage liquidity AIFMs should be permitted to enter into borrowing arrangements on behalf of AIFs they manage.                              Those arrangements can be short term or more permanent. In the latter case it is more likely that such an arrangement would                              be a special arrangement for the purpose of managing illiquid assets.

(130)In line with the principle of differentiation, and recognising the diversity of types of AIFs, the disclosure to investors                              required of an AIFM should vary according to the type of AIF and would depend on other factors such as investment strategy                              and the portfolio composition.

(131)Directive 2011/61/EU requires AIFMs to provide certain information on a regular basis to the competent authority of their                              home Member State for each EU AIFs they manage and for each of the AIF they market in the Union. It is therefore important                              to further specify the information to be provided and the frequency of the reporting which depend on the value of assets under                              management in portfolios of AIFs managed by a given AIFM. Pro-forma reporting templates should be provided for and should                              be completed by the AIFM for the AIFs it manages. Where an entity which is authorised as an AIFM markets AIFs which are managed                              by other AIFMs, it does not act as the manager of those AIFs but as an intermediary as any investment firm covered by Directive                              2004/39/EC. It therefore should not have to report for these AIFs, as this would lead to double- or multiple reporting. This                              reporting requirement should nevertheless apply to non-EU AIFMs that manage AIFs which are marketed in the Union.

(132)The threshold provided in this Regulation triggers only reporting requirements laid down in Article 24(4) of Directive 2011/61/EU.                              An AIF with a leverage ratio calculated in accordance with the commitment method of less than three times its net asset value                              would not be considered as employing leverage on a substantial basis. However, competent authorities may request additional                              information where necessary for the effective monitoring of systemic risks. Setting a reporting threshold also ensures that                              information relating to the build-up of systemic risk is collected throughout the Union in a consistent way and provides certainty                              to AIFMs.

(133)A competent authority’s supervisory powers under Article 25(3) of Directive 2011/61/EU are exercised within the new supervisory                              system, forming part of what are ongoing supervisory processes and systemic risk assessments of AIFMs by competent authorities                              and the European supervisory authorities, with reference to the stability and integrity of the financial system. Competent                              authorities should make appropriate use of the information they receive and should impose limits to leverage employed by an                              AIFM or other restrictions on the management of the AIF with respect to the AIFs managed where they deem this necessary in                              order to ensure the stability and integrity of the financial system. The assessment of systemic risk is likely to vary depending                              on the economic environment, whereby any AIFM, with respect to the AIFs it manages, has the potential to be systemically relevant.                              It is therefore a basic requirement that competent authorities obtain all the information necessary to assess those situations                              appropriately in order to avoid the build-up of systemic risk. Competent authorities should then assess the information thoroughly                              and take appropriate measures.

(134)To allow EU AIFMs to manage and market non-EU AIFs and non-EU AIFMs to manage and market AIFs in the Union, Directive 2011/61/EU                              requires appropriate cooperation arrangements to be put in place with the relevant supervisory authorities of the third country                              where the non-EU AIF and, as the case may be, or the non-EU AIFM is established. Such cooperation arrangements should ensure                              at least an efficient exchange of information that allows Union competent authorities to carry out their duties in accordance                              with Directive 2011/61/EU.

(135)Cooperation arrangements should allow competent authorities to carry out their supervisory and enforcement duties in respect                              of third country entities. Cooperation arrangements should therefore set out a clear concrete framework for access to information,                              for the carrying out of on-site inspections, and for assistance to be provided by the third country authorities. The cooperation                              arrangements should make sure that information received may be shared with other competent authorities concerned as well as                              with ESMA and the ESRB.

(136)In order to allow competent authorities, AIFMs and depositaries to adapt to the new requirements contained in this Regulation                              so that they can be applied in an efficient and effective manner, the starting date of application of this Regulation should                              be aligned with the transposition date of Directive 2011/61/EU,

HAS ADOPTED THIS REGULATION:

## CHAPTER IU.K.**DEFINITIONS**

### Article 1U.K.Definitions

In addition to the definitions laid down in Article 2 of Directive 2011/61/EU, the following definitions apply for the purposes                     of this Regulation:                  

‘capital commitment’ means the contractual commitment of an investor to provide the alternative investment fund (AIF) with                              an agreed amount of investment on request by the AIFM;                           

‘relevant person’ in relation to an AIFM means any of the following:

a director, partner or equivalent, or manager of the AIFM;

an employee of the AIFM, or any other natural person whose services are placed at the disposal and under the control of the                                       AIFM and who is involved in the provision of collective portfolio management services by the AIFM;                                    

a natural or legal person who is directly involved in the provision of services to the AIFM under a delegation arrangement                                       to third parties for the purpose of the provision of collective portfolio management by the AIFM;                                    

‘senior management’ means the person or persons who effectively conduct the business of an AIFM in accordance with Article                              8(1)(c) of Directive 2011/61/EU and, as the case may be, the executive member or members of the governing body;                           

‘governing body’ means the body with ultimate decision making authority in an AIFM, comprising the supervisory and the managerial                              functions, or only the managerial function if the two functions are separated;                           

‘special arrangement’ means an arrangement that arises as a direct consequence of the illiquid nature of the assets of an                              AIF which impacts the specific redemption rights of investors in a type of units or shares of the AIF and which is a bespoke                              or separate arrangement from the general redemption rights of investors.                           

## CHAPTER IIU.K.**GENERAL PROVISIONS**

### *SECTION 1*U.K.***Calculation of assets under management***(Article 3(2) of Directive 2011/61/EU)

#### Article 2U.K.Calculation of the total value of assets under management

1.In order to qualify for the exemption provided for in Article 3(2) of Directive 2011/61/EU an AIFM shall:                  

(a)identify all AIFs for which it is appointed as the external AIFM or the AIF for which it is the AIFM, where the legal form                        of the AIF permits internal management, in accordance with Article 5 of Directive 2011/61/EU;                  

(b)identify for each managed AIF the portfolio of assets and determine in accordance with the valuation rules laid down in the                        law of the country where the AIF is established and, as the case may be, or in the AIF rules or instruments of incorporation                        the corresponding value of assets under management, including all assets acquired through use of leverage;                  

(c)aggregate the determined values of assets under management for all AIFs managed and compare the resulting total value of assets                        under management to the relevant threshold laid down in Article 3(2) of Directive 2011/61/EU.                  

2.For the purposes of paragraph 1, undertakings for collective investment in transferable securities (UCITS) for which the AIFM                        acts as the designated management company under Directive 2009/65/EC shall not be included in the calculation.                  

For the purposes of paragraph 1, AIFs managed by the AIFM for which the AIFM has delegated functions in accordance with Article                     20 of Directive 2011/61/EU shall be included in the calculation. However, portfolios of AIFs that the AIFM is managing under                     delegation shall be excluded from the calculation.                  

3.For the purpose of calculating the total value of assets under management, each derivative instrument position, including                        any derivative embedded in transferable securities shall be converted into its equivalent position in the underlying assets                        of that derivative using the conversion methodologies set out in Article 10. The absolute value of that equivalent position                        shall then be used for the calculation of the total value of assets under management.                  

4.Where an AIF invests in other AIFs managed by the same externally appointed AIFM, that investment may be excluded from the                        calculation of the AIFM’s assets under management.                  

5.Where one compartment within an internally or externally managed AIF invests in another compartment of that AIF, that investment                        may be excluded from the calculation of the AIFMs assets under management.                  

6.The total value of assets under management shall be calculated in accordance with paragraphs 1 to 4 at least annually and                        using the latest available asset values. The latest available asset value for each AIF shall be produced during the 12 months                        preceding the date of the calculation of the threshold in accordance with the first sentence of this paragraph. The AIFM shall                        determine a threshold calculation date and apply it in a consistent manner. Any subsequent change to the date chosen must                        be justified to the competent authority. In selecting the threshold calculation date, the AIFM shall take into account the                        time and frequency of the valuation of the assets under management.                  

#### Article 3U.K.Ongoing monitoring of assets under management

AIFMs shall establish, implement and apply procedures to monitor on an ongoing basis the total value of assets under management.                     Monitoring shall reflect an up-to-date overview of the assets under management and shall include the observation of subscription                     and redemption activity or, where applicable, capital draw downs, capital distributions and the value of the assets invested                     in for each AIF.                  

The proximity of the total value of assets under management to the threshold set in Article 3(2) of Directive 2011/61/EU and                     the anticipated subscription and redemption activity shall be taken into account in order to assess the need for more frequent                     calculations of the total value of assets under management.                  

#### Article 4U.K.Occasional breach of the threshold

1.The AIFM shall assess situations where the total value of assets under management exceeds the relevant threshold in order                        to determine whether or not they are of a temporary nature.                  

2.Where the total value of assets under management exceeds the relevant threshold and the AIFM considers that the situation                        is not of a temporary nature, the AIFM shall notify the competent authority without delay stating that the situation is considered                        not to be of a temporary nature and shall seek authorisation within 30 calendar days in accordance with Article 7 of Directive                        2011/61/EU.                  

3.Where the total value of assets under management exceeds the relevant threshold and the AIFM considers that the situation                        is of a temporary nature, the AIFM shall notify the competent authority without delay, stating that the situation is considered                        to be of a temporary nature. The notification shall include supporting information to justify the AIFM’s assessment of the                        temporary nature of the situation, including a description of the situation and an explanation of the reasons for considering                        it temporary.                  

4.A situation shall not be considered of a temporary nature if it is likely to continue for a period in excess of three months.                  

5.Three months after the date on which the total value of assets under management exceeds the relevant threshold the AIFM shall                        recalculate the total value of assets under management in order to demonstrate that it is below the relevant threshold or                        demonstrate to the competent authority that the situation which resulted in the assets under management exceeding the threshold                        has been resolved and an application for authorisation of the AIFM is not required.                  

#### Article 5U.K.Information to be provided as part of registration

1.As part of the requirement in Article 3(3)(b) of Directive 2011/61/EU, AIFMs shall communicate to the competent authorities                        the total value of assets under management calculated in accordance with the procedure set out in Article 2.                  

2.As part of the requirement in Article 3(3)(c) of Directive 2011/61/EU AIFMs shall provide for each AIF the offering document                        or a relevant extract from the offering document or a general description of the investment strategy. The relevant extract                        from the offering document and the description of the investment strategy shall include at least the following information:                  

(a)the main categories of assets in which the AIF may invest;                  

(b)any industrial, geographic or other market sectors or specific classes of assets which are the focus of the investment strategy;                  

(c)a description of the AIF’s borrowing or leverage policy.                  

3.Information to be provided by the AIFM under point (d) of Article 3(3) of Directive 2011/61/EU is listed in Article 110(1)                        of this Regulation. It shall be provided in accordance with the pro-forma reporting template as set out in the Annex IV.                  

4.Information collected in accordance with Article 3(3)(d) of Directive 2011/61/EU shall be shared between competent authorities                        in the Union, with the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board (ESRB) where                        necessary for the fulfilment of their duties.                  

5.The information required for registration purposes shall be updated and provided on an annual basis. For reasons relating                        to the exercise of their powers under Article 46 of Directive 2011/61/EU, the competent authorities may require an AIFM to                        provide the information referred to in Article 3 of Directive 2011/61/EU on a more frequent basis.                  

### *SECTION 2*U.K.***Calculation of leverage***(Article 4(3) of Directive 2011/61/EU)

#### Article 6U.K.General provisions on the calculation of leverage

1.Leverage of an AIF shall be expressed as the ratio between the exposure of an AIF and its net asset value.                  

2.AIFMs shall calculate the exposure of the AIFs managed in accordance with the gross method as set out in Article 7 and the                        commitment method as set out in Article 8.                  

The Commission shall review, in the light of market developments and no later than 21 July 2015, the calculation methods referred                     to in the first subparagraph in order to decide whether these methods are sufficient and appropriate for all types of AIFs,                     or an additional and optional method for calculating leverage should be developed.                  

3.Exposure contained in any financial or legal structures involving third parties controlled by the relevant AIF shall be included                        in the calculation of the exposure where the structures referred to are specifically set up to directly or indirectly increase                        the exposure at the level of the AIF. For AIFs whose core investment policy is to acquire control of non-listed companies                        or issuers, the AIFM shall not include in the calculation of the leverage any exposure that exists at the level of those non-listed                        companies and issuers provided that the AIF or the AIFM acting on behalf of the AIF does not have to bear potential losses                        beyond its investment in the respective company or issuer.                  

4.AIFMs shall exclude borrowing arrangements entered into if these are temporary in nature and are fully covered by contractual                        capital commitments from investors in the AIF.                  

5.An AIFM shall have appropriately documented procedures to calculate the exposure of each AIF under its management in accordance                        with the gross method and the commitment method. The calculation shall be applied consistently over time.                  

#### Article 7U.K.Gross method for calculating the exposure of the AIF

The exposure of an AIF calculated in accordance with the gross method shall be the sum of the absolute values of all positions                     valued in accordance with Article 19 of Directive 2011/61/EU and all delegated acts adopted pursuant to it.                  

For the calculation of the exposure of an AIF in accordance with the gross method an AIFM shall:

exclude the value of any cash and cash equivalents which are highly liquid investments held in the base currency of the AIF,                              that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide                              a return no greater than the rate of a three-month high quality government bond;                           

convert derivative instruments into the equivalent position in their underlying assets using the conversion methodologies                              set out in Article 10 and the methods set out in paragraphs (4) to (9) and (14) of Annex I;                           

exclude cash borrowings that remain in cash or cash equivalent as referred to in point (a) and where the amounts of that payable                              are known;                           

include exposure resulting from the reinvestment of cash borrowings, expressed as the higher of the market value of the investment                              realised or the total amount of the cash borrowed as referred to in paragraphs (1) and (2) of Annex I;                           

include positions within repurchase or reverse repurchase agreements and securities lending or borrowing or other arrangements                              in accordance with paragraphs (3) and (10) to (13) of Annex I.                           

#### Article 8U.K.Commitment method for calculating the exposure of an AIF

1.The exposure of an AIF calculated in accordance with the commitment method shall be the sum of the absolute values of all                        positions valued in accordance with Article 19 of Directive 2011/61/EU and its corresponding delegated acts, subject to the                        criteria provided for in paragraphs 2 to 9.                  

2.For the calculation of the exposure of an AIF in accordance with the commitment method an AIFM shall:                  

(a)convert each derivative instrument position into an equivalent position in the underlying asset of that derivative using the                        conversion methodologies set out in Article 10 and paragraphs (4) to (9) and (14) of Annex II;                  

(b)apply netting and hedging arrangements;                  

(c)calculate the exposure created through the reinvestment of borrowings where such reinvestment increases the exposure of the                        AIF as defined in paragraphs (1) and (2) of Annex I;                  

(d)include other arrangements in the calculation in accordance with paragraphs (3) and (10) to (13) of Annex I.                  

3.For the purposes of calculating the exposure of an AIF according to the commitment method:                  

(a)netting arrangements shall include combinations of trades on derivative instruments or security positions which refer to the                        same underlying asset, irrespective — in the case of derivative instruments — of the maturity date of the derivative instruments                        and where those trades on derivative instruments or security positions are concluded with the sole aim of eliminating the                        risks linked to positions taken through the other derivative instruments or security positions;                  

(b)hedging arrangements shall include combinations of trades on derivative instruments or security positions which do not necessarily                        refer to the same underlying asset and where those trades on derivative instruments or security positions are concluded with                        the sole aim of offsetting risks linked to positions taken through the other derivative instruments or security positions.                  

4.By way of derogation from paragraph 2, a derivative instrument shall not be converted into an equivalent position in the underlying                        asset if it has all of the following characteristics:                  

(a)it swaps the performance of financial assets held in the AIF’s portfolio for the performance of other reference financial                        assets;                  

(b)it totally offsets the risks of the swapped assets held in the AIF’s portfolio so that the AIF’s performance does not depend                        on the performance of the swapped assets;                  

(c)it includes neither additional optional features, nor leverage clauses nor other additional risks as compared to a direct                        holding of the reference financial assets.                  

5.By way of derogation from paragraph 2, a derivative instrument shall not be converted into an equivalent position in the underlying                        asset when calculating the exposure according to the commitment method if it meets both of the following conditions:                  

(a)the combined holding by the AIF of a derivative instrument relating to a financial asset and cash which is invested in cash                        equivalent as defined in Article 7(a) is equivalent to holding a long position in the given financial asset;                  

(b)the derivative instrument shall not generate any incremental exposure and leverage or risk.                  

6.Hedging arrangements shall be taken into account when calculating the exposure of an AIF only if they comply with all the                        following conditions:                  

(a)the positions involved within the hedging relationship do not aim to generate a return and general and specific risks are                        offset;                  

(b)there is a verifiable reduction of market risk at the level of the AIF;                  

(c)the risks linked to derivative instruments, general and specific, if any, are offset;                  

(d)the hedging arrangements relate to the same asset class;                  

(e)they are efficient in stressed market conditions.                  

7.Subject to paragraph 6, derivative instruments used for currency hedging purposes and that do not add any incremental exposure,                        leverage or other risks shall not be included in the calculation.                  

8.An AIFM shall net positions in any of the following cases:                  

(a)between derivative instruments, provided they refer to the same underlying asset, even if the maturity date of the derivative                        instruments is different;                  

(b)between a derivative instrument whose underlying asset is a transferable security, money market instrument or units in a collective                        investment undertaking as referred to in points 1 to 3 of Section C of Annex I to Directive 2004/39/EC, and that same corresponding                        underlying asset.                  

9.AIFMs managing AIFs that, in accordance with their core investment policy, primarily invest in interest rate derivatives shall                        make use of specific duration netting rules in order to take into account the correlation between the maturity segments of                        the interest rate curve as set out in Article 11.                  

#### Article 9U.K.Methods of increasing the exposure of an AIF

When calculating exposure AIFMs shall use the methods set out in Annex I for the situations referred to therein.

#### Article 10U.K.Conversion methodologies for derivative instruments

AIFMs shall use the conversion methodologies set out in Annex II for the derivative instruments referred to therein.

#### Article 11U.K.Duration netting rules

1.Duration netting rules shall be applied by AIFMs when calculating the exposure of AIFs according to Article 8(9).                  

2.The duration-netting rules shall not be used where they would lead to a misrepresentation of the risk profile of the AIF.                        AIFMs availing themselves of those netting rules shall not include other sources of risk such as volatility in their interest                        rate strategy. Consequently, interest rate arbitrage strategies shall not apply those netting rules.                  

3.The use of those duration-netting rules shall not generate any unjustified level of leverage through investment in short-term                        positions. Short-dated interest rate derivatives shall not be the main source of performance for an AIF with medium duration                        which uses the duration netting rules.                  

4.Interest rate derivatives shall be converted into their equivalent underlying asset position and netted in accordance with                        Annex III.                  

5.An AIF making use of the duration-netting rules may still make use of the hedging framework. Duration netting rules may be                        applied only to the interest rate derivatives which are not included in hedging arrangements.                  

### *SECTION 3*U.K.***Additional own funds and professional indemnity insurance***(Article 9(7) and Article 15 of Directive 2011/61/EU)

#### Article 12U.K.Professional liability risks

1.The professional liability risks to be covered pursuant to Article 9(7) of Directive 2011/61/EU shall be risks of loss or                        damage caused by a relevant person through the negligent performance of activities for which the AIFM has legal responsibility.                  

2.Professional liability risks as defined in paragraph 1 shall include, without being limited to, risks of:                  

(a)loss of documents evidencing title of assets of the AIF;                  

(b)misrepresentations or misleading statements made to the AIF or its investors;                  

(c)acts, errors or omissions resulting in a breach of:                  

legal and regulatory obligations;

duty of skill and care towards the AIF and its investors;

fiduciary duties;

obligations of confidentiality;

AIF rules or instruments of incorporation;

terms of appointment of the AIFM by the AIF;

(d)failure to establish, implement and maintain appropriate procedures to prevent dishonest, fraudulent or malicious acts;                  

(e)improperly carried out valuation of assets or calculation of unit/share prices;                  

(f)losses arising from business disruption, system failures, failure of transaction processing or process management.                  

3.Professional liability risks shall be covered at all times either through appropriate additional own funds determined in accordance                        with Article 14 or through appropriate coverage of professional indemnity insurance determined in accordance with Article                        15.                  

#### Article 13U.K.Qualitative requirements addressing professional liability risks

1.An AIFM shall implement effective internal operational risk management policies and procedures in order to identify, measure,                        manage and monitor appropriately operational risks including professional liability risks to which the AIFM is or could be                        reasonably exposed. The operational risk management activities shall be performed independently as part of the risk management                        policy.                  

2.An AIFM shall set up a historical loss database, in which any operational failures, loss and damage experience shall be recorded.                        This database shall record, without being limited to, any professional liability risks as referred to in Article 12(2) that                        have materialised.                  

3.Within the risk management framework the AIFM shall make use of its internal historical loss data and where appropriate of                        external data, scenario analysis and factors reflecting the business environment and internal control systems.                  

4.Operational risk exposures and loss experience shall be monitored on an ongoing basis and shall be subject to regular internal                        reporting.                  

5.An AIFM’s operational risk management policies and procedures shall be well documented. An AIFM shall have arrangements in                        place for ensuring compliance with its operational risk management policies and effective measures for the treatment of non-compliance                        with these policies. An AIFM shall have procedures in place for taking appropriate corrective action.                  

6.The operational risk management policies and procedures and measurement systems shall be subject to regular review, at least                        on an annual basis.                  

7.An AIFM shall maintain financial resources adequate to its assessed risk profile.                  

#### Article 14U.K.Additional own funds

1.This Article shall apply to AIFMs that choose to cover professional liability risks through additional own funds.                  

2.The AIFM shall provide additional own funds for covering liability risks arising from professional negligence at least equal                        to 0,01 % of the value of the portfolios of AIFs managed.                  

The value of the portfolios of AIFs managed shall be the sum of the absolute value of all assets of all AIFs managed by the                     AIFM, including assets acquired through use of leverage, whereby derivative instruments shall be valued at their market value.                  

3.The additional own funds requirement referred to in paragraph 2 shall be recalculated at the end of each financial year and                        the amount of additional own funds shall be adjusted accordingly.                  

