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  • CIU-1.5 CIU-1.5 Governance and Risk Management

    • CIU-1.5.1

      The operator of a Bahrain domiciled CIU is ultimately held accountable for conducting the operations diligently and for governance, internal control and compliance arrangements in relation to the CIU. The operator must ensure that if any roles are delegated, the arrangements ensure full compliance with the CBB requirements.

      Added: April 2022

    • CIU-1.5.2

      The operators of Bahrain domiciled retail CIUs must appoint:

      (a) An independent CBB licensed custodian (The role of the fund administrator may, however, be combined with that of a CBB licensed custodian);
      (b) An independent CBB licensed fund administrator; and
      (c) An independent Bahrain based external auditor.
      Added: April 2022

    • CIU-1.5.3

      The operators of Bahrain domiciled exempt CIUs that are established as contractual CIUs must comply with the following:

      (a) Appoint an independent CBB licensed custodian;
      (b) Appoint an independent CBB licensed fund administrator; and
      (c) Appoint an independent Bahrain based external auditor.
      Amended: October 2022
      Added: April 2022

    • CIU-1.5.4

      The operators of Bahrain domiciled exempt CIUs that are not established as contractual CIUs are required to comply with the following requirements:

      (a) Appoint an independent CBB licensed custodian for open-ended CIUs;
      (b) The fund administration activity must be carried out in the Kingdom of Bahrain, either by the operator or by a custodian authorised to provide fund administration services; and
      (c) Appoint an independent Bahrain based external auditor.
      Added: April 2022

    • CIU-1.5.5

      The CBB will allow ‘hub and spoke’ arrangements with regards to custody, provided that:

      a) A suitably licensed office is maintained in Bahrain, through which the CBB can access the CIU’s records;
      b) The overseas office belongs to the same group as the Bahrain custodian, and regulated by a reputable regulatory authority acceptable to the CBB;
      c) The custodian retains ultimate responsibility for the CIU’s assets; and
      d) Suitable outsourcing arrangements have been put in place.
      Added: April 2022

    • CIU-1.5.6

      The CBB may allow, on a case-by-case basis, the outsourcing of certain tasks linked to the function of the fund administration to an entity located abroad, subject to certain conditions and under the responsibility of the Bahraini fund administrator.

      Added: April 2022

    • CIU-1.5.7

      The CIU operator may appoint another entity to act as investment manager of the CIU, provided there are no conflicts of interests (See also Paragraph CIU-1.5.15). The CBB as a matter of principle has no objection to such an arrangement provided that the operator has the ability to terminate the arrangement and also ensures that such arrangements are legally binding on the parties involved. In particular, the CIU operator must confirm to the CBB that:

      (a) The operator can demonstrate that the investment manager has the capabilities and resources to carry out its functions;
      (b) The arrangement does not prevent the CBB from effective supervision or access to the operator;
      (c) The arrangement does not prevent the operator from acting, or the CIU from being managed, in the best interests of the CIU participants;
      (d) In case of retail CIUs, the investment managers must be authorised to undertake asset management whether in the Kingdom of Bahrain or in overseas jurisdictions;
      (e) Where under the requirements of this Module, the CIU requires a custodian or a fund administrator who is independent of the operator of the CIU, such person (i.e. custodian or fund administrator) must not also act as the investment manager for that CIU.
      Added: April 2022

    • Custody

      • CIU-1.5.8

        Custody activities involve safeguarding the assets of the CIU and include the following:

        (a) To open, maintain and control CIU cash accounts with licensed banks (used for subscription and trading) in all relevant markets;
        (b) To open and maintain CIU securities accounts with authorised institutions;
        (c) To directly collect and receive all income and other payments, distributions and entitlements pertaining to a CIU;
        (d) To ensure that the cash flows of the CIU are properly monitored;
        (e) To make all payments and settlements on behalf of and for the interest of the CIU, in accordance with the CIU investment objectives, offering documents and within the time limits set by the arrangements between the operator and the custodian;
        (f) To record the financial instruments and assets of the CIU in accounts segregated from the custodian’s own books and books of its other clients;
        (g) To ensure that all assets belonging to the CIU are held in the name of the CIU or, where relevant market practices and/or legal requirements dictate, held on behalf of the CIU;
        (h) To execute any corporate actions;
        (i) To maintain records and documentation relating to all transactions made on behalf of the CIU;
        (j) To provide the operator on a regular basis with a comprehensive inventory of all the assets of the CIU;
        (k) The financial instruments and assets of the CIU held in custody must not be reused by the custodian, or by any third party, for their own account. Reuse comprises any transaction of assets held in custody including, but not limited to, transferring, pledging, selling and lending;
        (l) Any delegation of custodian role to sub-custodian must be approved by the operator and the custodian remains ultimately accountable for the custody and will be liable to the operator and CIU participants in case of any loss of the assets or financial instruments; and
        (m) To reconcile the statements obtained from sub-custodians, brokers and agents, on a regular and timely basis with its own CIU records.
        Added: April 2022

