# The Authorised Unit Trust Scheme (Investment and Borrowing Powers) Regulations 1988, Regulation 8: Hedging


(1) Subject to the provisions of paragraphs (2) to (10) and notwithstanding any other provision of these Regulations, the property of a scheme may be used in hedging transactions.
(2) No transaction shall be regarded as a hedging transaction for the purposes of this regulation unless—
(a) the transaction is one which may reasonably be regarded as economically appropriate to the reduction or elimination of risk arising in the management of the scheme by virtue of fluctuations in the price of investments comprised in the property of the scheme or by reason of fluctuations in interest or exchange rates;
(b) any instrument used in the transaction is one which, by virtue of the relationship between fluctuations in its price and fluctuations in the price of the property or any part of the property of the scheme or fluctuations in interest or exchange rates, may reasonably be regarded as an instrument which may appropriately be used in order to reduce or eliminate risk arising with respect to the property or the relevant part of it from such fluctuations; and
(c) the purpose of the transaction is the reduction or elimination of risk and not speculation, and, for these purposes, a transaction shall not be regarded as one for the reduction or elimination of risk if, having regard to other hedging transactions which have been entered into in relation to the property or any part of it, it is unreasonable to consider that risk continues to arise of a kind for which the instrument may appropriately be used.
(3) No hedging transaction shall be entered into at any time at which the total value, calculated in accordance with these Regulations, of all cash and other property paid, transferred or deposited by way of premium or initial margin which may reasonably be regarded as attributable to any obligation or right then arising under a hedging transaction which is not closed out would, if added to the amount of any premium or initial margin payable in respect of the proposed transaction, exceed 10% in value of the property of the scheme.
(4) Except in the case of an instrument which is utilised to hedge against fluctuations in exchange rates, no instrument shall be utilised by virtue of this regulation unless it is either a traded option or an instrument other than a traded option being an instrument which is traded on or under the rules of an approved options and futures market and which is an instrument relating to property with respect to which, or to an index or other factor by reference to which, instruments of that kind have been so traded for a period of at least six months.
(5) Subject to paragraph (6), no hedging transaction under which an obligation to receive or deliver property does arise or may arise at the option of some person other than the trustee, acting in his capacity as such, shall be entered into unless the transaction is covered and, for the purposes of this paragraph, a transaction shall be regarded as covered only if—
(a) in the case of a transaction under which an obligation to deliver property does or may arise, the property of the scheme includes either—
(i) property sufficient to enable that obligation together with any other similar obligation incurred in relation to the scheme with respect to property of the same kind to be discharged; or
(ii) rights to acquire property sufficient to enable that obligation and any other similar obligation incurred in relation to the scheme with respect to property of the same kind to be discharged; and
(b) in the case of a transaction under which an obligation to receive property does or may arise, the property of the scheme includes either—
(i) cash or near cash, which is not otherwise taken into account for the purposes of paragraph (7) or for the purposes of regulation 15 or 32(1)(c), sufficient to enable that obligation and all similar obligations incurred in relation to the scheme to be discharged; or
(ii) rights to dispose of the property should the obligation to acquire it arise.
(6) For the purposes of paragraph (5), the property of a scheme shall be regarded as including property sufficient to enable the discharge of an obligation arising under a hedging transaction which is a contract for differences if the property includes property or rights to acquire property, which, by virtue of the correlation between that property and the property, index or other factor by reference to which any amount payable under the hedging transaction is to be calculated, may reasonably be considered to be sufficient to enable the obligation to be discharged.
(7) No option shall be purchased unless the property of the scheme includes cash or near cash which is not taken into account for the purpose of paragraph (5)(b)(i) or for the purposes of regulation 15 or 32(1)(c) and which is sufficient to enable the payment of that premium and all other premia then payable including, in the case of an option which is a margined contract purchased for the scheme, the amount of any premium which will become payable unless the option is sold.
(8) No hedging transaction under which an obligation to receive property does or may arise shall be entered into unless the obligation could be discharged at the time the transaction is effected without contravening any provision of these Regulations.
(9) No instrument relating to currency shall be utilised in order to hedge against fluctuations in exchange rates unless the instrument relates to the base currency or to a currency in which the property or any part of it is then denominated.
(10) None of the provisions of paragraphs (2) to (9) shall prevent an instrument being utilised in order to close out a hedging transaction.
(11) If, at any time after a hedging transaction has been entered into, circumstances arise which have the effect that, having disregarded all obligations and rights arising under hedging transactions which have been closed out, the transaction could not then be entered into except in contravention of any provision of this regulation, the manager shall forthwith upon becoming aware of that fact take such steps as are necessary to ensure that the provisions of this regulation are complied with either by closing out the transaction or by providing cover for it or otherwise and the trustee shall, forthwith upon becoming aware of the contravention, take such steps as are necessary to ensure that the manager fulfils that duty.
(12) In the application of this regulation to a money market fund, paragraph (2)(a) shall have effect as if the reference in that paragraph to investments included reference to such cash, deposits, loans or bills of exchange as are comprised in the property of the fund.

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Source: https://www.legislation.gov.uk/uksi/1988/284/regulation/8 (the official version)
Page: https://openlegislation.uk/authorised-unit-trust-scheme-investment-and-borrowing-powers-regulations-1988/regulation-8
Contains public sector information licensed under the Open Government Licence v3.0. Source: legislation.gov.uk, The National Archives.