The AIFM shall establish, implement and apply procedures to monitor on an ongoing basis the value of the portfolios of AIFs                     managed, calculated in accordance with the second subparagraph of paragraph 2. Where, before the annual recalculation referred                     to in the first subparagraph, the value of the portfolios of AIFs managed increases significantly, the AIFM shall without                     undue delay recalculate the additional own funds requirement and shall adjust the additional own funds accordingly.                  

4.The competent authority of the home Member State of the AIFM may authorise the AIFM to provide additional own funds lower                        than the amount referred to in paragraph 2 only if it is satisfied — on the basis of the historical loss data of the AIFM                        as recorded over an observation period of at least three years prior to the assessment — that the AIFM provides sufficient                        additional own funds to appropriately cover professional liability risks. The authorised lower amount of additional own funds                        shall be not less than 0,008 % of the value of the portfolios of AIFs managed by the AIFM.                  

5.The competent authority of the home Member State of the AIFM may request the AIFM to provide additional own funds higher than                        the amount referred to in paragraph 2 if it is not satisfied that the AIFM has sufficient additional own funds to appropriately                        cover professional liability risks. The competent authority shall give reasons why it considers that the AIFM’s additional                        own funds are insufficient.                  

#### Article 15U.K.Professional indemnity insurance

1.This Article shall apply to AIFMs that choose to cover professional liability risks through professional indemnity insurance.                  

2.The AIFM shall take out and maintain at all times professional indemnity insurance that:                  

(a)shall have an initial term of no less than one year;                  

(b)shall have a notice period for cancellation of at least 90 days;                  

(c)shall cover professional liability risks as defined in Article 12(1) and (2);                  

(d)is taken out from an EU or non-EU undertaking authorised to provide professional indemnity insurance, in accordance with Union                        law or national law;                  

(e)is provided by a third party entity.                  

Any agreed defined excess shall be fully covered by own funds which are in addition to the own funds to be provided in accordance                     with Article 9(1) and (3) of Directive 2011/61/EU.                  

3.The coverage of the insurance for an individual claim shall be equal to at least 0,7 % of the value of the portfolios of AIFs                        managed by the AIFM calculated as set out in the second subparagraph of Article 14(2).                  

4.The coverage of the insurance for claims in aggregate per year shall be equal to at least 0,9 % of the value of the portfolios                        of AIFs managed by the AIFM calculated as set out in the second subparagraph of Article 14(2).                  

5.The AIFM shall review the professional indemnity insurance policy and its compliance with the requirements laid down in this                        Article at least once a year and in the event of any change which affects the policy’s compliance with the requirements in                        this Article.                  

## CHAPTER IIIU.K.**OPERATING CONDITIONS FOR AIFMs**

### *SECTION 1*U.K.***General principles***(Article 12(1) of Directive 2011/61/EU)

#### Article 16U.K.General obligations for competent authorities

When assessing the AIFM’s compliance with Article 12(1) of Directive 2011/61/EU, the competent authorities shall use at least                     the criteria laid down in this Section.                  

#### Article 17U.K.Duty to act in the best interests of the AIF or the investors in the AIF and the integrity of the market

1.AIFMs shall apply policies and procedures for preventing malpractices, including those that might reasonably be expected to                        affect adversely the stability and integrity of the market.                  

2.AIFMs shall ensure that the AIFs they manage or the investors in these AIFs are not charged undue costs.                  

#### Article 18U.K.Due diligence

1.AIFMs shall apply a high standard of diligence in the selection and ongoing monitoring of investments.                  

2.AIFMs shall ensure that they have adequate knowledge and understanding of the assets in which the AIF is invested.                  

3.AIFMs shall establish, implement and apply written policies and procedures on due diligence and implement effective arrangements                        for ensuring that investment decisions on behalf of the AIFs are carried out in compliance with the objectives, the investment                        strategy and, where applicable, the risk limits of the AIF.                  

4.The policies and procedures on due diligence referred to in paragraph 3 shall be regularly reviewed and updated.                  

#### Article 19U.K.Due diligence when investing in assets of limited liquidity

1.Where AIFMs invest in assets of limited liquidity and where such investment is preceded by a negotiation phase, they shall,                        in relation to the negotiation phase, in addition to the requirements laid down in Article 18:                  

(a)set out and regularly update a business plan consistent with the duration of the AIF and market conditions;                  

(b)seek and select possible transactions consistent with the business plan referred to in point (a);                  

(c)assess the selected transactions in consideration of opportunities, if any, and overall related risks, all relevant legal,                        tax-related, financial or other value affecting factors, human and material resources, and strategies, including exit strategies;                  

(d)perform due diligence activities related to the transactions prior to arranging execution;                  

(e)monitor the performance of the AIF with respect to the business plan referred to in point (a).                  

2.AIFMs shall retain records of the activities carried out pursuant to paragraph 1 for at least five years.                  

#### Article 20U.K.Due diligence in the selection and appointment of counterparties and prime brokers

1.When selecting and appointing counterparties and prime brokers, AIFMs shall exercise due skill, care and diligence before                        entering into an agreement and on an ongoing basis thereafter taking into account the full range and quality of their services.                  

2.When selecting prime brokers or counterparties of an AIFM or an AIF in an OTC derivatives transaction, in a securities lending                        or in a repurchase agreement, AIFMs shall ensure that those prime brokers and counterparties fulfil all of the following conditions:                  

(a)they are subject to ongoing supervision by a public authority;                  

(b)they are financially sound;                  

(c)they have the necessary organisational structure and resources for performing the services which are to be provided by them                        to the AIFM or the AIF.                  

3.When appraising the financial soundness referred to in paragraph 2(b), the AIFM shall take into account whether or not the                        prime broker or counterparty is subject to prudential regulation, including sufficient capital requirements, and effective                        supervision.                  

4.The list of selected prime brokers shall be approved by the AIFM’s senior management. In exceptional cases prime brokers not                        included in the list may be appointed provided that they fulfil the requirements laid down in paragraph 2 and subject to approval                        by senior management. The AIFM shall be able to demonstrate the reasons for such a choice and the due diligence that it exercised                        in selecting and monitoring the prime brokers which had not been listed.                  

#### Article 21U.K.Acting honestly, fairly and with due skills

In order to establish whether an AIFM conducts its activities honestly, fairly and with due skills, competent authorities                     shall assess, at least, whether the following conditions are met:                  

the governing body of the AIFM possesses adequate collective knowledge, skills and experience to be able to understand the                              AIFM’s activities, in particular the main risks involved in those activities and the assets in which the AIF is invested;                           

the members of the governing body commit sufficient time to properly perform their functions in the AIFM;

each member of the governing body acts with honesty, integrity and independence of mind;

the AIFM devotes adequate resources to the induction and training of members of the governing body.

#### Article 22U.K.Resources

1.AIFMs shall employ sufficient personnel with the skills, knowledge and expertise necessary for discharging the responsibilities                        allocated to them.                  

2.For the purposes of paragraph 1, AIFMs shall take into account the nature, scale and complexity of their business and the                        nature and range of services and activities undertaken in the course of that business.                  

#### Article 23U.K.Fair treatment of investors in the AIF

1.The AIFM shall ensure that its decision-making procedures and its organisational structure, referred to in Article 57, ensure                        fair treatment of investors.                  

2.Any preferential treatment accorded by an AIFM to one or more investors shall not result in an overall material disadvantage                        to other investors.                  

#### Article 24U.K.Inducements

1.AIFMs shall not be regarded as acting honestly, fairly and in accordance with the best interests of the AIFs they manage or                        the investors in these AIFs if, in relation to the activities performed when carrying out the functions referred to in Annex                        I to Directive 2011/61/EU, they pay or are paid any fee or commission, or provide or are provided with any non-monetary benefit,                        other than the following:                  

(a)a fee, commission or non-monetary benefit paid or provided to or by the AIF or a person on behalf of the AIF;                  

(b)a fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third                        party, where the AIFM can demonstrate that the following conditions are satisfied:                  

the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method                              of calculating that amount, is clearly disclosed to the investors in the AIF in a manner that is comprehensive, accurate and                              understandable, prior to the provision of the relevant service;                           

the payment of the fee or commission, or the provision of the non-monetary benefit are designed to enhance the quality of                              the relevant service and not impair compliance with the AIFM’s duty to act in the best interests of the AIF it manages or                              the investors in the AIF;                           

(c)proper fees which enable or are necessary for the provision of the relevant service, including custody costs, settlement and                        exchange fees, regulatory levies or legal fees, and which, by their nature, do not give rise to conflicts with the AIFM’s                        duties to act honestly, fairly and in accordance with the best interests of the AIF it manages or the investors of the AIF.                  

2.The disclosure of the essential terms of the arrangements relating to the fee, commission or non-monetary benefit in summary                        form shall be considered as satisfactory for the purposes of point (i) of paragraph 1(b), provided that the AIFM commits to                        disclose further details at the request of the investor in the AIF it manages and provided that it fulfils this commitment.                  

#### Article 25U.K.Effective employment of resources and procedures — handling of orders

1.AIFMs shall establish, implement and apply procedures and arrangements which provide for the prompt, fair and expeditious                        execution of orders on behalf of the AIF.                  

2.The procedures and arrangements referred to in paragraph 1 shall satisfy the following requirements:                  

(a)they shall ensure that orders executed on behalf of AIFs are promptly and accurately recorded and allocated;                  

(b)they shall execute otherwise comparable AIF orders sequentially and promptly unless the characteristics of the order or prevailing                        market conditions make this impracticable, or the interests of the AIF or of the investors in the AIF require otherwise.                  

3.The financial instruments, sums of money or other assets received in settlement of the executed orders shall be promptly and                        correctly delivered to or registered in the account of the relevant AIF.                  

4.AIFMs shall not misuse information related to pending AIF orders, and shall take all reasonable steps to prevent the misuse                        of such information by any of their relevant persons.                  

#### Article 26U.K.Reporting obligations in respect of execution of subscription and redemption orders

1.Where AIFMs have carried out a subscription or, where relevant, a redemption order from an investor, they shall promptly provide                        the investor, by means of a durable medium, with the essential information concerning the execution of that order or the acceptance                        of the subscription offer, as the case may be.                  

2.Paragraph 1 shall not apply where a third person is required to provide the investor with a confirmation concerning the execution                        of the order and where the confirmation contains the essential information.                  

AIFMs shall ensure that the third person complies with its obligations.

3.The essential information referred to in paragraphs 1 and 2 shall include the following information:                  

(a)the identification of the AIFM;                  

(b)the identification of the investor;                  

(c)the date and time of receipt of the order;                  

(d)the date of execution;                  

(e)the identification of the AIF;                  

(f)the gross value of the order including charges for subscription or the net amount after charges for redemptions.                  

4.AIFMs shall supply the investor, upon request, with information about the status of the order or the acceptance of the subscription                        offer, or both as the case may be.                  

#### Article 27U.K.Execution of decisions to deal on behalf of the managed AIF

1.AIFMs shall act in the best interests of the AIFs or the investors in the AIFs they manage when executing decisions to deal                        on behalf of the managed AIF in the context of the management of their portfolio.                  

2.Whenever AIFMs buy or sell financial instruments or other assets for which best execution is relevant, and for the purposes                        of paragraph 1, they shall take all reasonable steps to obtain the best possible result for the AIFs they manage or the investors                        in these AIFs, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other                        consideration relevant to the execution of the order. The relative importance of such factors shall be determined by reference                        to the following criteria:                  

(a)the objectives, investment policy and risks specific to the AIF, as indicated in the AIF’s rules or articles of association,                        prospectus or offering documents of the AIF;                  

(b)the characteristics of the order;                  

(c)the characteristics of the financial instruments or other assets that are the subject of that order;                  

(d)the characteristics of the execution venues to which that order can be directed.                  

3.AIFMs shall establish and implement effective arrangements for complying with the obligations referred to in paragraphs 1                        and 2. In particular, the AIFM shall establish in writing and implement an execution policy to allow AIFs and their investors                        to obtain, for AIF orders, the best possible result in accordance with paragraph 2.                  

4.AIFMs shall monitor on a regular basis the effectiveness of their arrangements and policy for the execution of orders with                        a view to identifying and, where appropriate, correcting any deficiencies.                  

5.AIFMs shall review their execution policy on an annual basis. A review shall also be carried out whenever a material change                        occurs that affects the AIFM’s ability to continue to obtain the best possible result for the managed AIFs.                  

6.AIFMs shall be able to demonstrate that they have executed orders on behalf of the AIF in accordance with their execution                        policy.                  

7.Whenever there is no choice of different execution venues paragraphs 2 to 5 shall not apply. However, AIFMs shall be able                        to demonstrate that there is no choice of different execution venues.                  

#### Article 28U.K.Placing orders to deal on behalf of AIFs with other entities for execution

1.Whenever the AIFM buys or sells financial instruments or other assets for which best execution is relevant, it shall act in                        the best interest of the AIFs it manages or the investors in the AIFs when placing orders to deal on behalf of the managed                        AIFs with other entities for execution, in the context of the management of their portfolio.                  

2.AIFMs shall take all reasonable steps to obtain the best possible result for the AIF or the investors in the AIF taking into                        account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the                        execution of the order. The relative importance of such factors shall be determined by reference to the criteria laid down                        in Article 27(2).                  

AIFMs shall establish, implement and apply a policy to enable them to comply with the obligation referred to in the first                     subparagraph. The policy shall identify, in respect of each class of instruments, the entities with which the orders may be                     placed. The AIFM shall only enter into arrangements for execution where such arrangements are consistent with the obligations                     laid down in this Article. The AIFM shall make available to investors in the AIFs it manages appropriate information on the                     policy established in accordance with this paragraph and on any material changes to that policy.                  

3.AIFMs shall monitor on a regular basis the effectiveness of the policy established in accordance with paragraph 2 and, in                        particular, the quality of the execution by the entities identified in that policy and, where appropriate, correct any deficiencies.                  

In addition, AIFMs shall review the policy on an annual basis. Such a review shall also be carried out whenever a material                     change occurs that affects the AIFM’s ability to continue to obtain the best possible result for the managed AIFs.                  

4.AIFMs shall be able to demonstrate that they have placed orders on behalf of the AIF in accordance with the policy established                        pursuant to paragraph 2.                  

5.Whenever there is no choice of different execution venues paragraphs 2 to 5 shall not apply. However, AIFMs shall be able                        to demonstrate that there is no choice of different execution venues.                  

#### Article 29U.K.Aggregation and allocation of trading orders

1.AIFMs can only carry out an AIF order in aggregate with an order of another AIF, a UCITS or a client or with an order made                        when investing their own funds where:                  

(a)it can be reasonably expected that the aggregation of orders will not work overall to the disadvantage of any AIF, UCITS or                        clients whose order is to be aggregated;                  

(b)an order allocation policy is established and implemented, providing in sufficiently precise terms for the fair allocation                        of aggregated orders, including how the volume and price of orders determines allocations and the treatment of partial executions.                  

2.Where an AIFM aggregates an AIF order with one or more orders of other AIFs, UCITS or clients and the aggregated order is                        partially executed, it shall allocate the related trades in accordance with its order allocation policy.                  

3.Where an AIFM aggregates transactions for its own account with one or more orders of AIFs, UCITS or clients, it shall not                        allocate the related trades in a way that is detrimental to the AIF, UCITS or a client.                  

4.Where an AIFM aggregates an order of an AIF, UCITS or another client with a transaction for its own account and the aggregated                        order is partially executed, it shall allocate the related trades to the AIF, UCITS or to clients in priority over those for                        own account.                  

However, if the AIFM is able to demonstrate to the AIF or to the client on reasonable grounds that it would not have been                     able to carry out the order on such advantageous terms without aggregation, or at all, it may allocate the transaction for                     its own account proportionally, in accordance with the policy referred to in point (b) of paragraph 1.                  

### *SECTION 2*U.K.***Conflicts of interest***(Article 14 of Directive 2011/61/EU)

#### Article 30U.K.Types of conflicts of interest

For the purpose of identifying the types of conflicts of interest that arise in the course of managing an AIF, AIFMs shall                     take into account, in particular, whether the AIFM, a relevant person or a person directly or indirectly linked by way of                     control to the AIFM:                  

is likely to make a financial gain, or avoid a financial loss, at the expense of the AIF or its investors;

has an interest in the outcome of a service or an activity provided to the AIF or its investors or to a client or of a transaction                              carried out on behalf of the AIF or a client, which is distinct from the AIF’s interest in that outcome;                           

has a financial or other incentive to favour:
                -  the interest of a UCITS, a client or group of clients or another AIF over the interest of the AIF, 
                -  the interest of one investor over the interest of another investor or group of investors in the same AIF; 

carries out the same activities for the AIF and for another AIF, a UCITS or client; or

receives or will receive from a person other than the AIF or its investors an inducement in relation to collective portfolio                              management activities provided to the AIF, in the form of monies, goods or services other than the standard commission or                              fee for that service.                           

#### Article 31U.K.Conflicts of interest policy

1.The AIFM shall establish, implement and apply an effective conflicts of interest policy. That policy shall be set out in writing                        and shall be appropriate to the size and organisation of the AIFM and the nature, scale and complexity of its business.                  

Where the AIFM is a member of a group, the policy shall also take into account any circumstances of which the AIFM is or should                     be aware which may give rise to a conflict of interest resulting from the structure and business activities of other members                     of the group.                  

2.The conflicts of interest policy established in accordance with paragraph 1 shall include the following:                  

(a)with reference to the activities carried out by or on behalf of the AIFM, including activities carried out by a delegate,                        sub-delegate, external valuer or counterparty, identification of the circumstances which constitute or may give rise to a                        conflict of interest entailing a material risk of damage to the interests of the AIF or its investors;                  

(b)procedures to be followed and measures to be adopted in order to prevent, manage and monitor such conflicts.                  

#### Article 32U.K.Conflicts of interest related to the redemption of investments

The AIFM that manages an open-ended AIF shall identify, manage and monitor conflicts of interest arising between investors                     wishing to redeem their investments and investors wishing to maintain their investments in the AIF, and any conflicts between                     the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy in accordance with its obligations under                     Article 14(1) of Directive 2011/61/EU.                  

#### Article 33U.K.Procedures and measures preventing or managing conflicts of interest

1.The procedures and measures established for the prevention or management of conflicts of interest shall be designed to ensure                        that the relevant persons engaged in different business activities involving a risk of conflict of interest carry out these                        activities having a degree of independence which is appropriate to the size and activities of the AIFM and of the group to                        which it belongs, and to the materiality of the risk of damage to the interests of the AIF or its investors.                  

2.Where necessary and appropriate for the AIFM to ensure the requisite degree of independence, the procedures to be followed                        and measures to be adopted in accordance with point (b) of Article 31(2) shall include the following:                  

(a)effective procedures to prevent or control the exchange of information between relevant persons engaged in collective portfolio                        management activities or other activities pursuant to Article 6(2) and (4) of Directive 2011/61/EU involving a risk of conflict                        of interest where the exchange of information may harm the interest of one or more AIFs or their investors;                  

(b)the separate supervision of relevant persons, whose principal functions involve carrying out collective portfolio management                        activities on behalf of, or providing services to, clients or investors, whose interests may conflict, or who otherwise represent                        different interests that may conflict, including those of the AIFM;                  

(c)the removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration                        of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest                        may arise in relation to those activities;                  

(d)measures to prevent or restrain any person from exercising inappropriate influence over the way in which a relevant person                        carries out collective portfolio management activities;                  

(e)measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate collective portfolio                        management activities or other activities pursuant to Article 6(2) and (4) of Directive 2011/61/EU where such involvement                        may impair the proper management of conflicts of interest.                  

Where the adoption or the application of one or more of those measures and procedures does not ensure the requisite degree                     of independence, the AIFM shall adopt such alternative or additional measures and procedures as are necessary and appropriate                     for those purposes.                  

#### Article 34U.K.Managing conflicts of interest

Where the organisational or administrative arrangements made by the AIFM are not sufficient to ensure, with reasonable confidence,                     that risks of damage to the interests of the AIF or investors in the AIF are prevented, the senior management or other competent                     internal body of the AIFM shall be promptly informed in order to take any necessary decision or action to ensure that the                     AIFM acts in the best interests of the AIF or the investors in that AIF.                  

#### Article 35U.K.Monitoring conflicts of interest

1.The AIFM shall keep and regularly update a record of the types of activities undertaken by or on behalf of the AIFM in which                        a conflict of interest entailing a material risk of damage to the interests of one or more AIFs or its investors has arisen                        or, in the case of an ongoing activity, may arise.                  

2.Senior management shall receive on a frequent basis, and at least annually, written reports on activities referred to in paragraph                        1.                  

#### Article 36U.K.Disclosure of conflicts of interest

1.The information to be disclosed to investors in accordance with Article 14(1) and (2) of Directive 2011/61/EU shall be provided                        to investors in a durable medium or by means of a website.                  

2.Where information referred to in paragraph 1 is provided by means of a website and is not addressed personally to the investor,                        the following conditions shall be satisfied:                  

(a)the investor has been notified of the address of the website, and the place on the website where the information may be accessed,                        and has consented to the provision of the information by such means;                  

(b)the information must be up to date;                  

(c)the information must be accessible continuously by means of that website for such period of time as the investor may reasonably                        need to inspect it.                  

#### Article 37U.K.Strategies for the exercise of voting rights

1.An AIFM shall develop adequate and effective strategies for determining when and how any voting rights held in the AIF portfolios                        it manages are to be exercised, to the exclusive benefit of the AIF concerned and its investors.                  

2.The strategy referred to in paragraph 1 shall determine measures and procedures for:                  

(a)monitoring relevant corporate actions;                  

(b)ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant AIF;                  

(c)preventing or managing any conflicts of interest arising from the exercise of voting rights.                  

3.A summary description of the strategies and details of the actions taken on the basis of those strategies shall be made available                        to the investors on their request.                  

### *SECTION 3*U.K.***Risk management***(Article 15 of Directive 2011/61/EU)

#### Article 38U.K.Risk management systems

For the purposes of this Section, risk management systems shall be understood as systems comprised of relevant elements of                     the organisational structure of the AIFM, with a central role for a permanent risk management function, policies and procedures                     related to the management of risk relevant to each AIF’s investment strategy, and arrangements, processes and techniques related                     to risk measurement and management employed by the AIFM in relation to each AIF it manages.                  