    • Fund Administration

      • CIU-1.5.9

        Fund administration activities include the following:

        (a) Fund accounting (including tax returns) and record keeping services for the CIU;
        (b) Maintain a register of CIU participants unless this role is performed independently by another party;
        (c) Preparation of semi-annual and annual accounts for the CIU;
        (d) Preparation of the Quarterly Statistical Report (Form CIU-QS);
        (e) Calculation of dividends, service providers’ fees, performance fees (if any) and other distributions;
        (f) To ensure that the sale, issue, repurchase, redemption and cancellation of CIU units, their value calculations and income application are carried out in accordance with the requirements of the offering documents and the operator’s mandate;
        (g) Valuation, pricing and calculation of NAV;
        (h) Report to the CBB any non-compliance with CIU investment objectives and other terms of the offering documents and relevant regulations of the CBB in relation to the CIU; and
        (i) Handling of client enquiries on matters such as relevant to calculation of NAV and issue and redemption prices.
        Added: April 2022

      • CIU-1.5.10

        The obligation referred to in Paragraph CIU-1.5.9 (h) requires that the fund administrator brings to the attention of the CBB any irregularities and or violation of the requirements of the CBB or the terms of the offering document that come to its attention during the normal course of undertaking its own functions with regards to the CIU for which administration service are provided. The fund administrator shall undertake its functions with diligence and due care. Examples of such deviations or violations can include, assets not in accordance with the investment policy, any noted breaches in liquidations of assets etc. identified based on data available to the fund administrator.

        Added: April 2022

    • Investment and Risk Management

      • CIU-1.5.11

        The operator must adhere to the investment strategies and risk limits disclosed in the offering documents and agreed with the CIU participants. The operator must implement adequate risk management systems and processes in order to identify, manage and monitor the risks relevant to each CIU.

        Added: April 2022

    • Valuation

      • CIU-1.5.12

        CIU operators must ensure that, for each CIU that they operate, appropriate and consistent procedures are established so that a proper and independent valuation of the CIU assets can be performed. These procedures must be consistent with the constituent and offering documents of the CIU. The operator must ensure:

        (a) Comprehensive, documented policies and procedures, that are aligned to IFRS/AAOIFI or other accepted accounting and valuation standards are established to govern the valuation of assets held or employed by a CIU and for periodic calculation of net asset values (NAV) and reporting and disclosure of the same to CIU participants;
        (b) The policies and procedures clearly identify the methodologies, tools and procedures that will be used for valuing each type of asset held by the CIU;
        (c) The assets held by the CIU are consistently valued according to the policies and procedures;
        (d) The valuation policies and procedures address any current or potential conflicts of interest;
        (e) The policies and procedures in place seek to detect, prevent, and correct pricing errors;
        (f) The pricing errors (i.e. calculation errors) that result in material harm to CIU participants are addressed promptly, and CIU participants fully compensated;
        (g) There are arrangements in place for the periodic review of the valuation policies and procedures to ensure their continued appropriateness and effective implementation; and
        (h) A third-party (e.g. external auditor) is appointed to review the CIU valuation process at least annually.
        Added: April 2022

      • CIU-1.5.13

        The valuation/pricing of listed securities must be obtained from the exchanges, bourses, or platforms on which the assets are listed. The valuation of unlisted securities and for listed securities for which the latest quotation is not representative must be based on the probable realisation value, estimated with international best practices. The valuation of illiquid asset classes, like real estate or private equity must be done by an independent third-party valuation agent or expert in the asset class.

        Added: April 2022

      • CIU-1.5.14

        The frequency of valuations depends on the type of CIU. For open-ended CIUs, such valuations and calculations must be carried out at a frequency which is both appropriate to the nature of underlying assets and its issuance and redemption frequency. For closed-ended CIUs, such valuations and calculations must be carried out in case of an increase or decrease of the capital of the CIU. In all cases, the valuation procedures used must ensure that the assets are valued and the net asset value per unit is calculated at least once a year.

