In the light of the exceptional circumstances of the Covid-19 pandemic, on April 7 the Financial Sector Supervisory Authority (CSSF) issued an updated version of its frequently asked questions document relating to the use of the swing pricing mechanism by Luxembourg-domiciled investment funds that are UCITS, Part II collective investment undertakings and SIFs.
The swing pricing mechanism is designed to protect long-term shareholders from dilution of value resulting from trading costs engendered by subscription and redemption activity by other investors in the fund.
The CSSF has confirmed that investment fund managers may increase the swing factor to be applied to the fund's net asset value up to the maximum level provided for in its prospectus without prior notification to the CSSF.
In addition, a swing factor may be applied beyond the maximum stipulated in the fund's prospectus in various situations:
Where the fund's prospectus formally authorises the management body to exceed the maximum level subject to certain predefined conditions, the manager can decide to increase the swing factor in accordance with the provisions and conditions set out in the prospectus.
If the prospectus does not offer this possibility to the manager, the CSSF is permitting managers on a temporary basis, given the current exceptional market circumstances, to increase the swing factor beyond the maximum stipulated in the prospectus. In this event, an update of the prospectus formally to authorise the manager to exceed the maximum swing factor under certain conditions must be carried out as soon as possible.
In both cases, the fund's board of directors must communicate its decision to current as well as new investors through the customary communication channels stipulated by the prospectus. In the second case, communication to investors must take place before applying an increase in the swing factor beyond the maximum authorised by the prospectus, and the CSSF must receive a copy of the communication at the same time.
In each case, the decision must be duly justified and take into account the best interest of investors, and must be communicated to current as well as new investors through the customary communication channels set out in the prospectus, for example through the ordinary notice to investors, the fund's internet site or any other means indicated in the prospectus.
If the fund prospectus does not offer the possibility of exceeding the maximum swing factor stipulated by the fund prospectus, not only must the decision to increase it be communicated to investors in advance, but investment funds must provide the CSSF with a detailed notification including an explanation of the reasons for the decision.
Increasing the maximum swing factor on a temporary basis beyond the maximum level laid down in the prospectus is conditional on the following conditions being fulfilled:
- The revised swing factors are the result of a robust internal governance process and based on a robust methodology, including analysis based on market or transaction data, that provides an accurate net asset value representative of prevailing market conditions.
- Appropriate communication must be made to investors through the customary communication channels.
Swing factors usually range between 1% and 3% depending on the type of assets held by the fund. In the even of implementation of a swing factor adjustment going beyond the maximum authorised by the prospectus as it stands, the CSSF may ask the fund to justify on a retrospective basis the level of swing factor applied and to provide documentary evidence that the factor at that time reflected the prevailing market conditions.
For additional information, the complete frequently-asked questions document is published by the CSSF at: https://www.cssf.lu/fileadmin/files/Metier_OPC/FAQ/FAQ_Swing_Pricing_Mechanism_070420.pdf.
We will continue to keep you informed of any further CSSF regulatory updates that may impact your fund.
For further information, please contact:
Chevalier & Sciales
Office: + 352 26 25 90 30
Fax: +352 26 25 83 88
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.