#### Article 39U.K.Permanent risk management function

1.An AIFM shall establish and maintain a permanent risk management function that shall:                  

(a)implement effective risk management policies and procedures in order to identify, measure, manage and monitor on an ongoing                        basis all risks relevant to each AIF’s investment strategy to which each AIF is or may be exposed;                  

(b)ensure that the risk profile of the AIF disclosed to investors in accordance with point (c) of Article 23(4) of Directive                        2011/61/EU is consistent with the risk limits that have been set in accordance with Article 44 of this Regulation;                  

(c)monitor compliance with the risk limits set in accordance with Article 44 and notify the AIFM’s governing body and, where                        it exists, the AIFM’s supervisory function in a timely manner when it considers the AIF’s risk profile inconsistent with these                        limits or sees a material risk that the risk profile will become inconsistent with these limits;                  

(d)provide the following regular updates to the governing body of the AIFM and where it exists the AIFM’s supervisory function                        at a frequency which is in accordance with the nature, scale and complexity of the AIF or the AIFM’s activities:                  

the consistency between and compliance with the risk limits set in accordance with Article 44 and the risk profile of the                              AIF as disclosed to investors in accordance with Article 23(4)(c) of Directive 2011/61/EU;                           

the adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures                              have been or will be taken in the event of any actual or anticipated deficiencies;                           

(e)provide regular updates to the senior management outlining the current level of risk incurred by each managed AIF and any                        actual or foreseeable breaches of any risk limits set in accordance with Article 44, so as to ensure that prompt and appropriate                        action can be taken.                  

2.The risk management function shall have the necessary authority and access to all relevant information necessary to fulfil                        the tasks set out in paragraph 1.                  

#### Article 40U.K.Risk management policy

1.An AIFM shall establish, implement and maintain an adequate and documented risk management policy which identifies all the                        relevant risks to which the AIFs it manages are or may be exposed.                  

2.The risk management policy shall comprise such procedures as are necessary to enable the AIFM to assess for each AIF it manages                        the exposure of that AIF to market, liquidity and counterparty risks, and the exposure of the AIF to all other relevant risks,                        including operational risks, which may be material for each AIF it manages.                  

3.The AIFM shall address at least the following elements in the risk management policy:                  

(a)the techniques, tools and arrangements that enable it to comply with Article 45;                  

(b)the techniques, tools and arrangements that enable liquidity risk of the AIF to be assessed and monitored under normal and                        exceptional liquidity conditions including through the use of regularly conducted stress tests in accordance with Article                        48;                  

(c)the allocation of responsibilities within the AIFM pertaining to risk management;                  

(d)the limits set in accordance with Article 44 of this Regulation and a justification of how these are aligned with the risk                        profile of the AIF disclosed to investors in accordance with Article 23(4)(c) of Directive 2011/61/EU;                  

(e)the terms, contents, frequency and addressees of reporting by the permanent risk management function referred to in Article                        39.                  

4.The risk management policy shall include a description of the safeguards referred to in Article 43, in particular:                  

(a)the nature of the potential conflicts of interest;                  

(b)the remedial measures put in place;                  

(c)the reasons why these measures should be reasonably expected to result in independent performance of the risk management function;                  

(d)how the AIFM expects to ensure that the safeguards are consistently effective.                  

5.The risk management policy referred to in paragraph 1 shall be appropriate to the nature, scale and complexity of the business                        of the AIFM and of the AIF it manages.                  

#### Article 41U.K.Assessment, monitoring and review of the risk management systems

1.AIFMs shall assess, monitor and periodically, at least once a year, review:                  

(a)the adequacy and effectiveness of the risk management policy and of the arrangements, processes and techniques referred to                        in Article 45;                  

(b)the degree of compliance by the AIFM with the risk management policy and with the arrangements, processes and techniques referred                        to in Article 45;                  

(c)the adequacy and effectiveness of measures taken to address any deficiencies in the performance of the risk management process;                  

(d)the performance of the risk management function;                  

(e)the adequacy and effectiveness of measures aiming to ensure the functional and hierarchical separation of the risk management                        function in accordance with Article 42.                  

The frequency of the periodic review referred to in the first subparagraph shall be decided by the senior management in accordance                     with the principle of proportionality given the nature, scale and complexity of the AIFM’s business and the AIF it manages.                  

2.In addition to the periodic review referred to in paragraph 1, the risk management systems shall be reviewed where:                  

(a)material changes are made to the risk management policies and procedures and to the arrangements, processes and techniques                        referred to in Article 45;                  

(b)internal or external events indicate that an additional review is required;                  

(c)material changes are made to the investment strategy and objectives of an AIF that the AIFM manages.                  

3.The AIFM shall update the risk management systems on the basis of the outcome of the review referred to in paragraphs 1 and                        2.                  

4.The AIFM shall notify the competent authority of its home Member State of any material changes to the risk management policy                        and of the arrangements, processes and techniques referred to in Article 45.                  

#### Article 42U.K.Functional and hierarchical separation of the risk management function

1.The risk management function shall be considered as functionally and hierarchically separated from the operating units, including                        the portfolio management function, only where all the following conditions are satisfied:                  

(a)persons engaged in the performance of the risk management function are not supervised by those responsible for the performance                        of the operating units, including the portfolio management function, of the AIFM;                  

(b)persons engaged in the performance of the risk management function are not engaged in the performance of activities within                        the operating units, including the portfolio management function;                  

(c)persons engaged in the performance of the risk management function are compensated in accordance with the achievement of the                        objectives linked to that function, independently of the performance of the operating units, including the portfolio management                        function;                  

(d)the remuneration of senior officers in the risk management function is directly overseen by the remuneration committee, where                        such a committee has been established.                  

2.The functional and hierarchical separation of the risk management function in accordance with paragraph 1 shall be ensured                        throughout the whole hierarchical structure of the AIFM, up to its governing body. It shall be reviewed by the governing body                        and, where it exists, the supervisory function of the AIFM.                  

3.The competent authorities of the home Member State of the AIFM shall review the way in which the AIFM has applied paragraphs                        1 and 2 on the basis of the criteria laid down in the second subparagraph of Article 15(1) of Directive 2011/61/EU.                  

#### Article 43U.K.Safeguards against conflicts of interest

1.The safeguards against conflicts of interest referred to in Article 15(1) of Directive 2011/61/EU shall ensure, at least,                        that:                  

(a)decisions taken by the risk management function are based on reliable data, which are subject to an appropriate degree of                        control by the risk management function;                  

(b)the remuneration of those engaged in the performance of the risk management function reflects the achievement of the objectives                        linked to the risk management function, independently of the performance of the business areas in which they are engaged;                  

(c)the risk management function is subject to an appropriate independent review to ensure that decisions are being arrived at                        independently;                  

(d)the risk management function is represented in the governing body or the supervisory function, where it has been established,                        at least with the same authority as the portfolio management function;                  

(e)any conflicting duties are properly segregated.                  

2.Where proportionate, taking into account the nature, scale and complexity of the AIFM, the safeguards referred to in paragraph                        1 shall also ensure that:                  

(a)the performance of the risk management function is reviewed regularly by the internal audit function, or, if the latter has                        not been established, by an external party appointed by the governing body;                  

(b)where a risk committee has been established, it is appropriately resourced and its non-independent members do not have undue                        influence over the performance of the risk management function.                  

3.The governing body of the AIFM and, where it exists, the supervisory function shall establish the safeguards against conflicts                        of interest laid down in paragraphs 1 and 2, regularly review their effectiveness and take timely remedial action to address                        any deficiencies.                  

#### Article 44U.K.Risk limits

1.An AIFM shall establish and implement quantitative or qualitative risk limits, or both, for each AIF it manages, taking into                        account all relevant risks. Where only qualitative limits are set, the AIFM shall be able to justify this approach to the                        competent authority.                  

2.The qualitative and quantitative risk limits for each AIF shall, at least, cover the following risks:                  

(a)market risks;                  

(b)credit risks;                  

(c)liquidity risks;                  

(d)counterparty risks;                  

(e)operational risks.                  

3.When setting risk limits, the AIFM shall take into account the strategies and assets employed in respect of each AIF it manages                        as well as the national rules applicable to each of those AIFs. Those risk limits shall be aligned with the risk profile of                        the AIF as disclosed to investors in accordance with point (c) of Article 23(4) of Directive 2011/61/EU and approved by the                        governing body.                  

#### Article 45U.K.Risk measurement and management

1.AIFMs shall adopt adequate and effective arrangements, processes and techniques in order to:                  

(a)identify, measure, manage and monitor at any time the risks to which the AIFs under their management are or might be exposed;                  

(b)ensure compliance with the limits set in accordance with Article 44.                  

2.The arrangements, processes and techniques referred to in paragraph 1 shall be proportionate to the nature, scale and complexity                        of the business of the AIFM and of each AIF it manages and shall be consistent with the AIF’s risk profile as disclosed to                        investors in accordance with point (c) of Article 23(4) of Directive 2011/61/EU.                  

3.For the purposes of paragraph 1, the AIFM shall take the following actions for each AIF it manages:                  

(a)put in place such risk measurement arrangements, processes and techniques as are necessary to ensure that the risks of positions                        taken and their contribution to the overall risk profile are accurately measured on the basis of sound and reliable data and                        that the risk measurement arrangements, processes and techniques are adequately documented;                  

(b)conduct periodic back-tests in order to review the validity of risk measurement arrangements which include model-based forecasts                        and estimates;                  

(c)conduct, periodic appropriate stress tests and scenario analyses to address risks arising from potential changes in market                        conditions that might adversely impact the AIF;                  

(d)ensure that the current level of risk complies with the risk limits set in accordance with Article 44;                  

(e)establish, implement and maintain adequate procedures that, in the event of actual or anticipated breaches of the risk limits                        of the AIF, result in timely remedial actions in the best interest of investors;                  

(f)ensure that there are appropriate liquidity management systems and procedures for each AIF in line with the requirements laid                        down in Article 46.                  

### *SECTION 4*U.K.***Liquidity management***(Article 16 of Directive 2011/61/EU)

#### Article 46U.K.Liquidity management system and procedures

AIFMs shall be able to demonstrate to the competent authorities of their home Member State that an appropriate liquidity management                     system and effective procedures referred to in Article 16(1) of Directive 2011/61/EU are in place taking into account the                     investment strategy, the liquidity profile and the redemption policy of each AIF.                  

#### Article 47U.K.Monitoring and managing liquidity risk

1.The liquidity management system and procedures referred to in Article 46 shall at least, ensure that:                  

(a)the AIFM maintains a level of liquidity in the AIF appropriate to its underlying obligations, based on an assessment of the                        relative liquidity of the AIF’s assets in the market, taking account of the time required for liquidation and the price or                        value at which those assets can be liquidated, and their sensitivity to other market risks or factors;                  

(b)the AIFM monitors the liquidity profile of the AIF’s portfolio of assets, having regard to the marginal contribution of individual                        assets which may have a material impact on liquidity, and the material liabilities and commitments, contingent or otherwise,                        which the AIF may have in relation to its underlying obligations. For these purposes the AIFM shall take into account the                        profile of the investor base of the AIF, including the type of investors, the relative size of investments and the redemption                        terms to which these investments are subject;                  

(c)the AIFM, where the AIF invests in other collective investment undertakings, monitors the approach adopted by the managers                        of those other collective investment undertakings to the management of liquidity, including through conducting periodic reviews                        to monitor changes to the redemption provisions of the underlying collective investment undertakings in which the AIF invests.                        Subject to Article 16(1) of Directive 2011/61/EU, this obligation shall not apply where the other collective investment undertakings                        in which the AIF invests are actively traded on a regulated market within the meaning of point (14) of Article 4(1) of Directive                        2004/39/EC or an equivalent third country market;                  

(d)the AIFM implements and maintains appropriate liquidity measurement arrangements and procedures to assess the quantitative                        and qualitative risks of positions and of intended investments which have a material impact on the liquidity profile of the                        portfolio of the AIF’s assets to enable their effects on the overall liquidity profile to be appropriately measured. The procedures                        employed shall ensure that the AIFM has the appropriate knowledge and understanding of the liquidity of the assets in which                        the AIF has invested or intends to invest including, where applicable, the trading volume and sensitivity of prices and, as                        the case may be, or spreads of individual assets in normal and exceptional liquidity conditions;                  

(e)the AIFM considers and puts into effect the tools and arrangements, including special arrangements, necessary to manage the                        liquidity risk of each AIF under its management. The AIFM shall identify the types of circumstances where these tools and                        arrangements may be used in both normal and exceptional circumstances, taking into account the fair treatment of all AIF investors                        in relation to each AIF under management. The AIFM may use such tools and arrangements only in these circumstances and if                        appropriate disclosures have been made in accordance with Article 108.                  

2.AIFMs shall document their liquidity management policies and procedures, as referred to in paragraph 1, review them on at                        least an annual basis and update them for any changes or new arrangements.                  

3.AIFMs shall include appropriate escalation measures in their liquidity management system and procedures, as referred to in                        paragraph 1, to address anticipated or actual liquidity shortages or other distressed situations of the AIF.                  

4.Where the AIFM manages an AIF which is a leveraged closed-ended AIF, point (e) of paragraph 1 shall not apply.                  

#### Article 48U.K.Liquidity management limits and stress tests

1.AIFMs shall, where appropriate, considering the nature, scale and complexity of each AIF they manage, implement and maintain                        adequate limits for the liquidity or illiquidity of the AIF consistent with its underlying obligations and redemption policy                        and in accordance with the requirements laid down in Article 44 relating to quantitative and qualitative risk limits.                  

AIFMs shall monitor compliance with those limits and where limits are exceeded or likely to be exceeded, they shall determine                     the required (or necessary) course of action. In determining appropriate action, AIFMs shall consider the adequacy of the                     liquidity management policies and procedures, the appropriateness of the liquidity profile of the AIF’s assets and the effect                     of atypical levels of redemption requests.                  

2.AIFMs shall regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess                        the liquidity risk of each AIF under their management. The stress tests shall:                  

(a)be conducted on the basis of reliable and up-to-date information in quantitative terms or, where this is not appropriate,                        in qualitative terms;                  

(b)where appropriate, simulate a shortage of liquidity of the assets in the AIF and atypical redemption requests;                  

(c)cover market risks and any resulting impact, including on margin calls, collateral requirements or credit lines;                  

(d)account for valuation sensitivities under stressed conditions;                  

(e)be conducted at a frequency which is appropriate to the nature of the AIF, taking in to account the investment strategy, liquidity                        profile, type of investor and redemption policy of the AIF, and at least once a year.                  

3.AIFMs shall act in the best interest of investors in relation to the outcome of any stress tests.                  

#### Article 49U.K.Alignment of investment strategy, liquidity profile and redemption policy

1.For the purposes of Article 16(2) of Directive 2011/61/EU, the investment strategy, liquidity profile and redemption policy                        of each AIF managed by an AIFM shall be considered to be aligned when investors have the ability to redeem their investments                        in a manner consistent with the fair treatment of all AIF investors and in accordance with the AIF’s redemption policy and                        its obligations.                  

2.In assessing the alignment of the investment strategy, liquidity profile and redemption policy the AIFM shall also have regard                        to the impact that redemptions may have on the underlying prices or spreads of the individual assets of the AIF.                  

### *SECTION 5*U.K.***Investment in securitisation positions***(Article 17 of Directive 2011/61/EU)

#### Article 50U.K.Definitions

For the purposes of this Section:

‘securitisation’ means a securitisation within the meaning of Article 4(36) of Directive 2006/48/EC;

‘securitisation position’ means a securitisation position within the meaning of Article 4(40) of Directive 2006/48/EC;

‘sponsor’ means a sponsor within the meaning of Article 4(42) of Directive 2006/48/EC;

‘tranche’ means a tranche within the meaning of Article 4(39) of Directive 2006/48/EC.

#### Article 51U.K.Requirements for retained interest

1.AIFMs shall assume exposure to the credit risk of a securitisation on behalf of one or more AIFs it manages only if the originator,                        sponsor or original lender has explicitly disclosed to the AIFM that it retains, on an ongoing basis, a material net economic                        interest, which in any event shall not be less than 5 %.                  

Only any of the following shall qualify as retention of a material net economic interest of not less than 5 %:

(a)retention of no less than 5 % of the nominal value of each of the tranches sold or transferred to the investors;                  

(b)in the case of securitisations of revolving exposures, retention of the originator’s interest of no less than 5 % of the nominal                        value of the securitised exposures;                  

(c)retention of randomly selected exposures, equivalent to not less than 5 % of the nominal value of the securitised exposures,                        where such exposures would otherwise have been securitised in the securitisation, provided that the number of potentially                        securitised exposures is not less than 100 at origination;                  

(d)retention of the first loss tranche and, if necessary, other tranches having the same or a more severe risk profile than those                        transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention                        equals in total not less than 5 % of the nominal value of the securitised exposures;                  

(e)retention of a first loss exposure of not less than 5 % of every securitised exposure in the securitisation.                  

Net economic interest shall be measured at the origination and shall be maintained on an ongoing basis. The net economic interest,                     including retained positions, interest or exposures, shall not be subject to any credit risk mitigation or any short positions                     or any other hedge and shall not be sold. The net economic interest shall be determined by the notional value for off-balance                     sheet items.                  

There shall be no multiple applications of the retention requirements for any given securitisation.

2.Paragraph 1 shall not apply where the securitised exposures are claims or contingent claims on or fully, unconditionally and                        irrevocably guaranteed by the institutions listed in the first subparagraph of Article 122a(3) of Directive 2006/48/EC, and                        shall not apply to those transactions listed in the second subparagraph of Article 122a(3) of Directive 2006/48/EC.                  

#### Article 52U.K.Qualitative requirements concerning sponsors and originators

Prior to an AIFM assuming exposure to the credit risk of a securitisation on behalf of one or more AIFs, it shall ensure that                     the sponsor and originator:                  

grant credit based on sound and well-defined criteria and clearly establish the process for approving, amending, renewing                              and re-financing loans to exposures to be securitised as they apply to exposures they hold;                           

have in place and operate effective systems to manage the ongoing administration and monitoring of their credit risk-bearing                              portfolios and exposures, including for identifying and managing problem loans and for making adequate value adjustments and                              provisions;                           

adequately diversify each credit portfolio based on the target market and overall credit strategy;

have a written policy on credit risk that includes their risk tolerance limits and provisioning policy and describes how it                              measures, monitors and controls that risk;                           

grant readily available access to all materially relevant data on the credit quality and performance of the individual underlying                              exposures, cash flows and collateral supporting a securitisation exposure and such information that is necessary to conduct                              comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures.                              For that purpose, materially relevant data shall be determined as at the date of the securitisation and where appropriate                              due to the nature of the securitisation thereafter;                           

grant readily available access to all other relevant data necessary for the AIFM to comply with the requirements laid down                              in Article 53;                           

disclose the level of their retained net economic interest as referred to in Article 51, as well as any matters that could                              undermine the maintenance of the minimum required net economic interest as referred to in that Article.                           

#### Article 53U.K.Qualitative requirements concerning AIFMs exposed to securitisations

1.Before becoming exposed to the credit risk of a securitisation on behalf of one or more AIFs, and as appropriate thereafter,                        AIFMs shall be able to demonstrate to the competent authorities for each of their individual securitisation positions that                        they have a comprehensive and thorough understanding of those positions and have implemented formal policies and procedures                        appropriate to the risk profile of the relevant AIF’s investments in securitised positions for analysing and recording:                  

(a)information disclosed under Article 51, by originators or sponsors to specify the net economic interest that they maintain,                        on an ongoing basis, in the securitisation;                  

(b)the risk characteristics of the individual securitisation position;                  

(c)the risk characteristics of the exposures underlying the securitisation position;                  

(d)the reputation and loss experience in earlier securitisations of the originators or sponsors in the relevant exposure classes                        underlying the securitisation position;                  

(e)the statements and disclosures made by the originators or sponsors, or their agents or advisors, about their due diligence                        on the securitised exposures and, where applicable, on the quality of the collateral supporting the securitised exposures;                  

(f)where applicable, the methodologies and concepts on which the valuation of collateral supporting the securitised exposures                        is based and the policies adopted by the originator or sponsor to ensure the independence of the valuer;                  

(g)all the structural features of the securitisation that can materially impact the performance of the institution’s securitisation                        position, such as the contractual waterfall and waterfall related triggers, credit enhancements, liquidity enhancements, market                        value triggers, and deal-specific definitions of default.                  

2.Where an AIFM has assumed exposure to a material value of the credit risk of a securitisation on behalf of one or more AIFs,                        it shall regularly perform stress tests appropriate to such securitisation positions in accordance with point (b) of Article                        15(3) of Directive 2011/61/EU. The stress test shall be commensurate with the nature, scale and complexity of the risk inherent                        in the securitisation positions.                  

AIFMs shall establish formal monitoring procedures in line with the principles laid down in Article 15 of Directive 2011/61/EU                     commensurate with the risk profile of the relevant AIF in relation to the credit risk of a securitisation position in order                     to monitor on an ongoing basis and in a timely manner performance information on the exposures underlying such securitisation                     positions. Such information shall include (if relevant to the specific type of securitisation and not limited to such types                     of information further described herein), the exposure type, the percentage of loans more than 30, 60 and 90 days past due,                     default rates, prepayment rates, loans in foreclosure, collateral type and occupancy, frequency distribution of credit scores                     or other measures of credit worthiness across underlying exposures, industry and geographical diversification and frequency                     distribution of loan to value ratios with bandwidths that facilitate adequate sensitivity analysis. Where the underlying exposures                     are themselves securitisation positions, AIFMs shall have the information set out in this subparagraph not only on the underlying                     securitisation tranches, such as the issuer name and credit quality, but also on the characteristics and performance of the                     pools underlying those securitisation tranches.                  

AIFMs shall apply the same standards of analysis to participations or underwritings in securitisation issues purchased from                     third parties.                  