        Added: April 2022

    • Managing Conflicts of Interests

      • CIU-1.5.15

        CIU operators must take reasonable steps to identify, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the CIU participants. In particular, the CIU operators must:

        (a) Segregate, within their own operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest (e.g. using ‘information barriers’ or ‘Chinese walls’);
        (b) Clearly disclose the general nature or sources of conflicts of interest to the CIU participants before undertaking business on their behalf;
        (c) Ensure that arrangements with any connected parties are conducted at commercial terms (arm’s length basis) and that such relationships are disclosed in all documents distributed to CIU participants, except however, that no investments may be made by in a financial instrument issued by a connected party in excess of 20% of the net assets;
        (d) Not lend CIU assets to a relevant person of the CIU, except in a stock lending arrangement with a licensed bank in respect of any securities with aggregate value not exceeding 20% of the net assets of the CIU’s assets, provided that it is disclosed in the offering; and
        (e) Develop appropriate policies and procedures to identify and prevent or manage conflicts of interest internally and with third parties such as the custodian and fund administrator and make the policy available to CIU participants.
        Added: April 2022

      • CIU-1.5.16

        Notwithstanding CIU-1.5.15 (c), the custodian and /or the fund administrator of a Bahrain domiciled CIU must not be participants in the CIU in respect of which they are contractually engaged to offer custody and/or fund administration services as the case may be.

        Added: April 2022

    • Specific Conditions for Retail CIUs

      • CIU-1.5.17

        The assets of a Bahrain domiciled retail CIU must comprise only one or more of the following:

        (a) Securities traded on the licensed exchanges:
        i. Shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
        ii. Bonds or other forms of securitised debt, sukuk including depositary receipts in respect of such securities; and
        iii. Any other securities, including accepted crypto-assets traded actively on recognised exchanges (to be demonstrated to the CBB by the CIU operator) giving the right to acquire or sell any such securities or giving rise to a cash settlement determined by reference to such securities, currencies, interest rates or yields, commodities or other indices or measures.
        (b) Money market instruments listed on a regulated market;
        (c) Sovereign securities such as treasury bonds and sukuk;
        (d) Units of other Bahrain domiciled CIUs or overseas domiciled retail CIUs investing in liquid investments;
        (e) Bank deposits which are repayable on demand or maturing in no more than 12 months;
        (f) Financial derivative instruments, including equivalent cash- settled instruments, listed on a regulated market;
        (g) Over the Counter (OTC) financial derivative provided that
        i. The underlying consists of instruments such as financial indices, interest rates, foreign exchange rates or currencies, in which the retail CIU may invest according to its investment objectives;
        ii. The counterparties to OTC derivative transactions are institutions subject to prudential supervision; and
        iii. The OTC derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time at their fair value at the operator’s initiative.
        (h) Real estate in the case of Real Estate Investments Trusts (REITS) provided they are established under the Trust Law and meet the following conditions:
        i. Unless otherwise agreed with the CBB, the REIT must hold a minimum of 2 real estate properties, comprising of at least 80% of the REIT’s NAV;
        ii. A maximum of 20% of the REIT’s NAV may be invested in the development of existing owned property;
        iii. A maximum of 20% of the REIT’s NAV may be invested in other REITs, subject to 10% investment per REIT;
        iv. Other assets of the REIT must be held in cash and cash equivalents;
        v. Invest in undeveloped land and mortgages is not permitted; and
        vi. leverage is limited to a maximum of 50% of its NAV for investment purposes.
        Added: April 2022

      • CIU-1.5.18

        The principal focus of retail CIUs is portfolio diversification and liquidity and as such the investments of a Bahrain domiciled retail CIUs must adhere to prudent limits and standards governing investment portfolio composition, liquidity and risk management. Such limits and standards must be disclosed in the offering documents. The risk management measures must include:

        (a) investment policy on avoidance of excessive risk, for example significant exposure to derivatives, indices or other complex financial instruments;
        (b) avoidance of excessive leverage and single exposure concentrations including for cash with banks; and
        (c) maintenance of adequate cash and liquid funds to meet redemption and distribution needs.
        Added: April 2022

      • CIU-1.5.19

        Bahrain domiciled Exchange Traded Funds (ETFs) are subject to requirements applicable to Bahrain domiciled retail CIUs.

        Added: October 2022