Sovereign Ordinance No. 10.281 of 20th December 2023 amending Sovereign Ordinance No. 1.285 of 10th September 2007 implementing Law No. 1.339 of 7th September 2007 relating to unit trusts and investment funds
Summary
The changes introduced by Sovereign Ordinance relate to the accounting and financial rules of funds.
First for all, the Sovereign Ordinance introduced a mechanism for the adjustment of the net asset value, known as «swing pricing».
Swing pricing is a mechanism by which the cost of adjusting subscription and redemption flows to be included in the net asset value of the fund.
Secondly, the Sovereign Ordinance has redefined concepts of net income and result.
Real estate funds, which are subject to specific accounting and financial regulations, are not covered by the latter provisions.
These regulatory changes came into force at the same time as the FSB (Financial Stability Board) and OICV-IOSCO (International Organisation of Securities Commissions) published their final reports on liquidity management for open-end funds. These reports deal respectively with the implementation and harmonised use of anti-dilution liquidity management tools and the use and presentation of anti-dilution tools in prospectuses.
What does this mean in practical terms?
I. Swing Pricing
Sovereign Ordinance introduces a net asset value adjustment mechanism into the regulations governing unit trusts and investment funds. This mechanism makes it possible to allocate to the net asset value of the fund, which serves as a reference for the settlement of net subscription and redemption flows, the costs of portfolio rebalancing caused by these flows.
This mechanism protects existing unitholders so that they do not bear the transaction costs that would result from the movements of other investors.
In practice, management companies that apply swing pricing will have to draw up adetailed procedurewhich will examine in particularthe rules and methodology used, the controls applied and potential conflicts of interest.
Management companies will also have to inform LPs of the implementation of this mechanism by all available means.
II. New accounting definitions
Sovereign Ordinance replaces the term "net result" with "net income". This terminological clarification is not insignificant as it has accounting consequences.
The net income of a mutual fund is now defined as the total net income for the financial year, less or plus net realised capital gains and losses and changes in net unrealised capital gains and losses, less interim payments made in respect of the financial year.
The income statement has also been restructured to present the following items:
- net income, comprising net financial income, other income and expenses and accruals and deferred income;
- net realised capital gains and losses and related accruals and deferrals;
- changes in net unrealised gains and losses and related accruals; and
- interim payments made in respect of the financial year.
III. Real estate funds
These amendments do not apply to property funds where the net income of a property fund consists of income from property assets in the portfolio net of related costs and expenses, income and fees from the management of other assets net of related costs and expenses, and other income of the fund net of related costs and expenses.
The income statement shows income from real estate activities, income from financial transactions, other income and expenses less management fees, income from the disposal of assets (net realised capital gains and losses) and the balance of provisions for the year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.