3.For the purposes of appropriate risk and liquidity management, AIFMs assuming exposure to the credit risk of a securitisation                        on behalf of one or more AIFs shall properly identify, measure, monitor, manage, control and report the risks that arise because                        of mismatches between the assets and liabilities of the relevant AIF, concentration risk or investment risk arising from these                        instruments. The AIFM shall ensure that the risk profile of such securitisation positions corresponds to the size, overall                        portfolio structure, investment strategies and objectives of the relevant AIF as laid down in the AIF rules or instruments                        of incorporation, prospectus and offering documents.                  

4.AIFMs shall ensure, in line with the requirements laid down in Article 18 of Directive 2011/61/EU, that there is an adequate                        degree of internal reporting to the senior management so that senior management is fully aware of any material assumption                        of exposure to securitisations and that the risks arising from those exposures are adequately managed.                  

5.AIFMs shall include appropriate information on their exposures to the credit risk of securitisation and their risk management                        procedures in this area in the reports and disclosures to be submitted in accordance with Articles 22, 23 and 24 of Directive                        2011/61/EU.                  

#### Article 54U.K.Corrective action

1.AIFMs shall take such corrective action as is in the best interest of the investors in the relevant AIF where they discover,                        after the assumption of an exposure to a securitisation, that the determination and disclosure of the retained interest did                        not meet the requirements laid down in this Regulation.                  

2.AIFMs shall take such corrective action as is in the best interest of the investors in the relevant AIF, where the retained                        interest becomes less than 5 % at a given moment after the assumption of the exposure and this is not due to the natural payment                        mechanism of the transaction.                  

#### Article 55U.K.Grandfathering clause

Articles 51 to 54 shall apply in relation to new securitisations issued on or after 1 January 2011. Articles 51 to 54 shall,                     after 31 December 2014, apply in relation to existing securitisations where new underlying exposures are added or substituted                     after that date.                  

#### Article 56U.K.Interpretation

In the absence of specific interpretation given by ESMA or by the Joint Committee of the European Supervisory Authorities,                     the provisions of this Section shall be interpreted in a consistent manner with the corresponding provisions of Directive                     2006/48/EC and with the Guidelines to Article 122a of the Capital Requirements Directive of 31 December 2010(9) issued by the Committee of European Banking Supervisors and their subsequent amendments.                  

### *SECTION 6*U.K.***Organisational requirements — general principles***(Articles 12 and 18 of Directive 2011/61/EU)

#### Article 57U.K.General requirements

1.AIFMs shall:                  

(a)establish, implement and maintain decision-making procedures and an organisational structure which specifies reporting lines                        and allocates functions and responsibilities clearly and in a documented manner;                  

(b)ensure that their relevant persons are aware of the procedures to be followed for the proper discharge of their responsibilities;                  

(c)establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures                        at all levels of the AIFM;                  

(d)establish, implement and maintain effective internal reporting and communication of information at all relevant levels of                        the AIFM and effective information flows with any third party involved;                  

(e)maintain adequate and orderly records of their business and internal organisation.                  

AIFMs shall take into account the nature, scale and complexity of their business and the nature and range of services and                     activities undertaken in the course of that business.                  

2.AIFMs shall establish, implement and maintain systems and procedures that are adequate to safeguard the security, integrity                        and confidentiality of information, taking into account the nature of the information in question.                  

3.AIFMs shall establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the event of an                        interruption to their systems and procedures, the preservation of essential data and functions, and the maintenance of services                        and activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of                        their services and activities.                  

4.AIFMs shall establish, implement and maintain accounting policies and procedures and valuation rules that enable them, at                        the request of the competent authority, to deliver in a timely manner to the competent authority financial reports which reflect                        a true and fair view of their financial position and which comply with all applicable accounting standards and rules.                  

5.AIFMs shall implement appropriate policies and procedures to ensure that the redemption policies of the AIF are disclosed                        to investors, in sufficient detail, before they invest in the AIF and in the event of material changes.                  

6.AIFMs shall monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems, internal control mechanisms                        and arrangements established in accordance with paragraphs 1 to 5, and take appropriate measures to address any deficiencies.                  

#### Article 58U.K.Electronic data processing

1.AIFMs shall make appropriate and sufficient arrangements for suitable electronic systems so as to permit the timely and proper                        recording of each portfolio transaction or subscription or, where relevant, redemption order.                  

2.AIFMs shall ensure a high standard of security during the electronic data processing and integrity and confidentiality of                        the recorded information, as appropriate.                  

#### Article 59U.K.Accounting procedures

1.AIFMs shall employ accounting policies and procedures as referred to in Article 57(4) so as to ensure the protection of investors.                        The accounting records shall be kept in such a way that all assets and liabilities of the AIF can be directly identified at                        all times. If an AIF has different investment compartments, separate accounts shall be maintained for those compartments.                  

2.AIFMs shall establish, implement and maintain accounting and valuation policies and procedures so as to ensure that the net                        asset value of each AIF is accurately calculated on the basis of the applicable accounting rules and standards.                  

#### Article 60U.K.Control by the governing body, senior management and supervisory function

1.When allocating functions internally, AIFMs shall ensure that the governing body, the senior management and, where it exists,                        the supervisory function are responsible for the AIFM’s compliance with its obligations under Directive 2011/61/EU.                  

2.An AIFM shall ensure that its senior management:                  

(a)is responsible for the implementation of the general investment policy for each managed AIF, as defined, where relevant, in                        the fund rules, the instruments of incorporation, the prospectus or the offering documents;                  

(b)oversees the approval of the investment strategies for each managed AIF;                  

(c)is responsible for ensuring that valuation policies and procedures in accordance with Article 19 of Directive 2011/61/EU are                        established and implemented;                  

(d)is responsible for ensuring that the AIFM has a permanent and effective compliance function, even if this function is performed                        by a third party;                  

(e)ensures and verifies on a periodic basis that the general investment policy, the investment strategies and the risk limits                        of each managed AIF are properly and effectively implemented and complied with, even if the risk management function is performed                        by third parties;                  

(f)approves and reviews on a periodic basis the adequacy of the internal procedures for undertaking investment decisions for                        each managed AIF, so as to ensure that such decisions are consistent with the approved investment strategies;                  

(g)approves and reviews on a periodic basis the risk management policy and the arrangements, processes and techniques for implementing                        that policy, including the risk limit system for each AIF it manages;                  

(h)is responsible for establishing and applying a remuneration policy in line with Annex II to Directive 2011/61/EU.                  

3.An AIFM shall also ensure that its senior management and, where appropriate, its governing body or supervisory function:                  

(a)assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with                        the obligations laid down in Directive 2011/61/EU;                  

(b)take appropriate measures to address any deficiencies.                  

4.An AIFM shall ensure that its senior management receives on a frequent basis, and at least annually, written reports on matters                        of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been                        taken in the event of any deficiencies.                  

5.An AIFM shall ensure that its senior management receives on a regular basis reports on the implementation of investment strategies                        and of the internal procedures for taking investment decisions referred to in points (b) to (e) of paragraph 2.                  

6.An AIFM shall ensure that the governing body or the supervisory function, if any, receives on a regular basis written reports                        on the matters referred to in paragraph 4.                  

#### Article 61U.K.Permanent compliance function

1.AIFMs shall establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the                        AIFM to comply with its obligations under Directive 2011/61/EU, and the associated risks, and put in place adequate measures                        and procedures designed to minimise such risk and to enable the competent authorities to exercise their powers effectively                        under that Directive.                  

The AIFM shall take into account the nature, scale and complexity of its business, and the nature and range of services and                     activities undertaken in the course of that business.                  

2.An AIFM shall establish and maintain a permanent and effective compliance function which operates independently and has the                        following responsibilities:                  

(a)monitoring and, on a regular basis, evaluating the adequacy and effectiveness of the measures, policies and procedures put                        in place in accordance with paragraph 1 and the actions taken to address any deficiencies in the AIFM’s compliance with its                        obligations;                  

(b)advising the relevant persons responsible for carrying out services and activities and assisting them in complying with the                        AIFM’s obligations under Directive 2011/61/EU.                  

3.In order to enable the compliance function referred to in paragraph 2 to perform its responsibilities properly and independently,                        the AIFM shall ensure that:                  

(a)the compliance function has the necessary authority, resources, expertise and access to all relevant information;                  

(b)a compliance officer is appointed and is responsible for the compliance function and for reporting on a frequent basis, and                        at least annually, to the senior management on matters of compliance, indicating in particular whether appropriate remedial                        measures have been taken in the event of any deficiencies;                  

(c)persons in the compliance function are not involved in the performance of services or activities they monitor;                  

(d)the method of determining the remuneration of a compliance officer and other persons in the compliance function do not affect                        their objectivity and are not likely to do so.                  

However, the AIFM shall not be required to comply with point (c) or (d) of the first subparagraph where it is able to demonstrate                     that in view of the nature, scale and complexity of its business, and the nature and range of its services and activities,                     that the requirement is not proportionate and that its compliance function continues to be effective.                  

#### Article 62U.K.Permanent internal audit function

1.AIFMs shall, where appropriate and proportionate in view of the nature, scale and complexity of their business and the nature                        and range of collective portfolio management activities undertaken in the course of that business, establish and maintain                        an internal audit function which is separate and independent from the other functions and activities of the AIFM.                  

2.The internal audit function referred to in paragraph 1 shall:                  

(a)establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the AIFM’s systems,                        internal control mechanisms and arrangements;                  

(b)issue recommendations based on the results of work carried out in accordance with point (a);                  

(c)verify compliance with the recommendations referred to in point (b);                  

(d)report internal audit matters.                  

#### Article 63U.K.Personal transactions

1.For any relevant person who is involved in activities that may give rise to a conflict of interest, or who has access to inside                        information within the meaning of Article 1(1) of Directive 2003/6/EC of the European Parliament and of the Council of 28                        January 2003 on insider dealing and market manipulation (market abuse)(10) or to other confidential information relating to an AIF or transactions with or for an AIF, an AIFM shall establish, implement                        and maintain adequate arrangements aimed at preventing such relevant persons from:                  

(a)entering into a personal transaction in financial instruments or other assets which fulfils one of the following criteria:                  

the transaction is subject to Article 2(1) of Directive 2003/6/EC;

the transaction involves the misuse or improper disclosure of confidential information;

the transaction conflicts or is likely to conflict with an obligation of the AIFM under Directive 2011/61/EU;

(b)advising or inducing, other than in the proper course of his employment or contract for services, any other person to enter                        into a personal transaction referred to in point (a)(i) and (ii), or that would otherwise constitute a misuse of information                        relating to pending orders;                  

(c)disclosing, other than in the normal course of his employment or contract for services and without prejudice to Article 3(a)                        of Directive 2003/6/EC, any information or opinion to any other person if the relevant person knows, or reasonably ought to                        know, that as a result of that disclosure that other person would or would be likely to take either of the following steps:                  

entering into a personal transaction referred to in point (a)(i) and (ii) in financial instruments or other assets or that                              would otherwise constitute a misuse of information relating to pending orders;                           

advising or inducing another person to enter into such a personal transaction.

2.The arrangements referred to in paragraph 1 shall in particular be designed to ensure that:                  

(a)each relevant person is aware of the restrictions on personal transactions referred to in paragraph 1, and of the measures                        established by the AIFM in connection with personal transactions and disclosure, pursuant to paragraph 1;                  

(b)the AIFM is informed promptly of any personal transaction entered into by a relevant person covered by paragraph 1, either                        by notification of that transaction or by other procedures enabling the AIFM to identify such transactions;                  

(c)a record is kept of the personal transaction notified to the AIFM or identified by it, including any authorisation or prohibition                        in connection with such a transaction.                  

For the purposes of point (b) of the first subparagraph, where certain activities of the AIFM are performed by third parties,                     the AIFM shall ensure that the entity performing the activity maintains a record of personal transactions entered into by                     any relevant person covered by paragraph 1 and provides that information to the AIFM promptly on request.                  

3.Paragraphs 1 and 2 shall not apply to personal transactions:                  

(a)effected under a discretionary portfolio management service where there is no prior communication in connection with the transaction                        between the portfolio manager and the relevant person or other person for whose account the transaction is executed;                  

(b)in UCITS or AIFs that are subject to supervision under the law of a Member State which requires an equivalent level of risk                        spreading in their assets, where the relevant person and any other person for whose account the transactions are effected                        are not involved in the management of that undertaking.                  

4.For the purpose of paragraph 1, a personal transaction shall also include a transaction in a financial instrument or other                        asset effected on behalf or for the account of:                  

(a)a relevant person;                  

(b)any person with whom the relevant person has a family relationship or with whom the relevant person has close links;                  

(c)a person whose relationship with the relevant person is such that the relevant person has a direct or indirect material interest                        in the outcome of the trade, other than a fee or commission for the execution of the trade.                  

#### Article 64U.K.Recording of portfolio transactions

1.AIFMs shall make without delay for each portfolio transaction relating to AIFs it manages a record of information which is                        sufficient to reconstruct the details of the order and the executed transaction or of the agreement.                  

2.With regard to portfolio transactions on an execution venue, the record referred to in paragraph 1 shall include the following                        information:                  

(a)the name or other designation of the AIF and of the person acting for the account of the AIF;                  

(b)the asset;                  

(c)where relevant, the quantity;                  

(d)the type of the order or transaction;                  

(e)the price;                  

(f)for orders, the date and exact time of the transmission of the order and the name or other designation of the person to whom                        the order was transmitted, or for transactions, the date and exact time of the decision to deal and the execution of the transaction;                  

(g)where applicable, the name of the person transmitting the order or executing the transaction;                  

(h)where applicable, the reasons for the revocation of an order;                  

(i)for executed transactions the counterparty and execution venue identification.                  

3.With regard to portfolio transactions by the AIF outside an execution venue, the record referred to in paragraph 1 shall include                        the following information:                  

(a)the name or other designation of the AIF;                  

(b)the legal and other documentation that forms the basis of the portfolio transaction, including in particular the agreement                        as executed;                  

(c)the price.                  

4.For the purposes of paragraphs 2 and 3, an execution venue shall include a systematic internaliser as referred to in point                        (7) of Article 4(1) of Directive 2004/39/EC, a regulated market as referred to in point (14) of Article 4(1) of that Directive,                        a multilateral trading facility as referred to in point (15) of Article 4(1) of that Directive, a market maker as referred                        to in point (8) of Article 4(1) of that Directive or other liquidity provider or an entity that performs a similar function                        in a third country to the functions performed by any of the foregoing.                  

#### Article 65U.K.Recording of subscription and redemption orders

1.AIFMs shall take all reasonable steps to ensure that received AIF subscriptions and, where relevant, redemption orders are                        recorded without undue delay after receipt of any such order.                  

2.That record shall include information on the following:                  

(a)the relevant AIF;                  

(b)the person giving or transmitting the order;                  

(c)the person receiving the order;                  

(d)the date and time of the order;                  

(e)the terms and means of payment;                  

(f)the type of the order;                  

(g)the date of execution of the order;                  

(h)the number of units or shares or equivalent amounts subscribed or redeemed;                  

(i)the subscription or, where relevant, redemption price for each unit or share or, where relevant, the amount of capital committed                        and paid;                  

(j)the total subscription or redemption value of the units or shares;                  

(k)the gross value of the order including charges for subscription, or the net amount after charges for redemption.                  

Information under points (i), (j) and (k) shall be recorded as soon as available.

#### Article 66U.K.Recordkeeping requirements

1.AIFMs shall ensure that all required records referred to in Articles 64 and 65 are retained for a period of at least five                        years.                  

However, competent authorities may require AIFMs to ensure that any or all of those records are retained for a longer period,                     taking into account the nature of the asset or portfolio transaction, where it is necessary to enable the authority to exercise                     its supervisory functions under Directive 2011/61/EU.                  

2.Following the termination of the authorisation of an AIFM, the records are to be retained at least for the outstanding term                        of the five-year period referred to in paragraph 1. Competent authorities may require retention for a longer period.                  

Where the AIFM transfers its responsibilities in relation to the AIF to another AIFM, it shall ensure that the records referred                     to in paragraph 1 are accessible to that AIFM.                  

3.The records shall be retained on a medium that allows the storage of information in a way accessible for future reference                        by the competent authorities, and in such a form and manner that:                  

(a)the competent authorities are able to access them readily and to reconstitute each key stage of the processing of each portfolio                        transaction;                  

(b)corrections or other amendments, and the contents of the records prior to such corrections or amendments, may be easily ascertained;                  

(c)no other manipulation or alteration is possible.                  

### *SECTION 7*U.K.***Valuation***(Article 19 of Directive 2011/61/EU)

#### Article 67U.K.Policies and procedures for the valuation of the assets of the AIF

1.AIFMs shall establish, maintain, implement and review, for each AIF they manage, written policies and procedures that ensure                        a sound, transparent, comprehensive and appropriately documented valuation process. The valuation policy and procedures shall                        cover all material aspects of the valuation process and valuation procedures and controls in respect of the relevant AIF.                  

Without prejudice to requirements under national law and the AIF rules and instruments of incorporation, the AIFM shall ensure                     that fair, appropriate and transparent valuation methodologies are applied for the AIFs it manages. The valuation policies                     shall identify and the procedures shall implement the valuation methodologies used for each type of asset in which the AIF                     may invest in accordance with applicable national law, the AIF rules and the instruments of incorporation. The AIFM shall                     not invest in a particular type of asset for the first time unless an appropriate valuation methodology or methodologies have                     been identified for that specific type of asset.                  

The policies and procedures setting out valuation methodologies shall include inputs, models and the selection criteria for                     pricing and market data sources. They shall provide that prices shall be obtained from independent sources whenever possible                     and appropriate. The selection process of a particular methodology shall include an assessment of the available relevant methodologies,                     taking into account their sensitivity to changes in variables and how specific strategies determine the relative value of                     the assets in the portfolio.                  

2.The valuation policies shall set out the obligations, roles and responsibilities of all parties involved in the valuation                        process, including the senior management of the AIFM. The procedures shall reflect the organisational structure as set out                        in the valuation policies.                  

The valuation policies and procedures shall address at least the following:

(a)the competence and independence of personnel who are effectively carrying out the valuation of assets;                  

(b)the specific investment strategies of the AIF and the assets the AIF might invest in;                  

(c)the controls over the selection of valuation inputs, sources and methodologies;                  

(d)the escalation channels for resolving differences in values for assets;                  

(e)the valuation of any adjustments related to the size and liquidity of positions, or to changes in the market conditions, as                        appropriate;                  

(f)the appropriate time for closing the books for valuation purposes;                  

(g)the appropriate frequency for valuing assets.                  

3.Where an external valuer is appointed, the valuation policies and procedures shall set out a process for the exchange of information                        between the AIFM and the external valuer to ensure that all necessary information required for the purpose of performing the                        valuation task is provided.                  

The valuation policies and procedures shall ensure that the AIFM conducts initial and periodic due diligence on third parties                     that are appointed to perform valuation services.                  

4.Where the valuation is performed by the AIFM itself, the policies shall include a description of the safeguards for the functionally                        independent performance of the valuation task in accordance with point (b) of Article 19(4) of Directive 2011/61/EU. Such                        safeguards shall include measures to prevent or restrain any person from exercising inappropriate influence over the way in                        which a person carries out valuation activities.                  

#### Article 68U.K.Use of models to value assets

1.If a model is used to value the assets of an AIF, the model and its main features shall be explained and justified in the                        valuation policies and procedures. The reason for the choice of the model, the underlying data, the assumptions used in the                        model and the rationale for using them, and the limitations of the model-based valuation shall be appropriately documented.                  

2.The valuation policies and procedures shall ensure that before being used a model is validated by a person with sufficient                        expertise who has not been involved in the process of building that model. The validation process shall be appropriately documented.                  

3.The model shall be subject to prior approval by the senior management of the AIFM. Where the model is used by an AIFM that                        performs the valuation function itself, the approval by the senior management shall be without prejudice to the competent                        authority’s right to require under Article 19(9) of Directive 2011/61/EU that the model be verified by an external valuer                        or an auditor.                  

#### Article 69U.K.Consistent application of valuation policies and procedures

1.An AIFM shall ensure that the valuation policies and procedures and the designated valuation methodologies are applied consistently.                  

2.The valuation policies and procedures and the designated methodologies shall be applied to all assets within an AIF taking                        into account the investment strategy, the type of asset and, if applicable, the existence of different external valuers.                  

3.Where no update is required, the policies and procedures shall be applied consistently over time and valuation sources and                        rules shall remain consistent over time.                  

4.The valuation procedures and the designated valuation methodologies shall be applied consistently across all AIFs managed                        by the same AIFM, taking into account the investment strategies and the types of asset held by the AIFs, and, if applicable,                        the existence of different external valuers.                  

#### Article 70U.K.Periodic review of valuation policies and procedures

1.Valuation policies shall provide for a periodic review of the policies and procedures, including of the valuation methodologies.                        The review shall be carried out at least annually and before the AIF engages with a new investment strategy or a new type                        of asset that is not covered by the actual valuation policy.                  

2.The valuation policies and procedures shall outline how a change to the valuation policy, including a methodology, may be                        effected and in what circumstances this would be appropriate. Recommendations for changes to the policies and procedures shall                        be made to the senior management, which shall review and approve any changes.                  

3.The risk management function referred to in Article 38 shall review and, if needed, provide appropriate support concerning                        the policies and procedures adopted for the valuation of assets.                  

#### Article 71U.K.Review of individual values of assets

1.An AIFM shall ensure that all assets held by the AIF are fairly and appropriately valued. The AIFM shall document by type                        of asset the way the appropriateness and fairness of the individual values is assessed. The AIFM shall at all times be able                        to demonstrate that the portfolios of AIFs it manages are properly valued.                  

2.The valuation policies and procedures shall set out a review process for the individual values of assets, where a material                        risk of an inappropriate valuation exists, such as in the following cases:                  

(a)the valuation is based on prices only available from a single counterparty or broker source;                  

(b)the valuation is based on illiquid exchange prices;                  

(c)the valuation is influenced by parties related to the AIFM;                  

(d)the valuation is influenced by other entities that may have a financial interest in the AIF’s performance;                  

(e)the valuation is based on prices supplied by the counterparty who originated an instrument, in particular where the originator                        is also financing the AIF’s position in the instrument;                  

(f)the valuation is influenced by one or more individuals within the AIFM.                  

