On 30 July 2019, the CSSF issued an FAQ concerning the swing pricing mechanism.
In particular, it provides for specific disclosures in the UCIs' constitutional documents (articles of association or management regulations) and prospectuses. The constitutional documents should permit adjustments to the net asset value per share (NAV) in order to counter dilution effects. The prospectuses, however, should contain a higher level of detail and the FAQ requires disclosure of the following main elements in the prospectus:
- (i) a detailed description of the swing pricing mechanism used;
- (ii) the reasons for applying the mechanism;
- (iii) the impacts of using the mechanism;
- (iv) the maximum swing factors;
- (v) an indication of the components underlying the swing factor;
- (vi) an indication of the decision process and the decision makers involved;
- (vii) the sub-funds of the umbrella UCIs subject to the mechanism; and
- (viii) any performance fee, if applicable, that will be charged on the basis of the unswung NAV.
Should the prospectus and/or articles of association/management regulations of a UCI not yet comply with these principles, the relevant changes should be included in the next update.
The annual and semi-annual reports of a UCI also need to provide, either directly in the reports or by referencing a website, a description of the swing pricing mechanism, the maximum swing factor applicable as well as the list of sub-funds of the umbrella UCI that have applied the mechanism during the reference period.
In addition, the appointed UCITS management companies ("UCITS ManCos") or authorised alternative investment fund managers ("AIFMs") or the self-managed alternative investment fund (AIFs) or UCITS are required under the UCI Law3 and the AIFM Law4 to have, amongst other things, sound administrative and accounting procedures as well as adequate internal control mechanisms.
On that basis, the CSSF considers that when they are applying swing pricing, UCITS ManCos and AIFMs should provide robust policies, processes and procedures governing the application of that mechanism and related operational risks. In that context, they should establish a detailed swing pricing mechanism policy approved by their board of directors, and, if applicable, by the board of directors of the UCIs, as well as specific operational procedures governing the day-to-day application of the mechanism. The policy and related operational procedures should cover certain elements listed in Question 5 of the FAQ such as the governance process, the oversight of the delegates (if applicable), methodologies used for the determination and periodic review of swing factors and thresholds, maximum swing factor, the review process, situations of non-application of the mechanism, the treatment of corporate actions of the UCI or its sub-fund, the ongoing monitoring and the periodic review of the adequacy and effectiveness of the mechanism.
The CSSF expects the policies, processes and procedures to be in place before the swing pricing is used.
The FAQ also clarifies that CSSF Circular 02/77 (on the protection of investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to UCIs) applies in event of administrative error in relation to the application of the swing pricing mechanism.
UCITS ManCos and authorised AIFMs should therefore have in place adequate policies, procedures and processes as requested by the new FAQ as soon as practicable.
An assessment should also be performed at the level of the fund in order to determine whether the documentation of the funds complies with the new FAQ, or not. Adequate disclosures will have to be included in the annual and semi-annual reports of the fund. Where changes to the fund's prospectus, articles of association or management regulations are required, they should be reflected in the next update of these fund documents.
1. "Part II UCIs" refers to Undertakings for collective investment subject to Part II of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment, as amended.
2. "SIFs" refers to Specialised Investment Funds subject to the Luxembourg Law of 13 February 2007 relating to specialised investment funds, as amended.
3. "UCI Law" refers to the Law of 17 December 2010 on undertakings for collective investment, as amended.
4. "AIFM Law" refers to the Law of 12 July 2013 on Alternative Investment Fund Managers, as amended.
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.