Document ID: chunk:federal_register_of_legislation:F2022C00868:reg:26
Version: federal_register_of_legislation:F2022C00868
Segment Type: reg
Provision Reference: reg 26
Character Range: 64824–66577

26  Requirements for embedded derivatives
 (1) A passport fund may acquire a transferable security or money market instrument that embeds a derivative only if the embedded derivative satisfies:
 (a) section 25; and
 (b) section 27 where the counterparty risk of the embedded derivative is or may be transferred to the passport fund;
as if the embedded derivative were a derivative and the passport fund were a direct party to that derivative.

Meaning of embeds a derivative and embedded derivative
 (2) For these rules, a transferable security or money market instrument in question embeds a derivative:
 (a) if it includes a component (the embedded derivative) that:
 (i) results in some or all of the cash flows that would otherwise be payable under the transferable security or money market instrument which functions as the host contract to be modified by reference (wholly or in part) to a variable other than, for shares or stock of a body corporate, the discretion of the body corporate as to payment of dividends or repayment of capital or amounts payable on its winding up; and
 (ii) has benefits and risks that are not closely related to economic characteristics of the transferable security or money market instrument which functions as the host contract; and
 (iii) has a significant impact on the risks in holding, and the price of, the transferable security or money market instrument in question; and
 (iv) is not transferable independently of the transferable security or money market instrument or is not treated by the passport fund as a separate asset; or
 (b) if it would be a derivative but for being a transferable security or a money market instrument, and the terms were designed to meet the specific needs of a passport fund.