3.The valuation policies and procedures shall describe the review process including sufficient and appropriate checks and controls                        on the reasonableness of individual values. Reasonableness shall be assessed in terms of the existence of an appropriate degree                        of objectivity. Such checks and controls shall include at least:                  

(a)verifying values by a comparison amongst counterparty-sourced pricings and over time;                  

(b)validating values by comparison of realised prices with recent carrying values;                  

(c)considering the reputation, consistency and quality of the valuation source;                  

(d)a comparison with values generated by a third party;                  

(e)an examination and documentation of exemptions;                  

(f)highlighting and researching any differences that appear unusual or vary by valuation benchmark established for the type of                        asset;                  

(g)testing for stale prices and implied parameters;                  

(h)a comparison with the prices of any related assets or their hedges;                  

(i)a review of the inputs used in model-based pricing, in particular of those to which the model’s price exhibits significant                        sensitivity.                  

4.The valuation policies and procedures shall include appropriate escalation measures to address differences or other problems                        in the valuation of assets.                  

#### Article 72U.K.Calculation of the net asset value per unit or share

1.An AIFM shall ensure that for each AIF it manages the net asset value per unit or share is calculated on the occasion of each                        issue or subscription or redemption or cancellation of units or shares, but at least once a year.                  

2.An AIFM shall ensure that the procedures and the methodology for calculating the net asset value per unit or share are fully                        documented. The calculation procedures and methodologies and their application shall be subject to regular verification by                        the AIFM, and the documentation shall be amended accordingly.                  

3.An AIFM shall ensure that remedial procedures are in place in the event of an incorrect calculation of the net asset value.                  

4.An AIFM shall ensure that the number of units or shares in issue is subject to regular verification, at least as often as                        the unit or share price is calculated.                  

#### Article 73U.K.Professional guarantees

1.External valuers shall provide upon request professional guarantees to demonstrate their ability to perform the valuation                        function. Professional guarantees to be furnished by external valuers shall be in written form.                  

2.The professional guarantees shall contain evidence of the external valuer’s qualification and capability to perform proper                        and independent valuation, including, at least, evidence of:                  

(a)sufficient personnel and technical resources;                  

(b)adequate procedures safeguarding proper and independent valuation;                  

(c)adequate knowledge and understanding of the investment strategy of the AIF and of the assets the external valuer is appointed                        to value;                  

(d)a sufficiently good reputation and sufficient experience with valuation.                  

3.Where the external valuer is subject to mandatory professional registration with the competent authority or another entity                        of the state where it is established, the professional guarantee shall contain the name of this authority or entity, including                        the relevant contact information. The professional guarantee shall indicate clearly the legal or regulatory provisions or                        rules of professional conduct to which the external valuer is subject.                  

#### Article 74U.K.Frequency of valuation of assets held by open-ended AIFs

1.The valuation of financial instruments held by open-ended AIFs shall take place every time the net asset value per unit or                        share is calculated pursuant to Article 72(1).                  

2.The valuation of other assets held by open-ended AIFs shall take place at least once a year, and every time there is evidence                        that the last determined value is no longer fair or proper.                  

### *SECTION 8*U.K.***Delegation of AIFM functions***(Article 20(1), (2), (4) and (5) of Directive 2011/61/EU)

#### Article 75U.K.General principles

When delegating the task of carrying out one or more functions on their behalf, AIFMs shall comply, in particular, with the                     following general principles:                  

the delegation structure does not allow for the circumvention of the AIFM’s responsibilities or liability;

the obligations of the AIFM towards the AIF and its investors are not altered as a result of the delegation;

the conditions with which the AIFM must comply in order to be authorised and carry out activities in accordance with Directive                              2011/61/EU are not undermined;                           

the delegation arrangement takes the form of a written agreement concluded between the AIFM and the delegate;

the AIFM ensures that the delegate carries out the delegated functions effectively and in compliance with applicable law and                              regulatory requirements and must establish methods and procedures for reviewing on an ongoing basis the services provided                              by the delegate. The AIFM shall take appropriate action if it appears that the delegate cannot carry out the functions effectively                              or in compliance with applicable laws and regulatory requirements;                           

the AIFM supervises effectively the delegated functions and manages the risks associated with the delegation. For this purpose                              the AIFM shall have at all times the necessary expertise and resources to supervise the delegated functions. The AIFM shall                              set out in the agreement its right of information, inspection, admittance and access, and its instruction and monitoring rights                              against the delegate. The AIFM shall also ensure that the delegate properly supervises the performance of the delegated functions,                              and adequately manages the risks associated with the delegation;                           

the AIFM ensures that the continuity and quality of the delegated functions or of the delegated task of carrying out functions                              are maintained also in the event of termination of the delegation either by transferring the delegated functions or the delegated                              task of carrying out functions to another third party or by performing them itself;                           

the respective rights and obligations of the AIFM and the delegate are clearly allocated and set out in the agreement. In                              particular, the AIFM shall contractually ensure its instruction and termination rights, its rights of information, and its                              right to inspections and access to books and premises. The agreement shall make sure that sub-delegation can take place only                              with the consent of the AIFM;                           

where it concerns portfolio management, the delegation is in accordance with the investment policy of the AIF. The delegate                              shall be instructed by the AIFM how to implement the investment policy and the AIFM shall monitor whether the delegate complies                              with it on an ongoing basis;                           

the AIFM ensures that the delegate discloses to the AIFM any development that may have a material impact on the delegate’s                              ability to carry out the delegated functions effectively and in compliance with applicable laws and regulatory requirements;                           

the AIFM ensures that the delegate protects any confidential information relating to the AIFM, the AIF affected by the delegation                              and the investors in that AIF;                           

the AIFM ensures that the delegate establishes, implements and maintains a contingency plan for disaster recovery and periodic                              testing of backup facilities while taking into account the types of delegated functions.                           

#### Article 76U.K.Objective reasons for delegation

1.The AIFM shall provide the competent authorities with a detailed description, explanation and evidence of the objective reasons                        for delegation. When assessing whether the entire delegation structure is based on objective reasons within the meaning of                        Article 20(1)(a) of Directive 2011/61/EU the following criteria shall be considered:                  

(a)optimising of business functions and processes;                  

(b)cost saving;                  

(c)expertise of the delegate in administration or in specific markets or investments;                  

(d)access of the delegate to global trading capabilities.                  

2.Upon request by the competent authorities, an AIFM shall provide further explanations and provide documents proving that the                        entire delegation structure is based on objective reasons.                  

#### Article 77U.K.Features of the delegate

1.A delegate shall have sufficient resources and shall employ sufficient personnel with the skills, knowledge and expertise                        necessary for the proper discharge of the tasks delegated to it and have an appropriate organisational structure supporting                        the performance of the delegated tasks.                  

2.Persons who effectively conduct the activities delegated by the AIFM shall have sufficient experience, appropriate theoretical                        knowledge and appropriate practical experience in the relevant functions. Their professional training and the nature of the                        functions they have performed in the past shall be appropriate for the conduct of the business.                  

3.Persons who effectively conduct the business of the delegate shall not be deemed of sufficiently good repute if they have                        any negative records relevant both for the assessment of good repute and for the proper performance of the delegated tasks                        or if there is other relevant information which affects their good reputation. Such negative records shall include but shall                        not be limited to criminal offences, judicial proceedings or administrative sanctions relevant for the performance of the                        delegated tasks. Special attention shall be given to any offences related to financial activities, including but not limited                        to obligations relating to the prevention of money laundering, dishonesty, fraud or financial crime, bankruptcy or insolvency.                        Other relevant information shall include information such as that indicating that the person is not trustworthy or honest.                  

Where the delegate is regulated in respect of its professional services within the Union, factors referred to in the first                     subparagraph shall be deemed to be satisfied when the relevant supervisory authority has reviewed the criterion of ‘good repute’                     within the authorisation procedure unless there is evidence to the contrary.                  

#### Article 78U.K.Delegation of portfolio or risk management

1.This Article shall apply where the delegation of portfolio management or risk management is concerned.                  

2.The following entities shall be deemed to be authorised or registered for the purpose of asset management and subject to supervision                        in accordance with point (c) of Article 20(1) of Directive 2011/61/EU:                  

(a)management companies authorised under Directive 2009/65/EC;                  

(b)investment firms authorised under Directive 2004/39/EC to perform portfolio management;                  

(c)credit institutions authorised under Directive 2006/48/EC having the authorisation to perform portfolio management under Directive                        2004/39/EC;                  

(d)external AIFMs authorised under Directive 2011/61/EU;                  

(e)third country entities authorised or registered for the purpose of asset management and effectively supervised by a competent                        authority in those countries.                  

3.Where the delegation is conferred on a third-country undertaking the following conditions shall be fulfilled in accordance                        with point (d) of Article 20(1) of Directive 2011/61/EU:                  

(a)a written arrangement shall exist between the competent authorities of the home Member State of the AIFM and the supervisory                        authorities of the undertaking to which delegation is conferred;                  

(b)with respect to the undertaking to which delegation is conferred, the arrangement referred to in point (a) allows the competent                        authorities to:                  

obtain on request the relevant information necessary to carry out their supervisory tasks as provided for in Directive 2011/61/EU;

obtain access to the documents relevant for the performance of their supervisory duties maintained in the third country;

carry out on-site inspections on the premises of the undertaking to which functions were delegated. The practical procedures                              for on-site inspections shall be detailed in the written arrangement;                           

receive as soon as possible information from the supervisory authority in the third country for the purpose of investigating                              apparent breaches of the requirements of Directive 2011/61/EU and its implementing measures;                           

cooperate in enforcement in accordance with the national and international law applicable to the supervisory authority of                              the third country and the EU competent authorities in cases of breach of the requirements of Directive 2011/61/EU and its                              implementing measures and relevant national law.                           

#### Article 79U.K.Effective supervision

A delegation shall be deemed to prevent the effective supervision of the AIFM where:

the AIFM, its auditors and the competent authorities do not have effective access to data related to the delegated functions                              and to the business premises of the delegate, or the competent authorities are not able to exercise those rights of access;                           

the delegate does not cooperate with the competent authorities of the AIFM in connection with the delegated functions;

the AIFM does not make available on request to the competent authorities all information necessary to enable authorities to                              supervise the compliance of the performance of the delegated functions with the requirements of Directive 2011/61/EU and its                              implementing measures.                           

#### Article 80U.K.Conflicts of interest

1.In accordance with point (b) of Article 20(2) of Directive 2011/61/EU, the criteria to assess whether a delegation conflicts                        with the interests of the AIFM or the investor in the AIF shall at least include:                  

(a)where the AIFM and the delegate are members of the same group or have any other contractual relationship, the extent to which                        the delegate controls the AIFM or has the ability to influence its actions;                  

(b)where the delegate and an investor in the relevant AIF are members of the same group or have any other contractual relationship,                        the extent to which this investor controls the delegate or has the ability to influence its actions;                  

(c)the likelihood that the delegate makes a financial gain, or avoids a financial loss, at the expense of the AIF or the investors                        in the AIF;                  

(d)the likelihood that the delegate has an interest in the outcome of a service or an activity provided to the AIFM or the AIF;                  

(e)the likelihood that the delegate has a financial or other incentive to favour the interest of another client over the interests                        of the AIF or the investors in the AIF;                  

(f)the likelihood that the delegate receives or will receive from a person other than the AIFM an inducement in relation to the                        collective portfolio management activities provided to the AIFM and the AIFs it manages in the form of monies, goods or services                        other than the standard commission or fee for that service.                  

2.The portfolio or risk management function may be considered to be functionally and hierarchically separated from other potentially                        conflicting tasks only where the following conditions are satisfied:                  

(a)persons engaged in portfolio management tasks are not engaged in the performance of potentially conflicting tasks such as                        controlling tasks;                  

(b)persons engaged in risk management tasks are not engaged in the performance of potentially conflicting tasks such as operating                        tasks;                  

(c)persons engaged in risk management functions are not supervised by those responsible for the performance of operating tasks;                  

(d)the separation is ensured throughout the whole hierarchical structure of the delegate up to its governing body and is reviewed                        by the governing body and, where it exists, the supervisory function of the delegate.                  

3.Potential conflicts of interest shall be deemed properly identified, managed, monitored and disclosed to the investors of                        the AIF only if:                  

(a)the AIFM ensures that the delegate takes all reasonable steps to identify, manage and monitor potential conflicts of interest                        that may arise between itself and the AIFM, the AIF or the investors in the AIF. The AIFM shall ensure that the delegate has                        procedures in place corresponding to those required under Articles 31 to 34;                  

(b)the AIFM ensures that the delegate discloses potential conflicts of interest as well as the procedures and measures to be                        adopted by it in order to manage such conflicts of interest to the AIFM which shall disclose them to the AIF and the investors                        in the AIF in accordance with Article 36.                  

#### Article 81U.K.Consent and notification of sub-delegation

1.A subdelegation shall become effective where the AIFM demonstrates its consent to it in writing.                  

A general consent given in advance by the AIFM shall not be deemed consent in accordance with point (a) of Article 20(4) of                     Directive 2011/61/EU.                  

2.Pursuant to point (b) of Article 20(4) of Directive 2011/61/EU, the notification shall contain details of the delegate, the                        name of the competent authority where the sub-delegate is authorised or registered, the delegated functions, the AIFs affected                        by the sub-delegation, a copy of the written consent by the AIFM and the intended effective date of the sub-delegation.                  

#### Article 82U.K.Letter-box entity and AIFM no longer considered to be managing an AIF

1.An AIFM shall be deemed a letter-box entity and shall no longer be considered to be the manager of the AIF at least in any                        of the following situations:                  

(a)the AIFM no longer retains the necessary expertise and resources to supervise the delegated tasks effectively and manage the                        risks associated with the delegation;                  

(b)the AIFM no longer has the power to take decisions in key areas which fall under the responsibility of the senior management                        or no longer has the power to perform senior management functions in particular in relation to the implementation of the general                        investment policy and investment strategies;                  

(c)the AIFM loses its contractual rights to inquire, inspect, have access or give instructions to its delegates or the exercise                        of such rights becomes impossible in practice;                  

(d)the AIFM delegates the performance of investment management functions to an extent that exceeds by a substantial margin the                        investment management functions performed by the AIFM itself. When assessing the extent of delegation, competent authorities                        shall assess the entire delegation structure taking into account not only the assets managed under delegation but also the                        following qualitative criteria:                  

the types of assets the AIF or the AIFM acting on behalf of the AIF is invested in, and the importance of the assets managed                              under delegation for the risk and return profile of the AIF;                           

the importance of the assets under delegation for the achievement of the investment goals of the AIF;

the geographical and sectoral spread of the AIF’s investments;

the risk profile of the AIF;

the type of investment strategies pursued by the AIF or the AIFM acting on behalf of the AIF;

the types of tasks delegated in relation to those retained; and

the configuration of delegates and their sub-delegates, their geographical sphere of operation and their corporate structure,                              including whether the delegation is conferred on an entity belonging to the same corporate group as the AIFM.                           

2.The Commission shall monitor, in the light of market developments, the application of this Article. The Commission shall review                        the situation after two years and shall, if necessary, take appropriate measures to further specify the conditions under which                        the AIFM shall be deemed to have delegated its functions to the extent that it becomes a letter box entity and can no longer                        be considered to be manager of the AIF.                  

3.ESMA may issue guidelines to ensure a consistent assessment of delegation structures across the Union.                  

## CHAPTER IVU.K.**DEPOSITARY**

### *SECTION 1*U.K.***Particulars of the written contract***(Article 21(2) of Directive 2011/61/EU)

#### Article 83U.K.Contractual particulars

1.A contract by which the depositary is appointed in accordance with Article 21(2) of Directive 2011/61/EU shall be drawn up                        between the depositary on the one hand and the AIFM and, as the case may be, or the AIF on the other hand and shall include                        at least the following elements:                  

(a)a description of the services to be provided by the depositary and the procedures to be adopted for each type of asset in                        which the AIF may invest and which shall then be entrusted to the depositary;                  

(b)a description of the way in which the safe-keeping and oversight function is to be performed depending on the types of assets                        and the geographical regions in which the AIF plans to invest. With respect to the custody duties this description shall include                        country lists and procedures for adding and, as the case may be, or withdrawing countries from that list. This shall be consistent                        with the information provided in the AIF rules, instruments of incorporation and offering documents regarding the assets in                        which the AIF may invest;                  

(c)a statement that the depositary’s liability shall not be affected by any delegation of its custody functions unless it has                        discharged itself of its liability in accordance with Article 21(13) or (14) of Directive 2011/61/EU;                  

(d)the period of validity and the conditions for amendment and termination of the contract including the situations which could                        lead to the termination of the contract and details regarding the termination procedure and, if applicable, the procedures                        by which the depositary should send all relevant information to its successor;                  

(e)the confidentiality obligations applicable to the parties in accordance with relevant laws and regulations. These obligations                        shall not impair the ability of competent authorities to have access to the relevant documents and information;                  

(f)the means and procedures by which the depositary transmits to the AIFM or the AIF all relevant information that it needs to                        perform its duties including the exercise of any rights attached to assets, and in order to allow the AIFM and the AIF to                        have a timely and accurate overview of the accounts of the AIF;                  

(g)the means and procedures by which the AIFM or the AIF transmits all relevant information or ensures the depositary has access                        to all the information it needs to fulfil its duties, including the procedures ensuring that the depositary will receive information                        from other parties appointed by the AIF or the AIFM;                  

(h)information on whether or not the depositary, or a third party to whom safe-keeping functions are delegated in accordance                        with Article 21(11) of Directive 2011/61/EU may re-use the assets it has been entrusted with and, if any, the conditions attached                        to any such re-use;                  

(i)the procedures to be followed when an amendment to the AIF rules, instruments of incorporation or offering documents is being                        considered, detailing the situations in which the depositary is to be informed, or where the prior agreement of the depositary                        is needed to proceed with the amendment;                  

(j)all necessary information that needs to be exchanged between the AIF, the AIFM, a third party acting on behalf of the AIF                        or the AIFM, on the one hand, and the depositary, on the other hand, related to the sale, subscription, redemption, issue,                        cancellation and re-purchase of units or shares of the AIF;                  

(k)all necessary information that needs to be exchanged between the AIF, the AIFM, a third party acting on behalf of the AIF                        or the AIFM and the depositary related to the performance of the depositary’s oversight and control function;                  

(l)where the parties to the contract envisage appointing third parties to carry out parts of their respective duties, a commitment                        to provide, on a regular basis, details of any third party appointed and, upon request, information on the criteria used to                        select the third party and the steps envisaged to monitor the activities carried out by the selected third party;                  

(m)information on the tasks and responsibilities of the parties to the contract in respect of obligations relating to the prevention                        of money laundering and the financing of terrorism;                  

(n)information on all cash accounts opened in the name of the AIF or in the name of the AIFM acting on behalf of the AIF and                        the procedures ensuring that the depositary will be informed when any new account is opened in the name of the AIF or in the                        name of the AIFM acting on behalf of the AIF;                  

(o)details regarding the depositary’s escalation procedures, including the identification of the persons to be contacted within                        the AIF and, as the case may be, or the AIFM by the depositary when it launches such a procedure;                  

(p)a commitment by the depositary to notify the AIFM when it becomes aware that the segregation of assets is not, or is no longer                        sufficient to ensure protection from insolvency of a third party, to whom safe-keeping functions are delegated in accordance                        with Article 21(11) of Directive 2011/61/EU in a specific jurisdiction;                  

(q)the procedures ensuring that the depositary, in respect of its duties, has the ability to enquire into the conduct of the                        AIFM and, as the case may be, or the AIF and to assess the quality of information transmitted including by way of having access                        to the books of the AIF and, as the case may be, or AIFM or by way of on-site visits;                  

(r)the procedures ensuring that the AIFM and, as the case may be, or the AIF can review the performance of the depositary in                        respect of the depositary’s contractual obligations.                  

2.The details of the means and procedures set out in points (a) to (r) shall be described in the contract appointing the depositary                        or any subsequent amendment to the contract.                  

3.The contract appointing the depositary or the subsequent amendment to the contract referred to in paragraph 2 shall be done                        in writing.                  

4.The parties may agree to transmit all or part of the information that flows between them electronically provided that proper                        recording of such information is ensured.                  

5.Unless otherwise provided by national law, there shall be no obligation to enter into a specific written agreement for each                        AIF; it shall be possible for the AIFM and the depositary to enter into a framework agreement listing the AIFs managed by                        that AIFM to which the agreement applies.                  

6.The national law applicable to the contract appointing the depositary and any subsequent agreement shall be specified.                  

### *SECTION 2*U.K.***General criteria for assessing the prudential regulation and supervision applicable to depositaries in third countries***(Article 21(6)(b) of Directive 2011/61/EU)

#### Article 84U.K.Criteria for assessing prudential regulation and supervision applicable to a depositary in a third country

For the purposes of point (b) of Article 21(6) of Directive 2011/61/EU, the effectiveness of prudential regulation and supervision                     applicable to a depositary in a third country whether it has the same effect as that provided for under Union law and its                     effective enforcement shall be assessed against the following criteria:                  

the depositary is subject to authorisation and ongoing supervision by a public competent authority with adequate resources                              to fulfil its tasks;                           

the law of the third country lay down criteria for authorisation as a depositary that have the same effect as those laid down                              for access to the business of credit institutions or investment firms within the Union;                           

the capital requirements imposed on the depositary in the third country have the same effect as those applicable in the Union                              depending on whether the depositary is of the same nature as an Union credit institution or investment firm;                           

the operating conditions applicable to a depositary in the third country have the same effect as those laid down for credit                              institutions or investment firms within the Union depending on the nature of the depositary;                           

the requirements regarding the performance of the specific duties as AIF depositary established in the law of the third country                              have the same effect as those provided for in Article 21(7) to (15) of Directive 2011/61/EU and its implementing measures                              and the relevant national law;                           

the law of the third country provides for the application of sufficiently dissuasive enforcement actions in the event of breach                              by the depositary of the requirements and conditions referred to points (a) to (e).                           

