General description of the SFTs and total return swaps used by the collective investment undertaking and the rationale for their use.
The Sempera Credit Opportunities Fund and The Sempera Fund(the "Sub-Funds") may enter into total return swaps ("TRS") on loans, bonds or market indices in order to achieve long or short exposures on underlying in a way in which it is more efficient and flexible than implementing physically in the portfolio.
In the case where the TRS format is used to access exposure to syndicated loans, the Sub-Funds do not need to invest the full market value of the loan. The TRS enables the Sub-Funds to access this exposure indirectly from a wider range of loan market counterparties. This gives the Sub-Funds the opportunity to both source exposure to a wider range of assets and achieve better pricing.
The Sub-Funds may from time to time enter into repurchase agreements ("repos") and reverse-repurchase agreements ("reverse-repos") with an institutional market counterparty through a GMRA (Global Master Repurchase Agreement). In the case of repos, it sells and agrees to repurchase back for a specific price and at a determined date in the future, certain bonds held by the Sub-Funds. In the case of reverse-repos it buys and agrees to sell back for a specific price and at a determined date in the future, in order to cover bonds sold short by the Sub-Funds. These are transacted on a delivery vs payment ("DVP") basis. The price and date in the future are set using an agreed rate of interest at which the Sub-Funds 'borrow' cash (in the case of repos) or 'lends' cash (reverse-repos) in exchange for the bonds. The bonds are delivered to the counterparty on a title transfer basis - which is standard under market repurchase agreements.
Repos can be advantageous for the Sub-Funds for two reasons: 1) there can be demand from certain market participants to 'borrow' certain bonds, in such cases the bonds can be 'lent' to the 'borrower' in exchange for cash at an advantageous interest rate. It may therefore be attractive for the Sub-Funds to 'lend' securities through repurchase agreements in such a situation, enabling the Sub-Funds to generate an additional profit. 2) It may be more efficient to 'lend' bonds ('borrow' cash) in repos than to borrow cash on an unsecured basis. This could apply to both cash management activities or borrowing in order to achieve leverage as permitted by the Sub-Funds' Offering Document.
Reverse-repos are used to 'borrow' securities the Sub-Funds have sold short in order that the Sub-Funds can deliver those securities to the buyer.
Overall data to be reported for each type of SFTs and total return swaps
The TRS will typically be executed under an ISDA Agreement. In the case where the underlying are loans this will also typically involve a loan TRS master agreement. An individual TRS can cover multiple underlying assets. The NAV of the Sub-Funds will record the aggregate mark-to-market of each TRS. Each TRS is reported to an ESMA- registered trade repository in full compliance with EMIR reporting rules.
The NAV of the Sub-Funds will record the size and the underlying bond used in each repo. It will also record the accrued value of each repo.
Types of assets that can be subject to them
- Total return swaps: Loans, bonds and market indices
- Repos: Bonds held by the Sub-Funds
- Reverse-repos: Bonds sold short by the Sub-Funds
Maximum proportion of AUM that can be subject to them
- Total return swaps: 100% of each Sub-Fund gross exposure could be achieved through total return swaps
- Repo/reverse-repos: 50% of each Sub-Fund assets could be subject to repo agreements
Expected proportion of AUM that will be subject to each of them
- It is envisaged that the portion of gross exposure to instruments using total return swaps will be in the order of 75% but could be materially higher or lower. It is envisaged that the proportion of each Sub-Fund’s assets constituted by total return swaps’ valuation within the NAV of each Sub-Fund will typically be less than 10% of each Sub-Fund’s assets. It is envisaged that the portion of each Sub-Fund’s assets subject to repo and reverse-repo agreements will typically be less than 10% but could be materially higher from time-to-time.
Criteria used to select counterparties (including legal status, country of origin, minimum credit rating).
The Sub-Funds only select market leading top tier institutional counterparties for total return swaps, repos and reverse-repos with high quality credit ratings. These institutions must be regulated banks established in G7 or the EU countries. All counterparties must be approved by KMG SICAV SIF's board of directors, Sempera Partners LLPs' Board and Sempera Partners LLPs' Investment Committee on a case by case basis.
Acceptable collateral: description of acceptable collateral with regard to asset types, issuer, maturity, liquidity as well as the collateral diversification and correlation policies.
The TRS will be collateralised by cash governed by an ISDA Master Agreement and CSA. The value of the TRS is determined based on the underlying assets' mark to market and the accrued value of the TRS's funding leg.
Repos and reverse-repos are transacted on a DVP basis in accordance with standard market practice.
Collateral valuation: description of the collateral valuation methodology used and its rationale, and whether daily mark-to-market and daily variation margins are used.
All collateral is cash in either EUR, USD or GBP, valued daily and subject to daily variation margin. The value of cash is readily observable and transparent.
All cash (typically in EUR, USD or GBP), will be valued daily and subject to daily variation margin. The value of cash is readily observable and transparent. The cash is margined based on the comparative daily market value of the bonds underlying the repo/reverse-repo agreement. The GMRA counterparty determines the market value of the bonds and applies a haircut percentage which is agreed with the investment manager. The margin will typically be in the same currency as the bond.
Risk management: description of the risks linked to SFTs and total return swaps as well as risks linked to collateral management, such as operational, liquidity, counterparty, custody and legal risks and, where applicable, the risks arising from its reuse.
Investment and derivative risks are disclosed in the Sub-Funds’ Appendices and main part of the Offering Document of KMG SICAV-SIF. The principle purpose of the TRS is to access the risk of the underlying instruments as an alternative to investing in them directly.
Repo/reverse-repos give rise to counterparty and settlement risk which are reduced through the use of market standard GMRA agreements, daily margin and careful selection of counterparties.
Specification of how assets subject to SFTs and total return swaps and collateral received are safe-kept (e.g. with fund custodian).
Collateral is limited to cash and is governed by an ISDA Agreement.
The Sub-Funds enter into repo/reverse-repo agreements where the assets and cash are subject to title transfer. Assets or cash received by the Sub-Funds are held by the Sub-Funds' depositary.
Specification of any restrictions (regulatory or self-imposed) on reuse of collateral.
Collateral is limited to cash and is governed by a market standard ISDA Master Agreement and CSA. This ISDA agreement provides an extensive legal framework under which the title to the cash collateral is transferred to the recipient whereby there are no restrictions for reuse. The bonds and cash in a repo/reverse-repo are delivered on a title transfer basis and can be re-used by the counterparties as is the case in a standard market GMRA.
Policy on sharing of return generated by SFTs and total return swaps: description of the proportions of the revenue generated by SFTs and total return swaps that is returned to the collective investment undertaking, and of the costs and fees assigned to the manager or third parties (e.g. the agent lender). The disclosure to investors shall also indicate if these are related parties to the manager
All returns generated by SFTs and total return swaps are retained by each Sub-Fund. There is no separate revenue generated outside the Sub-Funds.