### *SECTION 3*U.K.***Depositary functions, due diligence duties and segregation obligation***(Articles 21(7)-(9) and 21(11)(c) and (d)(iii) of Directive 2011/61/EU)

#### Article 85U.K.Cash monitoring — general requirements

1.Where a cash account is maintained or opened at an entity referred to in Article 21(7) of Directive 2011/61/EU in the name                        of the AIF, in the name of the AIFM acting on behalf of the AIF or in the name of the depositary acting on behalf of the AIF,                        an AIFM shall ensure that the depositary is provided, upon commencement of its duties and on an ongoing basis, with all relevant                        information it needs to comply with its obligations.                  

2.In order to have access to all information regarding the AIF’s cash accounts and have a clear overview of all the AIF’s cash                        flows, a depositary shall at least:                  

(a)be informed, upon its appointment, of all existing cash accounts opened in the name of the AIF, or in the name of the AIFM                        acting on behalf of the AIF;                  

(b)be informed at the opening of any new cash account by the AIF or by the AIFM acting on behalf of the AIF;                  

(c)be provided with all information related to the cash accounts opened at a third party entity, directly by those third parties.                  

#### Article 86U.K.Monitoring of the AIF’s cash flows

A depositary shall ensure effective and proper monitoring of the AIF’s cash flows and in particular it shall at least:

ensure that all cash of the AIF is booked in accounts opened with entities referred to in points (a), (b) and (c) of Article                              18(1) of Directive 2006/73/EC in the relevant markets where cash accounts are required for the purposes of the AIF’s operations                              and which are subject to prudential regulation and supervision that has the same effect as Union law, is effectively enforced                              and is in accordance with the principles laid down in Article 16 of Directive 2006/73/EC;                           

implement effective and proper procedures to reconcile all cash flow movements and perform such reconciliations on a daily                              basis or, in case of infrequent cash movements, when such cash flow movements occur;                           

implement appropriate procedures to identify at the close of business day significant cash flows and in particular those which                              could be inconsistent with the AIF’s operations;                           

review periodically the adequacy of those procedures including through a full review of the reconciliation process at least                              once a year and ensuring that the cash accounts opened in the name of the AIF, in the name of the AIFM acting on behalf of                              the AIF or in the name of the depositary acting on behalf of the AIF are included in the reconciliation process;                           

monitor on an ongoing basis the outcomes of the reconciliations and actions taken as a result of any discrepancies identified                              by the reconciliation procedures and notify the AIFM if an irregularity has not been rectified without undue delay and also                              the competent authorities if the situation cannot be clarified and, as the case may be, or corrected;                           

check the consistency of its own records of cash positions with those of the AIFM. The AIFM shall ensure that all instructions                              and information related to a cash account opened with a third party are sent to the depositary, so that the depositary is                              able to perform its own reconciliation procedure.                           

#### Article 87U.K.Duties regarding subscriptions

An AIFM shall ensure that the depositary is provided with information about payments made by or on behalf of investors upon                     the subscription of units or shares of an AIF at the close of each business day when the AIFM, the AIF or a party acting on                     behalf of it, such as a transfer agent receives such payments or an order from the investor. The AIFM shall ensure that the                     depositary receives all other relevant information it needs to make sure that the payments are then booked in cash accounts                     opened in the name of the AIF or in the name of the AIFM acting on behalf of the AIF or in the name of the depositary in accordance                     with the provisions of Article 21(7) of Directive 2011/61/EU.                  

#### Article 88U.K.Financial instruments to be held in custody

1.Financial instruments belonging to the AIF or to the AIFM acting on behalf of the AIF which are not able to be physically                        delivered to the depositary shall be included in the scope of the custody duties of the depositary where all of the following                        requirements are met:                  

(a)they are transferable securities including those which embed derivatives as referred to in the last subparagraph of Article                        51(3) of Directive 2009/65/EC and Article 10 of Commission Directive 2007/16/EC(11), money market instruments or units of collective investment undertakings;                  

(b)they are capable of being registered or held in an account directly or indirectly in the name of the depositary.                  

2.Financial instruments which, in accordance with applicable national law, are only directly registered in the name of the AIF                        with the issuer itself or its agent, such as a registrar or a transfer agent, shall not be held in custody.                  

3.Financial instruments belonging to the AIF or the AIFM acting on behalf of the AIF which are able to be physically delivered                        to the depositary shall always be included in the scope of the custody duties of the depositary.                  

#### Article 89U.K.Safekeeping duties with regard to assets held in custody

1.In order to comply with the obligations laid down in point (a) of Article 21(8) of Directive 2011/61/EU with respect to financial                        instruments to be held in custody, a depositary shall ensure at least that:                  

(a)the financial instruments are properly registered in accordance with Article 21(8)(a)(ii) of Directive 2011/61/EU;                  

(b)records and segregated accounts are maintained in a way that ensures their accuracy, and in particular record the correspondence                        with the financial instruments and cash held for AIFs;                  

(c)reconciliations are conducted on a regular basis between the depositary’s internal accounts and records and those of any third                        party to whom custody functions are delegated in accordance with Article 21(11) of Directive 2011/61/EU;                  

(d)due care is exercised in relation to the financial instruments held in custody in order to ensure a high standard of investor                        protection;                  

(e)all relevant custody risks throughout the custody chain are assessed and monitored and the AIFM is informed of any material                        risk identified;                  

(f)adequate organisational arrangements are introduced to minimise the risk of loss or diminution of the financial instruments,                        or of rights in connection with those financial instruments as a result of fraud, poor administration, inadequate registering                        or negligence;                  

(g)the AIF’s ownership right or the ownership right of the AIFM acting on behalf of the AIF over the assets is verified.                  

2.Where a depositary has delegated its custody functions to a third party in accordance with Article 21(11) of Directive 2011/61/EU,                        it shall remain subject to the requirements of points (b) to (e) of paragraph 1 of this Article. It shall also ensure that                        the third party complies with the requirements of points (b) to (g) of paragraph 1 of this Article and the segregation obligations                        laid down in Article 99.                  

3.A depositary’s safe-keeping duties as referred to in paragraphs 1 and 2 shall apply on a look-through basis to underlying                        assets held by financial and, as the case may be, or legal structures controlled directly or indirectly by the AIF or the                        AIFM acting on behalf of the AIF.                  

The requirement referred to in the first subparagraph shall not apply to fund of funds structures or master-feeder structures                     where the underlying funds have a depositary which keeps in custody the assets of these funds.                  

#### Article 90U.K.Safekeeping duties regarding ownership verification and record keeping

1.An AIFM shall provide the depositary, upon commencement of its duties and on an ongoing basis, with all relevant information                        the depositary needs in order to comply with its obligations pursuant to point (b) of Article 21(8) of Directive 2011/61/EU,                        and ensure that the depositary is provided with all relevant information by third parties.                  

2.In order to comply with the obligations referred to in point (b) of Article 21(8) of Directive 2011/61/EU, a depositary shall                        at least:                  

(a)have access without undue delay to all relevant information it needs in order to perform its ownership verification and record-keeping                        duties, including relevant information to be provided to the depositary by third parties;                  

(b)possess sufficient and reliable information for it to be satisfied of the AIF’s ownership right or of the ownership right                        of the AIFM acting on behalf of the AIF over the assets;                  

(c)maintain a record of those assets for which it is satisfied that the AIF or the AIFM acting on behalf of the AIF holds the                        ownership. In order to comply with this obligation, the depositary shall:                  

register in its record, in the name of the AIF, assets, including their respective notional amounts, for which it is satisfied                              that the AIF or the AIFM acting on behalf of the AIF holds the ownership;                           

be able to provide at any time a comprehensive and up-to-date inventory of the AIF’s assets, including their respective notional                              amounts.                           

For the purpose of point (c)(ii) of paragraph 2, the depositary shall ensure that there are procedures in place so that registered                     assets cannot be assigned, transferred, exchanged or delivered without the depositary or its delegate having been informed                     of such transactions and the depositary shall have access without undue delay to documentary evidence of each transaction                     and position from the relevant third party. The AIFM shall ensure that the relevant third party provides the depositary without                     undue delay with certificates or other documentary evidence every time there is a sale or acquisition of assets or a corporate                     action resulting in the issue of financial instruments and at least once a year.                  

3.In any event, a depositary shall ensure that the AIFM has and implements appropriate procedures to verify that the assets                        acquired by the AIF it manages are appropriately registered in the name of the AIF or in the name of the AIFM acting on behalf                        of the AIF, and to check the consistency between the positions in the AIFMs records and the assets for which the depositary                        is satisfied that the AIF or the AIFM acting on behalf of the AIF holds the ownership. The AIFM shall ensure that all instructions                        and relevant information related to the AIF’s assets are sent to the depositary, so that the depositary is able to perform                        its own verification or reconciliation procedure.                  

4.A depositary shall set up and implement an escalation procedure for situations where an anomaly is detected including notification                        of the AIFM and of the competent authorities if the situation cannot be clarified and, as the case may be, or corrected.                  

5.A depositary’s safe-keeping duties referred to in paragraphs 1 to 4 shall apply on a look-through basis to underlying assets                        held by financial and, as the case may be, or legal structures established by the AIF or by the AIFM acting on behalf of the                        AIF for the purposes of investing in the underlying assets and which are controlled directly or indirectly by the AIF or by                        the AIFM acting on behalf of the AIF.                  

The requirement referred to in the first subparagraph shall not apply to fund of funds structures and master-feeder structures                     where the underlying funds have a depositary which provides ownership verification and record-keeping functions for this fund’s                     assets.                  

#### Article 91U.K.Reporting obligations for prime brokers

1.Where a prime broker has been appointed, the AIFM shall ensure that from the date of that appointment an agreement is in place                        pursuant to which the prime broker is required to make available to the depositary in particular a statement in a durable                        medium which contains the following information:                  

(a)the values of the items listed in paragraph 3 at the close of each business day;                  

(b)details of any other matters necessary to ensure that the depositary of the AIF has up-to-date and accurate information about                        the value of assets the safekeeping of which has been delegated in accordance with Article 21(11) of Directive 2011/61/EU.                  

2.The statement referred to in paragraph 1 shall be made available to the depositary of the AIF no later than the close of the                        next business day to which it relates.                  

3.The items referred to in point (a) of paragraph 1 shall include:                  

(a)the total value of assets held by the prime broker for the AIF, where safe-keeping functions are delegated in accordance with                        Article 21(11) of Directive 2011/61/EU. The value of each of the following:                  

cash loans made to the AIF and accrued interest;

securities to be redelivered by the AIF under open short positions entered into on behalf of the AIF;

current settlement amounts to be paid by the AIF under any futures contracts;

short sale cash proceeds held by the prime broker in respect of short positions entered into on behalf of the AIF;

cash margins held by the prime broker in respect of open futures contracts entered into on behalf of the AIF. This obligation                              is in addition to the obligations under Articles 87 and 88;                           

mark-to-market close-out exposures of any OTC transaction entered into on behalf of the AIF;

total secured obligations of the AIF against the prime broker; and

all other assets relating to the AIF;

(b)the value of other assets referred to in point (b) of Article 21(8) of Directive 2011/61/EU held as collateral by the prime                        broker in respect of secured transactions entered into under a prime brokerage agreement;                  

(c)the value of the assets where the prime broker has exercised a right of use in respect of the AIF’s assets;                  

(d)a list of all the institutions at which the prime broker holds or may hold cash of the AIF in an account opened in the name                        of the AIF or in the name of the AIFM acting on behalf of the AIF in accordance with Article 21(7) of Directive 2011/61/EU.                  

#### Article 92U.K.Oversight duties — general requirements

1.At the time of its appointment, the depositary shall assess the risks associated with the nature, scale and complexity of                        the AIF’s strategy and the AIFM’s organisation in order to devise oversight procedures which are appropriate to the AIF and                        the assets in which it invests and which are then implemented and applied. Such procedures shall be regularly updated.                  

2.In performing its oversight duties under Article 21(9) of Directive 2011/61/EU, a depositary shall perform *ex-post* controls and verifications of processes and procedures that are under the responsibility of the AIFM, the AIF or an appointed                        third party. The depositary shall in all circumstances ensure that an appropriate verification and reconciliation procedure                        exists which is implemented and applied and frequently reviewed. The AIFM shall ensure that all instructions related to the                        AIF’s assets and operations are sent to the depositary, so that the depositary is able to perform its own verification or                        reconciliation procedure.                  

3.A depositary shall establish a clear and comprehensive escalation procedure to deal with situations where potential irregularities                        are detected in the course of its oversight duties, the details of which shall be made available to the competent authorities                        of the AIFM upon request.                  

4.An AIFM shall provide the depositary, upon commencement of its duties and on an ongoing basis, with all relevant information                        it needs in order to comply with its obligations pursuant to Article 21(9) of Directive 2011/61/EU including information to                        be provided to the depositary by third parties. The AIFM shall particularly ensure that the depositary is able to have access                        to the books and perform on-site visits on premises of the AIFM and of those of any service provider appointed by the AIF                        or the AIFM, such as administrators or external valuers and, as the case may be, or to review reports and statements of recognised                        external certifications by qualified independent auditors or other experts in order to ensure the adequacy and relevance of                        the procedures in place.                  

#### Article 93U.K.Duties regarding subscription and redemptions

In order to comply with point (a) of Article 21(9) of Directive 2011/61/EU the depositary shall meet the following requirements:

The depositary shall ensure that the AIF, the AIFM or the designated entity has established, implements and applies an appropriate                              and consistent procedure to:                           

reconcile the subscription orders with the subscription proceeds, and the number of units or shares issued with the subscription                                       proceeds received by the AIF;                                    

reconcile the redemption orders with the redemptions paid, and the number of units or shares cancelled with the redemptions                                       paid by the AIF;                                    

verify on a regular basis that the reconciliation procedure is appropriate.

For the purpose of points (i), (ii) and (iii), the depositary shall in particular regularly check the consistency between                              the total number of units or shares in the AIF’s accounts and the total number of outstanding shares or units that appear                              in the AIF’s register.                           

A depositary shall ensure and regularly check that the procedures regarding the sale, issue, repurchase, redemption and cancellation                              of shares or units of the AIF comply with the applicable national law and with the AIF rules or instruments of incorporation                              and verify that these procedures are effectively implemented.                           

The frequency of the depositary’s checks shall be consistent with the frequency of subscriptions and redemptions.

#### Article 94U.K.Duties regarding the valuation of shares/units

1.In order to comply with point (b) of Article 21(9) of Directive 2011/61/EU the depositary shall:                  

(a)verify on an ongoing basis that appropriate and consistent procedures are established and applied for the valuation of the                        assets of the AIF in compliance with Article 19 of Directive 2011/61/EU and its implementing measures and with the AIF rules                        and instruments of incorporation; and                  

(b)ensure that the valuation policies and procedures are effectively implemented and periodically reviewed.                  

2.A depositary’s procedures shall be conducted at a frequency consistent with the frequency of the AIF’s valuation policy as                        defined in Article 19 of Directive 2011/61/EU and its implementing measures.                  

3.Where a depositary considers that the calculation of the value of the shares or units of the AIF has not been performed in                        compliance with applicable law or the AIF rules or with Article 19 of Directive 2011/61/EU, it shall notify the AIFM and,                        as the case may be, or the AIF and ensure that timely remedial action is taken in the best interest of the investors in the                        AIF.                  

4.Where an external valuer has been appointed, a depositary shall check that the external valuer’s appointment is in accordance                        with Article 19 of Directive 2011/61/EU and its implementing measures.                  

#### Article 95U.K.Duties regarding the carrying out of the AIFM’s instructions

In order to comply with point (c) of Article 21(9) of Directive 2011/61/EU the depositary shall at least:

set up and implement appropriate procedures to verify that the AIF and AIFM comply with applicable laws and regulations and                              with the AIF’s rules and instruments of incorporation. In particular, the depositary shall monitor the AIF’s compliance with                              investment restrictions and leverage limits set in the AIF’s offering documents. Those procedures shall be proportionate to                              the nature, scale and complexity of the AIF;                           

set up and implement an escalation procedure where the AIF has breached one of the limits or restrictions referred to in point                              (a).                           

#### Article 96U.K.Duties regarding the timely settlement of transactions

1.In order to comply with point (d) of Article 21(9)(of Directive 2011/61/EU the depositary shall set up a procedure to detect                        any situation where a consideration related to the operations involving the assets of the AIF or of the AIFM acting on behalf                        of the AIF is not remitted to the AIF within the usual time limits, notify the AIFM and, where the situation has not been                        remedied, request the restitution of the financial instruments from the counterparty where possible.                  

2.Where transactions do not take place on a regulated market, the usual time limits shall be assessed with regard to the conditions                        attached to the transactions (OTC derivative contracts or investments in real estate assets or in privately held companies).                  

#### Article 97U.K.Duties related to the AIF’s income distribution

1.In order to comply with point (e) of Article 21(9)(of Directive 2011/61/EU the depositary shall:                  

(a)ensure that the net income calculation, once declared by the AIFM, is applied in accordance with the AIF rules, instruments                        of incorporation and applicable national law;                  

(b)ensure that appropriate measures are taken where the AIF’s auditors have expressed reserves on the annual financial statements.                        The AIF or the AIFM acting on behalf of the AIF shall provide the depositary with all information on reserves expressed on                        the financial statements; and                  

(c)check the completeness and accuracy of dividend payments, once they are declared by the AIFM, and, where relevant, of the                        carried interest.                  

2.Where a depositary considers that the income calculation has not been performed in compliance with applicable law or with                        the AIF rules or instruments of incorporation, it shall notify the AIFM and, as the case may be, or the AIF and ensure that                        timely remedial action has been taken in the best interest of the AIF’s investors.                  

#### Article 98U.K.Due diligence

1.In order to fulfil the obligations laid down in point (c) of Article 21(11) of Directive 2011/61/EU a depositary shall implement                        and apply an appropriate documented due diligence procedure for the selection and ongoing monitoring of the delegate. That                        procedure shall be reviewed regularly, at least once a year, and made available upon request to competent authorities.                  

2.When selecting and appointing a third party, to whom safekeeping functions are delegated in accordance with Article 21(11)                        of Directive 2011/61/EU, a depositary shall exercise all due skill, care and diligence to ensure that entrusting financial                        instruments to this third party provides an adequate standard of protection. It shall at least:                  

(a)assess the regulatory and legal framework, including country risk, custody risk and the enforceability of the third party’s                        contracts. That assessment shall in particular enable the depositary to determine the potential implication of an insolvency                        of the third party for the assets and rights of the AIF. If a depositary becomes aware that the segregation of assets is not                        sufficient to ensure protection from insolvency because of the law of the country where the third party is located, it shall                        immediately inform the AIFM;                  

(b)assess whether the third party’s practice, procedures and internal controls are adequate to ensure that the financial instruments                        of the AIF or of the AIFM acting on behalf of the AIF are subject to a high standard of care and protection;                  

(c)assess whether the third party’s financial strength and reputation are consistent with the tasks delegated. That assessment                        shall be based on information provided by the potential third party as well as other data and information, where available;                  

(d)ensure that the third party has the operational and technological capabilities to perform the delegated custody tasks with                        a satisfactory degree of protection and security.                  

3.A depositary shall exercise all due skill, care and diligence in the periodic review and ongoing monitoring to ensure that                        the third party continues to comply with the criteria provided for in paragraph 1 of this Article and the conditions set out                        in point (d) of Article 21(11) of Directive 2011/61/EU. To this end the depositary shall at least:                  

(a)monitor the third party’s performance and its compliance with the depositary’s standards;                  

(b)ensure that the third party exercises a high standard of care, prudence and diligence in the performance of its custody tasks                        and in particular that it effectively segregates the financial instruments in line with the requirements of Article 99;                  

(c)review the custody risks associated with the decision to entrust the assets to the third party and without undue delay notify                        the AIF or AIFM of any change in those risks. That assessment shall be based on information provided by the third party and                        other data and information where available. During market turmoil or when a risk has been identified, the frequency and the                        scope of the review shall be increased. If the depositary becomes aware that the segregation of assets is no longer sufficient                        to ensure protection from insolvency because of the law of the country where the third party is located, it shall immediately                        inform the AIFM.                  

4.Where the third party further delegates any of the functions delegated to it, the conditions and criteria set out in paragraphs                        1, 2 and 3 shall apply *mutatis mutandis*.                  

5.A depositary shall monitor compliance with Article 21(4) of Directive 2011/61/EU.                  

6.A depositary shall devise contingency plans for each market in which it appoints a third party in accordance with Article                        21(11) of Directive 2011/61/EU to perform safekeeping duties. Such a contingency plan shall include the identification of                        an alternative provider, if any.                  

7.A depositary shall take measures, including termination of the contract, which are in the best interest of the AIF and its                        investors where the delegate no longer complies with the requirements.                  

#### Article 99U.K.Segregation obligation

1.Where safekeeping functions have been delegated wholly or partly to a third party, a depositary shall ensure that the third                        party, to whom safe-keeping functions are delegated pursuant to Article 21(11) of Directive 2011/61/EU, acts in accordance                        with the segregation obligation laid down in point (iii) of Article 21(11)(d) of Directive 2011/61/EU by verifying that the                        third party:                  

(a)keeps such records and accounts as are necessary to enable it at any time and without delay to distinguish assets of the depositary’s                        AIF clients from its own assets, assets of its other clients, assets held by the depositary for its own account and assets                        held for clients of the depositary which are not AIFs;                  

(b)maintains records and accounts in a way that ensures their accuracy, and in particular their correspondence to the assets                        safe-kept for the depositary’s clients;                  

(c)conducts, on a regular basis, reconciliations between its internal accounts and records and those of the third party to whom                        it has delegated safe-keeping functions in accordance with the third subparagraph of Article 21(11) of Directive 2011/61/EU;                  

(d)introduces adequate organisational arrangements to minimise the risk of loss or diminution of financial instruments or of                        rights in connection with those financial instruments as a result of misuse of the financial instruments, fraud, poor administration,                        inadequate record-keeping or negligence;                  

(e)Where the third party is an entity referred to in points (a), (b) and (c) of Article 18(1) of Directive 2006/73/EC which is                        subject to effective prudential regulation and supervision that has the same effect as Union law and is effectively enforced,                        the depositary shall take the necessary steps to ensure that the AIF’s cash is held in an account or accounts in accordance                        with Article 21(7) of Directive 2011/61/EU.                  

2.Where a depositary has delegated its custody functions to a third party in accordance with Article 21(11) of Directive 2011/61/EU,                        the monitoring of the third party’s compliance with its segregation obligations shall ensure that the financial instruments                        belonging to its clients are protected from any insolvency of that third party. If, according to the applicable law, including                        in particular the law relating to property or insolvency, the requirements laid down in paragraph 1 are not sufficient to                        achieve that objective, the depositary shall assess what additional arrangements are to be made in order to minimise the risk                        of loss and maintain an adequate standard of protection.                  

3.Paragraphs 1, and 2 shall apply *mutatis mutandis* when the third party, to whom safe-keeping functions are delegated in accordance with Article 21(11) of Directive 2011/61/EU,                        has decided to delegate all or part of its safe-keeping functions to another third party pursuant to the third subparagraph                        of Article 21(11) of Directive 2011/61/EU.                  

### *SECTION 4*U.K.***Loss of financial instruments, liability discharge and objective reasons***(Article 21(12) and (13) of Directive 2011/61/EU)

#### Article 100U.K.Loss of a financial instrument held in custody

1.A loss of a financial instrument held in custody within the meaning of Article 21(12) of Directive 2011/61/EU shall be deemed                        to have taken place when, in relation to a financial instrument held in custody by the depositary or by a third party to whom                        the custody of financial instruments held in custody has been delegated, any of the following conditions is met:                  

(a)a stated right of ownership of the AIF is demonstrated not to be valid because it either ceased to exist or never existed;                  

(b)the AIF has been definitively deprived of its right of ownership over the financial instrument;                  

(c)the AIF is definitively unable to directly or indirectly dispose of the financial instrument.                  

2.The ascertainment by the AIFM of the loss of a financial instrument shall follow a documented process readily available to                        the competent authorities. Once a loss is ascertained, it shall be notified immediately to investors in a durable medium.                  

3.A financial instrument held in custody shall not be deemed to be lost within the meaning of Article 21(12) of Directive 2011/61/EU                        where an AIF is definitively deprived of its right of ownership in respect of a particular instrument, but this instrument                        is substituted by or converted into another financial instrument or instruments.                  

4.In the event of insolvency of the third party to whom the custody of financial instruments held in custody has been delegated,                        the loss of a financial instrument held in custody shall be ascertained by the AIFM as soon as one of the conditions listed                        in paragraph 1 is met with certainty.                  

There shall be certainty as to whether any of the conditions set out in paragraph 1 is fulfilled at the latest at the end                     of the insolvency proceedings. The AIFM and the depositary shall monitor closely the insolvency proceedings to determine whether                     all or some of the financial instruments entrusted to the third party to whom the custody of financial instruments has been                     delegated are effectively lost.                  

5.A loss of a financial instrument held in custody shall be ascertained irrespective of whether the conditions listed in paragraph                        1 are the result of fraud, negligence or other intentional or non-intentional behaviour.                  

#### Article 101U.K.Liability discharge under Article 21(12) of Directive 2011/61/EU

1.A depositary’s liability under the second subparagraph of Article 21(12) of Directive 2011/61/EU shall not be triggered provided                        the depositary can prove that all the following conditions are met:                  

(a)the event which led to the loss is not the result of any act or omission of the depositary or of a third party to whom the                        custody of financial instruments held in custody in accordance with point (a) of Article 21(8) of Directive 2011/61/EU has                        been delegated;                  

(b)the depositary could not have reasonably prevented the occurrence of the event which led to the loss despite adopting all                        precautions incumbent on a diligent depositary as reflected in common industry practice;                  

(c)despite rigorous and comprehensive due diligence, the depositary could not have prevented the loss.                  

This condition may be deemed to be fulfilled when the depositary has ensured that the depositary and the third party to whom                     the custody of financial instruments held in custody in accordance with point (a) of Article 21(8) of Directive 2011/61/EU                     has been delegated have taken all of the following actions:                  

establishing, implementing, applying and maintaining structures and procedures and insuring expertise that are adequate and                              proportionate to the nature and complexity of the assets of the AIF in order to identify in a timely manner and monitor on                              an ongoing basis external events which may result in loss of a financial instrument held in custody;                           

assessing on an ongoing basis whether any of the events identified under point (i) presents a significant risk of loss of                              a financial instrument held in custody;                           

informing the AIFM of the significant risks identified and taking appropriate actions, if any, to prevent or mitigate the                              loss of financial instruments held in custody, where actual or potential external events have been identified which are believed                              to present a significant risk of loss of a financial instrument held in custody.                           

2.The requirements referred to in points (a) and (b) of paragraph 1 may be deemed to be fulfilled in the following circumstances:                  

(a)natural events beyond human control or influence;                  

(b)the adoption of any law, decree, regulation, decision or order by any government or governmental body, including any court                        or tribunal, which impacts the financial instruments held in custody;                  

(c)war, riots or other major upheavals.                  

3.The requirements referred to in points (a) and (b) of paragraph 1 shall not be deemed to be fulfilled in cases such as an                        accounting error, operational failure, fraud, failure to apply the segregation requirements at the level of the depositary                        or a third party to whom the custody of financial instruments held in custody in accordance with point (a) of Article 21(8)                        of Directive 2011/61/EU has been delegated.                  

4.This Article shall apply *mutatis mutandis* to the delegate when the depositary has contractually transferred its liability in accordance with Article 21(13) and (14)                        of Directive 2011/61/EU.                  

#### Article 102U.K.Objective reasons for the depositary to contract a discharge of liability

1.The objective reasons for contracting a discharge pursuant to Article 21(13) of Directive 2011/61/EU shall be:                  

(a)limited to precise and concrete circumstances characterising a given activity;                  

(b)consistent with the depositary’s policies and decisions.                  

2.The objective reasons shall be established each time the depositary intends to discharge itself of liability.                  

3.The depositary shall be deemed to have objective reasons for contracting the discharge of its liability in accordance with                        Article 21(13) of Directive 2011/61/EU when the depositary can demonstrate that it had no other option but to delegate its                        custody duties to a third party. In particular, this shall be the case where:                  

(a)the law of a third country requires that certain financial instruments be held in custody by a local entity and local entities                        exist that satisfy the delegation criteria laid down in Article 21(11) of Directive 2011/61/EU; or                  

(b)the AIFM insists on maintaining an investment in a particular jurisdiction despite warnings by the depositary as to the increased                        risk this presents.                  

## CHAPTER VU.K.**TRANSPARENCY REQUIREMENTS, LEVERAGE, RULES RELATING TO THIRD COUNTRIES AND EXCHANGE OF INFORMATION ON THE POTENTIAL CONSEQUENCES                           OF AIFM ACTIVITY**

### *SECTION 1*U.K.***Annual report, disclosure to investors and reporting to competent authorities***(Article 22(2)(a) to (e) and Articles 23(4) and 24(1)of Directive 2011/61/EU)

#### Article 103U.K.General principles for the annual report

All information provided in the annual report, including the information specified in this Section, shall be presented in                     a manner that provides materially relevant, reliable, comparable and clear information. The annual report shall contain the                     information investors need in relation to particular AIF structures.                  

#### Article 104U.K.Content and format of the balance sheet or statement of assets and liabilities and of the income and expenditure account

1.The balance sheet or statement of assets and liabilities shall contain at least the following elements and underlying line                        items in accordance with point (a) of Article 22(2) of Directive 2011/61/EU:                  

(a)‘assets’ comprising the resources controlled by the AIF as a result of past events and from which future economic benefits                        are expected to flow to the AIF. Assets shall be sub-classified according to the following line items:                  

‘investments’, including, but not limited to, debt and equity securities, real estate and property and derivatives;

‘cash and cash equivalents’, including, but not limited to, cash-in-hand, demand deposits and qualifying short-term liquid                              investments;                           

‘receivables’, including, but not limited to, amounts receivable in relation to dividends and interest, investments sold,                              amounts due from brokers and ‘prepayments’, including, but not limited to, amounts paid in advance in relation to expenses                              of the AIF;                           

(b)‘liabilities’, comprising present obligations of the AIF arising from past events, the settlement of which is expected to                        result in an outflow from the AIF of resources embodying economic benefits. Liabilities shall be sub-classified according                        to the following line items:                  

‘payables’, including, but not limited to, amounts payable in relation to the purchase of investments or redemption of units                              or shares in the AIF and amounts due to brokers and ‘accrued expenses’, including, but not limited to, liabilities for management                              fees, advisory fees, performance fees, interest and other expenses incurred in the course of operations of the AIF;                           

‘borrowings’, including, but not limited to, amounts payable to banks and other counterparties;

‘other liabilities’, including, but not limited to, amounts due to counterparties for collateral on return of securities loaned,                              deferred income and dividends and distributions payable;                           

(c)‘net assets’, representing the residual interest in the assets of the AIF after deducting all its liabilities.                  

2.The income and expenditure account shall contain at least the following elements and underlying line items:                  

(a)‘income’, representing any increases in economic benefits during the accounting period in the form of inflows or enhancements                        of assets or decreases of liabilities that result in increases in net assets other than those relating to contributions from                        investors. Income shall be sub-classified according to the following line items:                  

‘investment income’, which can be further sub-classified as follows:
                -  ‘dividend income’, relating to dividends on equity investments to which the AIF is entitled, 
                -  ‘interest income’, relating to interest on debt investments and on cash to which the AIF is entitled, 
                -  ‘rental income’, relating to rental income from property investments to which the AIF is entitled; 

‘realised gains on investments’, representing gains on the disposal of investments;

‘unrealised gains on investments’, representing gains on the revaluation of investments; and

‘other income’ including, but not limited to, fee income from securities loaned and from miscellaneous sources.

(b)‘expenses’, representing decreases in economic benefits during the accounting period in the form of outflows or depletions                        of assets or incurrences of liabilities that result in decreases in net assets, other than those relating to distributions                        to investors. Expenses shall, be sub-classified according to the following line items:                  
          -  (b)‘investment advisory or management fees’, representing contractual fees due to the advisor or AIFM, 
          -  ‘other expenses’, including, but not limited to, administration fees, professional fees, custodian fees and interest. Individual                           items, if material in nature, should be disclosed separately,                         
          -  ‘realised loss on investments’, representing loss on the disposal of investments, 
          -  ‘unrealised loss on investments’, representing loss on the revaluation of investments; 

(c)‘net income or expenditure’, representing the excess of income over expenditure or expenditure over income, as applicable.                  

3.The layout, nomenclature and terminology of line items shall be consistent with the accounting standards applicable to or                        the rules adopted by the AIF, and shall comply with legislation applicable where the AIF is established. Such line items may                        be amended or extended to ensure compliance with the above.                  

4.Additional line items, headings and subtotals shall be presented when such presentation is relevant to the understanding of                        an AIF’s financial position in the balance sheet or statement of assets and liabilities or an AIF’s financial performance                        in the content and format of the income and expenditure account. Where relevant additional information shall be presented                        in the notes to the financial statements. The purpose of the notes shall be to provide narrative descriptions or disaggregation                        of items presented in the primary statements and information about items that do not qualify for recognition in these statements.                  

5.Each material class of similar items shall be presented separately. Individual items, if material, shall be disclosed. Materiality                        shall be assessed under the requirements of the accounting framework adopted.                  

6.The presentation and classification of items in the balance sheet or statement of assets and liabilities shall be retained                        from one reporting or accounting period to the next unless it is apparent that another presentation or classification would                        be more appropriate, as when a shift in the investment strategy leads to different trading patterns, or because an accounting                        standard has required a change in presentation.                  

7.With respect to the content and format of the income and expenditure account set out to in Annex IV, all items of income and                        expense shall be recognised in a given period in the income and expenditure account unless an accounting standard adopted                        by the AIF requires otherwise.                  

#### Article 105U.K.Report on the activities of the financial year

1.The report on activities of the financial year shall include at least:                  

(a)an overview of investment activities during the year or period, and an overview of the AIF’s portfolio at year-end or period                        end;                  

(b)an overview of AIF performance over the year or period;                  

(c)material changes as defined below in the information listed in Article 23 of Directive 2011/61/EU not already present in the                        financial statements.                  

2.The report shall include a fair and balanced review of the activities and performance of the AIF, containing also a description                        of the principal risks and investment or economic uncertainties that the AIF might face.                  

3.To the extent necessary for an understanding of the AIF’s investment activities or its performance, the analysis shall include                        both financial and non-financial key performance indicators relevant to that AIF. The information provided in the report shall                        be consistent with national rules where the AIF is established.                  

4.The information in the report on the activities of the financial year shall form part of the directors or investment managers                        report in so far as this is usually presented alongside the financial statements of the AIF.                  

#### Article 106U.K.Material changes

1.Any changes in information shall be deemed material within the meaning of point (d) of Article 22(2) of Directive 2011/61/EU                        if there is a substantial likelihood that a reasonable investor, becoming aware of such information, would reconsider its                        investment in the AIF, including because such information could impact an investor’s ability to exercise its rights in relation                        to its investment, or otherwise prejudice the interests of one or more investors in the AIF.                  

2.In order to comply with point (d) of Article 22(2) of Directive 2011/61/EU, AIFMs shall assess changes in the information                        referred to in Article 23 of Directive 2011/61/EU during the financial year in accordance with paragraph 1 of this Article.                  

3.Information shall be disclosed in line with the requirements of the accounting standards and accounting rules adopted by the                        AIF together with a description of any potential or anticipated impact on the AIF and, as the case may be, or investors in                        the AIF. Additional disclosures shall be made when compliance with specific requirements of the accounting standards and accounting                        rules may be insufficient to enable investors to understand the impact of the change.                  

4.Where the information required to be disclosed in accordance with paragraph 1 is not covered by the accounting standards applicable                        to an AIF, or its accounting rules, a description of the material change shall be provided together with any potential or                        anticipated impact on the AIF and, as the case may be, or investors in the AIF.                  

#### Article 107U.K.Remuneration disclosure

1.When information required by point (e) of Article 22(2) of Directive 2011/61/EU is given, it shall be specified whether or                        not the total remuneration relates to any of the following:                  

(a)the total remuneration of the entire staff of the AIFM, indicating the number of beneficiaries;                  

(b)the total remuneration of those staff of the AIFM who are fully or partly involved in the activities of the AIF, indicating                        the number of beneficiaries;                  

(c)the proportion of the total remuneration of the staff of the AIFM attributable to the AIF, indicating the number of beneficiaries.                  

2.Where relevant, the total remuneration for the financial year shall also mention the carried interest paid by the AIF.                  

3.Where information is disclosed at the level of the AIFM, an allocation or breakdown shall be provided in relation to each                        AIF, in so far as this information exists or is readily available. As part of this disclosure, a description of how the allocation                        or breakdown has been provided shall be included.                  

4.AIFMs shall provide general information relating to the financial and non-financial criteria of the remuneration policies                        and practices for relevant categories of staff to enable investors to assess the incentives created. In accordance with the                        principles set out in Annex II to Directive 2011/61/EU, AIFMs shall disclose at least the information necessary to provide                        an understanding of the risk profile of the AIF and the measures it adopts to avoid or manage conflicts of interest.                  

#### Article 108U.K.Periodic disclosure to investors

1.The information referred to in Article 23(4) of Directive 2011/61/EU shall be presented in a clear and understandable way.                  

2.When disclosing the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature                        in accordance with Article 23(4)(a) of Directive 2011/61/EU the AIFM shall:                  

(a)provide an overview of any special arrangements in place including whether they relate to side pockets, gates or other similar                        arrangements, the valuation methodology applied to assets which are subject to such arrangements and how management and performance                        fees apply to these assets;                  

(b)disclose this information as part of the AIF’s periodic reporting to investors, as required by the AIF’s rules or instruments                        of incorporation, or at the same time as the prospectus and offering document and — as a minimum — at the same time as the                        annual report is made available in accordance with Article 22(1) of Directive 2011/61/EU.                  

The percentage of the AIF’s assets which are subject to special arrangements as defined in Article 1(5) shall be calculated                     as the net value of those assets subject to special arrangements divided by the net asset value of the AIF concerned.                  

3.For any new arrangements for managing the liquidity of the AIF in accordance with point (b) of Article 23(4) of Directive                        2011/61/EU AIFMs shall:                  

(a)for each AIF that they manage which is not an unleveraged closed-ended AIF, notify to investors whenever they make changes                        to the liquidity management systems and procedures referred to in Article 16(1) of Directive 2011/61/EU which are material                        in accordance with Article 106(1);                  

(b)immediately notify investors where they activate gates, side pockets or similar special arrangements or where they decide                        to suspend redemptions;                  

(c)provide an overview of the changes to arrangements concerning liquidity, whether or not these are special arrangements. Where                        relevant, the terms under which redemption is permitted and circumstances determining when management discretion applies shall                        be included. Also any voting or other restrictions exercisable, the length of any lock-up or any provision concerning ‘first                        in line’ or ‘pro-rating’ on gates and suspensions shall be included.                  

4.The disclosure of the risk profile of the AIF in accordance with point (c) of Article 23(4) of Directive 2011/61/EU shall                        outline:                  

(a)measures to assess the sensitivity of the AIF’s portfolio to the most relevant risks to which the AIF is or could be exposed;                  

(b)if risk limits set by the AIFM have been or are likely to be exceeded and where these risk limits have been exceeded a description                        of the circumstances and, the remedial measures taken.                  

The information shall be disclosed as part of the AIF’s periodic reporting to investors, as required by the AIF’s rules or                     instruments of incorporation or at the same time as the prospectus and offering document and — at a minimum — at the same                     time as the annual report is made available in accordance with Article 22(1) of Directive 2011/61/EU.                  

5.The risk management systems employed by the AIFM in accordance with point (c) of Article 23(4) of Directive 2011/61/EU shall                        outline the main features of the risk management systems employed by the AIFM to manage the risks to which each AIF it manages                        is or may be exposed. In the case of a change the disclosure shall include the information relating to the change and its                        anticipated impact on the AIF and its investors.                  

The information shall be disclosed as part of the AIF’s periodic reporting to investors, as required by the AIF’s rules or                     instruments of incorporation or at the same time as the prospectus and offering document and — as a minimum — at the same                     time as the annual report is made available or made public in accordance with Article 22(1) of Directive 2011/61/EU.                  

#### Article 109U.K.Regular disclosure to investors

1.The information referred to in Article 23(5) of Directive 2011/61/EU shall be presented in a clear and understandable way.                  

2.Information on changes to the maximum level of leverage calculated in accordance with the gross and commitment methods and                        any right of re-use of collateral or any guarantee under the leveraging arrangements shall be provided without undue delay                        and shall include:                  

(a)the original and revised maximum level of leverage calculated in accordance with Articles 7 and 8, whereby the level of leverage                        shall be calculated as the relevant exposure divided by the net asset value of the AIF;                  

(b)the nature of the rights granted for the reuse of collateral;                  

(c)the nature of guarantees granted; and                  

(d)details of changes in any service providers which relating to one of the items above.                  

3.Information on the total amount of leverage calculated in accordance with the gross and commitment methods employed by the                        AIF shall be disclosed as part of the AIF’s periodic reporting to investors, as required by the AIF’s rules or instruments                        of incorporation, or at the same time as the prospectus and offering document and at least at the same time as the annual                        report is made available according to Article 22(1) of Directive 2011/61/EU.                  

#### Article 110U.K.Reporting to competent authorities

1.In order to comply with the requirements of the second subparagraph of Article 24(1) and of point (d) of Article 3(3) of Directive                        2011/61/EU, an AIFM shall provide the following information when reporting to competent authorities:                  

(a)the main instruments in which it is trading, including a break-down of financial instruments and other assets, including the                        AIF’s investment strategies and their geographical and sectoral investment focus;                  

(b)the markets of which it is a member or where it actively trades;                  

(c)the diversification of the AIF’s portfolio, including, but not limited to, its principal exposures and most important concentrations.                  

The information shall be provided as soon as possible and not later than one month after the end of the period referred to                     in paragraph 3. Where the AIF is a fund of funds this period may be extended by the AIFM by 15 days.                  

2.For each of the EU AIFs they manage and for each of the AIFs they market in the Union, AIFMs shall provide to the competent                        authorities of their home Member State the following information in accordance with Article 24(2) of Directive 2011/61/EU:                  

(a)the percentage of the AIF’s assets which are subject to special arrangements as defined in Article 1(5) of this Regulation                        arising from their illiquid nature as referred to in point (a) of Article 23(4) of Directive 2011/61/EU;                  

(b)any new arrangements for managing the liquidity of the AIF;                  

(c)the risk management systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk and other risks                        including operational risk;                  

(d)the current risk profile of the AIF, including:                  

the market risk profile of the investments of the AIF, including the expected return and volatility of the AIF in normal market                              conditions;                           

the liquidity profile of the investments of the AIF, including the liquidity profile of the AIF’s assets, the profile of redemption                              terms and the terms of financing provided by counterparties to the AIF;                           

(e)information on the main categories of assets in which the AIF invested including the corresponding short market value and                        long market value, the turnover and performance during the reporting period; and                  

(f)the results of periodic stress tests, under normal and exceptional circumstances, performed in accordance with point (b) of                        Article 15(3) and the second subparagraph of Article 16(1) of Directive 2011/61/EU.                  

3.The information referred to in paragraphs 1 and 2 shall be reported as follows:                  

(a)on a half-yearly basis by AIFMs managing portfolios of AIFs whose assets under management calculated in accordance with Article                        2 in total exceed the threshold of either EUR 100 million or EUR 500 million laid down in points (a) and (b) respectively                        of Article 3(2) of Directive 2011/61/EU but do not exceed EUR 1 billion, for each of the EU AIFs they manage and for each                        of the AIFs they market in the Union;                  

(b)on a quarterly basis by AIFMs managing portfolios of AIFs whose assets under management calculated in accordance with Article                        2 in total exceed EUR 1 billion, for each of the EU AIFs they manage, and for each of the AIFs they market in the Union;                  

(c)on a quarterly basis by AIFMs which are subject to the requirements referred to in point (a) of this paragraph, for each AIF                        whose assets under management, including any assets acquired through use of leverage, in total exceed EUR 500 million, in                        respect of that AIF;                  

(d)on an annual basis by AIFMs in respect of each unleveraged AIF under their management which, in accordance with its core investment                        policy, invests in non-listed companies and issuers in order to acquire control.                  

4.By way of derogation from paragraph 3, the competent authority of the home Member State of the AIFM may deem it appropriate                        and necessary for the exercise of its function to require all or part of the information to be reported on a more frequent                        basis.                  

5.AIFMs managing one or more AIFs which they have assessed to be employing leverage on a substantial basis in accordance with                        Article 111 of this Regulation shall provide the information required under Article 24(4) of Directive 2011/61/EU at the same                        time as that required under paragraph 2 of this Article.                  

6.AIFMs shall provide the information specified under paragraphs 1, 2 and 5 in accordance with the pro-forma reporting template                        set out in the Annex IV.                  

7.In accordance with point (a) of Article 42(1) of Directive 2011/61/EU, for non-EU AIFMs, any reference to the competent authorities                        of the home Member State shall mean the competent authority of the Member State of reference.                  

#### Article 111U.K.Use of leverage on a ‘substantial basis’

1.Leverage shall be considered to be employed on a substantial basis for the purposes of Article 24(4) of Directive 2011/61/EU                        when the exposure of an AIF as calculated according to the commitment method under Article 8 of this Regulation exceeds three                        times its net asset value.                  

2.Where the requirements referred to in paragraph 1 of this Article are fulfilled, AIFMs shall provide information in accordance                        with Article 24(4) of Directive 2011/61/EU to the competent authorities of their home Member States in accordance with the                        principles laid down in Article 110(3) of this Regulation.                  

### *SECTION 2*U.K.***AIFMs managing leveraged AIFs***(Article 25(3) of Directive 2011/61/EU)

#### Article 112U.K.Restrictions on the management of AIFs

1.The principles laid down in this Article shall apply in order to specify the circumstances in which competent authorities                        exercise their power to impose leverage limits or other restrictions on AIFMs.                  

2.When assessing the information received under Articles 7(3), 15(4), 24(4) or 24(5) of Directive 2011/61/EU, a competent authority                        shall take into account the extent to which the use of leverage by an AIFM or its interaction with a group of AIFMs or other                        financial institutions can contribute to the build-up of systemic risk in the financial system or risks creating disorderly                        markets.                  

3.Competent authorities shall take into account at least the following aspects in their assessment:                  

(a)the circumstances in which the exposure of an AIF or several AIFs including those exposures resulting from financing or investment                        positions entered into by the AIFM for its own account or on behalf of the AIFs could constitute an important source of market,                        liquidity or counterparty risk to a financial institution;                  

(b)the circumstances in which the activities of an AIFM or its interaction with, for example, a group of AIFMs or other financial                        institutions, in particular with respect to the types of assets in which the AIF invests and the techniques employed by the                        AIFM through the use of leverage, contribute or could contribute to a downward spiral in the prices of financial instruments                        or other assets in a manner that threatens the viability of such financial instruments or other assets;                  

(c)criteria such as the type of AIF, the investment strategy of the AIFM with respect to the AIFs concerned, the market conditions                        in which the AIFM and the AIF operate and any likely pro-cyclical effects that could result from the imposition by the competent                        authorities of limits or other restrictions on the use of leverage by the AIFM concerned;                  

(d)criteria, such as the size of an AIF or several AIFs and any related impact in a particular market sector, concentrations                        of risks in particular markets in which the AIF or several AIFs are investing, any contagion risk to other markets from a                        market where risks have been identified, liquidity issues in particular markets at a given time, the scale of asset/liability                        mismatch in a particular AIFM investment strategy or irregular movements in the prices of assets in which an AIF may invest.                  

### *SECTION 3*U.K.***Specific rules relating to third countries***(Articles 34(1), 35(2) 36(1), Articles 37(7)(d), 40(2)(a) and Article 42(1) of Directive 2011/61/EU)

#### Article 113U.K.General requirements

1.Cooperation arrangements shall cover all possible situations and actors envisaged in Chapter VII of Directive 2011/61/EU taking                        into account the location of the AIFM, the location of the AIF and the activity of the AIFM.                  

2.Cooperation arrangements shall take a written form.                  

3.Cooperation arrangements shall establish the specific framework for consultation, cooperation and exchange of information                        for supervisory and enforcement purposes between EU competent authorities and third country supervisory authorities.                  

4.Cooperation arrangements shall include a specific clause providing for the transfer of information received by a Union competent                        authority from a supervisory authority in a third country to other Union competent authorities, to ESMA or to the ESRB as                        required under Directive 2011/61/EU.                  

#### Article 114U.K.Mechanisms, instruments and procedures

1.Cooperation arrangements shall establish the mechanisms, instruments and procedures required for enabling Union competent                        authorities to have access to all information necessary for the performance of their duties under Directive 2011/61/EU.                  

2.Cooperation arrangements shall establish the mechanisms, instruments and procedures required for enabling on-site inspections                        to be carried out where required for the exercise of the Union competent authority’s duties under Directive 2011/61/EU. On-site                        inspections shall be carried out directly by the Union competent authority or by the third country competent authority with                        the assistance of the Union competent authority.                  

3.Cooperation arrangements shall establish the mechanisms, instruments and procedures required for the third country competent                        authority to assist the Union competent authorities where it is necessary to enforce Union legislation and national implementing                        legislation breached by an entity established in the third country, in accordance with the national and international law                        applicable to that authority.                  

#### Article 115U.K.Data protection

Cooperation arrangements shall ensure that the transfer to third countries of data and the analysis of data takes place only                     in accordance with Article 52 of Directive 2011/61/EU.                  

### *SECTION 4*U.K.***Exchange of information on the potential systemic consequences of AIFM activity***(Article 53(1) of Directive 2011/61/EU)

#### Article 116U.K.Exchange of information on the potential systemic consequences of AIFM activity

For the purposes of Article 53 of Directive 2011/61/EU, the competent authorities of the Member States responsible for the                     authorisation or supervision of AIFMs under that Directive shall exchange with the competent authorities of other Member States,                     and with ESMA and the ESRB at least:                  

the information received pursuant to Article 110, whenever such information may be relevant for monitoring and responding                              to the potential implications of the activities of individual AIFMs or several AIFMs collectively for the stability of systemically                              relevant financial institutions and the orderly functioning of markets on which the AIFMs are active;                           

the information received from third country authorities whenever this is necessary for the monitoring of systemic risks;

the analysis of the information referred to in points (a) and (b) and the assessment of any situation in which the activities                              of one or more supervised AIFMs or of one or more AIFs under their management are considered to contribute to the build-up                              of systemic risk in the financial system, to the risk of disorderly markets or to risks for the long-term growth of the economy;                           

the measures taken, when the activity of one or more supervised AIFMs or of one or more AIFs under their management present                              systemic risk or jeopardise the orderly functioning of the markets on which they are active.                           

## CHAPTER VIU.K.**FINAL PROVISIONS**

### Article 117U.K.Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the *Official Journal of the European Union*.                  

It shall apply from 22 July 2013.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 19 December 2012.

*For the Commission*                            

*The President*                            

José Manuel Barroso                            

## ANNEX IU.K.**Methods of increasing the exposure of an AIF**

### 1.Unsecured cash borrowings: When cash borrowings are invested they have the propensity to increase the exposure of the AIF                        by the total amount of those borrowings. Therefore, the minimum exposure is always the amount of the borrowing. It might be                        higher if the value of the investment realised with the borrowing is greater than the borrowed amount. To avoid double counting,                        cash borrowings that are used to finance the exposure shall not be included within the calculation. If the cash borrowings                        are not invested but remain in cash or cash equivalent as defined in Article 7(a) they will not increase the exposure of the                        AIF.U.K.

### 2.Secured cash borrowings: Secured cash borrowings are similar to unsecured cash borrowings but the loan may be secured by a                        pool of assets or a single asset. If the cash borrowings are not invested but remain in cash or cash equivalent as defined                        in Article 7(a) they will not increase the exposure of the AIF.U.K.

### 3.Convertible borrowings: Convertible borrowings are purchased debt which has the ability, under certain circumstances, to enable                        the holder or issuer to convert that debt into another asset. The exposure of the AIF is the market value of such borrowings.U.K.

### 4.Interest rate swaps: An interest rate swap is an agreement to exchange interest rate cash flows, calculated on a notional                        principal amount, at specified intervals (payment dates) during the life of the agreement. Each party’s payment obligation                        is computed using a different interest rate based on the notional exposures.U.K.

### 5.Contracts for differences: A contract for differences (CFD) is an agreement between two parties — the investor and the CFD                        provider — to pay the other the change in the price of an underlying asset. Depending on which way the price moves, one party                        pays the other the difference from the time the contract was agreed to the point in time where it ends. Exposure is the market                        value of the underlying asset. The same treatment must be applied to financial spread bets.U.K.

### 6.Futures contracts: A futures contract is an agreement to buy or sell a stated amount of a security, currency, commodity, index                        or other asset at a specific future date and at a pre-agreed price. The exposure is the market value of the equivalent underlying                        asset.U.K.

### 7.Total return swaps: A total return swap is an agreement in which one party (total return payer) transfers the total economic                        performance of a reference obligation to the other party (total return receiver). Total economic performance includes income                        from interest and fees, gains or losses from market movements, and credit losses. The exposure of the AIF is the market value                        of the equivalent reference assets which have a bearing on the economic performance of the swap.U.K.

### 8.Forward agreements: A forward agreement is a customised, bilateral agreement to exchange an asset or cash flows at a specified                        future settlement date at a forward price agreed on the trade date. One party to the forward is the buyer (long), who agrees                        to pay the forward price on the settlement date; the other is the seller (short), who agrees to receive the forward price.                        Entering into a forward contract typically does not require the payment of a fee. The exposure of the AIF is the market value                        of the equivalent underlying asset. This may be replaced by the notional value of the contract where this is more conservative.U.K.

### 9.Options: An option is an agreement that gives the buyer, who pays a fee (premium), the right — but not the obligation — to                        buy or sell a specified amount of an underlying asset at an agreed price (strike or exercise price) on or until the expiration                        of the contract (expiry). A call option is an option to buy, and a put option an option to sell. The bounds of the exposure                        of the fund will be on the one side a potential unlimited exposure and on the other side an exposure that is limited to the                        higher of the premium paid or the market value of that option. The exposure between these two bounds is determined as the                        delta (an options delta measures the sensitivity of an option’s price solely to a change in the price of the underlying asset)                        adjusted equivalent of the underlying position. The same approach must be adopted for embedded derivatives, e.g. in structured                        products. The structure should be broken down into its component parts and the effect of layers of derivative exposures must                        be adequately captured.U.K.

### 10.Repurchase agreements: The repurchase agreement normally occurs where an AIF ‘sells’ securities to a reverse-repo counterparty                        and agrees to buy them back at an agreed price in the future. The AIF will incur a financing cost from engaging in this transaction                        and will therefore need to re-invest the cash proceeds (effectively cash collateral) in order to generate a return greater                        than the financing cost incurred. This reinvestment of ‘cash collateral’ means that incremental market risk will be carried                        by the AIF and consequently must be taken into account in the global exposure calculation. The economic risks and rewards                        of the ‘sold’ securities remain with the AIF. Also, a repo transaction will almost always give rise to leverage as the cash                        collateral will be reinvested. In the event that non-cash collateral is received as part of the transaction and this collateral                        is further used as part of another repo, or stock-loan agreement, the full market value of the collateral must be included                        in the global exposure amount. The exposure of the AIF is increased by the reinvested part of the cash collateral.U.K.

### 11.Reverse repurchase agreements: This transaction occurs where an AIF ‘purchases’ securities from a repo counterparty and agrees                        to sell them back at an agreed price in the future. AIFs normally engage in these transactions to generate a low-risk money-market                        type return, and the ‘purchased’ securities act as collateral. Therefore no global exposure is generated; nor does the AIF                        take on the risks and rewards of the ‘purchased’ securities, i.e. there is no incremental market risk. However, it is possible                        for the ‘purchased’ securities to be further used as part of a repo or security-loan transaction, as described above, and                        in that case the full market value of the securities must be included in the global exposure amount. The economic risks and                        rewards of the purchased securities remain with the counterparty and therefore this does not increase the exposure of the                        AIF.U.K.

### 12.Securities lending arrangements: An AIF engaging in a securities lending transaction will lend a security to a security-borrowing                        counterparty (who will normally borrow the security to cover a physical short sale transaction) for an agreed fee. The security                        borrower will deliver either cash or non-cash collateral to the AIF. Only where cash collateral is reinvested in instruments                        other than those defined in Article 7 point (a) will global exposure be created. If the non-cash collateral is further used                        as part of a repo or another security lending transaction, the full market value of the securities must be included in the                        global exposure amount as described above. Exposure is created to the extent that the cash collateral has been reinvested.U.K.

### 13.Securities borrowing arrangements: An AIF engaging in the borrowing of securities will borrow a security from a security-lending                        counterparty for an agreed fee. The AIF will then sell the security in the market. The AIF is now short that security. To                        the extent that the cash proceeds from the sale are reinvested this will also increase the exposure of the AIF. Exposure is                        the market value of the shorted securities; additional exposure is created to the extent that the cash received is reinvested.U.K.

### 14.Credit default swaps: A credit default swap (CDS) is a credit derivative agreement that gives the buyer protection, usually                        the full recovery, in case the reference entity defaults or suffers a credit event. In return the seller of the CDS receives                        from the buyer a regular fee, called the spread. For the protection seller, the exposure is the higher of the market value                        of the underlying reference assets or the notional value of the credit default swap. For the protection buyer, the exposure                        is the market value of the underlying reference asset.U.K.

## ANNEX IIU.K.**Conversion methodologies for derivative instruments**

### 1.The following conversion methods shall be applied to the non-exhaustive list below of standard derivatives:U.K.

Futures

:

Number of contracts * notional contract size * market price of the cheapest-to-deliver reference bond

:

Number of contracts * notional contract size

:

Number of contracts * notional contract size

:

Number of contracts * notional contract size * market price of underlying equity share

:

Number of contracts * notional contract size * index level

Plain vanilla options (bought/sold puts and calls)

:

Notional contract value * market value of underlying reference bond * delta

:

Number of contracts * notional contract size* market value of underlying equity share * delta

:

Notional contract value * delta

:

Notional contract value of currency leg(s) * delta

:

Number of contracts * notional contract size * index level * delta

:

Number of contracts * notional contract size * market value of underlying asset * delta

:

Reference swap commitment conversion amount * delta

:

Number of shares/bonds * market value of underlying referenced instrument * delta

Swaps

:

notional contract value

:

Notional value of currency leg(s)

:

Notional value of currency leg(s)

:

Underlying market value of reference asset(s)

:

Cumulative underlying market value of both legs of the TRS

:

—

The higher of the market value of the underlying reference asset or the notional value of the Credit Default Swap.

—

Market value of the underlying reference asset

:

Number of shares/bonds * market value of underlying referenced instrument

Forwards

:

notional value of currency leg(s)

:

notional value

Leveraged exposure to indices with embedded leverage

A derivative providing leveraged exposure to an underlying index, or indices that embed leveraged exposure to their portfolio,                              must apply the standard applicable commitment approach to the assets in question.                           

### 2.The following conversion methods shall be applied to the non-exhaustive list below of financial instruments which embed derivatives:U.K.

:

Number of referenced shares * market value of underlying referenced shares * delta

:

Market value of underlying reference asset(s)

:

Number of shares/bonds * market value of underlying referenced instruments

:

Number of shares/bonds * market value of underlying referenced instrument * delta

### 3.List of examples of non-standard derivatives with the related commitment methodology being used:U.K.

          -  Variance swaps: Variance swaps are contracts that allow investors to gain exposure to the variance (squared volatility) of                           an underlying asset and, in particular, to trade future realised (or historical) volatility against current implied volatility.                           According to market practice, the strike and the variance notional are expressed in terms of volatility. For the variance                           notional, this gives:                            The vega notional provides a theoretical measure of the profit or loss resulting from a 1 % change in volatility.  As realised volatility cannot be less than zero, a long swap position has a known maximum loss. The maximum loss on a short                           swap is often limited by the inclusion of a cap on volatility. However without a cap, a short swap’s potential losses are                           unlimited.                          The conversion methodology to be used for a given contract at time t is:  Variance notional * (current) variancet (without volatility cap)                          Variance notional * min [(current) variancet volatility cap2] (with volatility cap)                          whereby: (current) variancet is a function of the squared realised and implied volatility, more precisely:                           
          -  Volatility swaps  By analogy with the variance swaps, the following conversion formulae should be applied to volatility swaps:              -  Vega notional * (current) volatilityt (without volatility cap)                               
            -  Vega notional * min [(current) volatilityt; volatility cap] (with volatility cap)  whereby the (current) volatility t is a function of the realised and implied volatility. 

### 4.Barrier (knock-in knock-out) optionsU.K.

Number of contracts * notional contract size * market value of underlying equity share * delta

## ANNEX IIIU.K.**Duration netting rules**

### 1.An interest rate derivative shall be converted into its equivalent underlying asset position in accordance with the following                        methodology:U.K.

The equivalent underlying asset position of each interest rate derivative instrument shall be calculated as its duration divided                     by the target duration of the AIF and multiplied by the equivalent underlying asset position:                  

where:
          -  *duration*FDI is the duration (sensitivity of the market value of the financial derivative instrument to interest rate movements) of the                           interest rate derivative instrument,                         
          -  *duration*target is in line with the investment strategy, the directional positions and the expected level of risk at any time and will be                           regularised otherwise. It is also in line with the portfolio duration under normal market conditions,                         
          -  CVderivative is the converted value of the derivative position as defined by the Annex II.                         

### 2.The equivalent underlying asset positions calculated in accordance with to paragraph 1 shall be netted as follows:U.K.

Each interest rate derivative instrument shall be allocated to the appropriate maturity range of the following maturity-based                              ladder:                           

Maturities ranges

0-2 years

2-7 years

7-15 years

> 15 years

The long and short equivalent underlying asset positions shall be netted within each maturity range. The amount of the former                              which is netted with the latter is the netted amount for that maturity range.                           

Starting with the shortest maturity range, the netted amounts between two adjoining maturity ranges shall be calculated by                              netting the amount of the remaining unnetted long (or short) position in the maturity range (i) with the amount of the remaining                              unnetted short (long) position in the maturity range (i + 1).                           

Starting with the shortest maturity range, the netted amounts between two remote maturity ranges separated by another one                              shall be calculated by netting the amount of the remaining unnetted long (or short) position in the maturity range (i) with                              the amount of the remaining unnetted short (long) position in the maturity range (i + 2).                           

The netted amount shall be calculated between the remaining unnetted long and short positions of the two most remote maturity                              ranges.                           

### 3.The AIF shall calculate its exposures as the sum of absolute values:U.K.

          -  0 % of the netted amount for each maturity range, 
          -  40 % of the netted amounts between two adjoining maturity ranges (i) and (i + 1), 
          -  75 % of the netted amounts between two remote maturity ranges separated by another one, meaning maturity ranges (i) and (i + 2), 
          -  100 % of the netted amounts between the two most remote maturity ranges, and 
          -  100 % of the remaining unnetted positions. 

## ANNEX IVU.K.

### **Reporting Templates: AIFM**(Articles 3(3)(d) and 24 of Directive 2011/61/EU)U.K.

#### **AIFM-specific information to be reported**

(Articles 3(3)(d) and 24(1) of Directive 2011/61/EU)

#### **Detailed list of all AIFs which the AIFM manages**

to be provided on request for the end of each quarter

(Article 24(3) of Directive 2011/61/EU)

Monetary values should be reported in the base currency of the AIF.

### **Reporting Templates: AIF**(Articles 3(3)(d) and 24 of Directive 2011/61/EU)U.K.

#### **AIF-specific information to be provided**

(Articles 3(3)(d) and 24(1) of Directive 2011/61/EU)

Monetary values should be reported in the base currency of the AIF.

#### **AIF-specific information to be provided to competent authorities**

(Article 24(2) of Directive 2011/61/EU)

Monetary values should be reported in the base currency of the AIF.

### **Results of stress tests**U.K.

Please provide the **results of the stress tests** performed in accordance with point (b) of **Article 15(3) of Directive 2011/61/EU***[risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly                        identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures*;] *(free text)*                   

Monetary values should be reported in the base currency of the AIF.

Please provide the **results of the stress tests** performed in accordance with the **second subparagraph of Article 16(1) of Directive 2011/61/EU.** [*AIFMs shall regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess                        the liquidity risk of the AIFs and monitor the liquidity risk of the AIFs accordingly.] (free text)*                   

Monetary values should be reported in the base currency of the AIF.

#### **AIF-specific information to be made available to the competent authorities**

(Article 24(4) of Directive 2011/61/EU)

Monetary values should be reported in the base currency of the AIF.

1

OJ L 174, 1.7.2011, p. 1.                           

2

COM(2010) 284.

3

OJ L 241, 2.9.2006, p. 26.                           

4

OJ L 145, 30.4.2004, p. 1.                           

5

OJ L 302, 17.11.2009, p. 32.                           

6

OJ L 176, 10.7.2010, p. 42.                           

7

OJ L 177, 30.6.2006, p. 1.                           

8

Committee of European Banking Supervisors, Guidelines to Article 122a of the Capital Requirements Directive of 31 December                              2010, http://www.eba.europa.eu/cebs/media/Publications/Standards%20and%20Guidelines/2010/Application%20of%20Art.%20122a%20of%20the%20CRD/Guidelines.pdf                           

9

Committee of European Banking Supervisors, Guidelines to Article 122a of the Capital Requirements Directive of 31 December                              2010, http://www.eba.europa.eu/cebs/media/Publications/Standards%20and%20Guidelines/2010/Application%20of%20Art.%20122a%20of%20the%20CRD/Guidelines.pdf                           

10

OJ L 96, 12.4.2003, p. 16.                           

11

OJ L 79, 20.3.2007, p. 11.