CSSF FAQ | Swing Pricing Mechanism

Evelyn MaherPartner, Bonn Steichen & Partners

BACKGROUND AND DEFINITION

On 30 July 2019, the CSSF published a new FAQ Document on swing pricing mechanisms which is applicable to all regulated funds (UCITS, UCIs part II and SIFs) (“UCI”) making use of it in Luxembourg.

Swing pricing is a mechanism designed to protect long-term shareholders from dilution caused by trading costs generated by the subscription and redemption activity on the fund by other shareholders’ activity.

1. ARTICLES OF INCORPORATION AND MANAGEMENT REGULATIONS

The CSSF clarified that the articles of incorporation or the management regulations of a UCI should allow adjustments to the net asset value (“NAV“) in order to counter the dilution effects of the capital activity.

2. MANDATORY INFORMATION IN THE PROSPECTUS

Any UCI using swing pricing should at least mention in their prospectus the following information:

  • Details on the NAV adjustment mechanism in case of net subscriptions or redemptions;
  • The use of any specific subscription/redemption threshold before the application of the swing pricing mechanism;
  • The impacts and potential benefits to the investor due to the use of this mechanism;
  • The maximum swing factor applicable (as a percentage of the NAV or in monetary value);
  • An indication of the components underlying the swing factor;
  • An indication of the decision process;
  • The sub-funds of a UCI in the scope of the swing pricing mechanism (this information may be shared as well through a reference to a website).

The CSSF also recommends disclosing in the prospectus that any performance fee will be charged on the basis of the unswung NAV.

3. DISCLOSURE IN ANNUAL AND SEMI-ANNUAL REPORTS

Annual and semi-annual reports should provide for a description of the swing pricing mechanism, including at least details on the NAV adjustment mechanism in case of net subscriptions or redemptions, specific subscription and redemption threshold before the swing pricing mechanism becomes applicable; and the maximum swing factor applicable.

In addition, investors should be provided with a list of sub-funds that have applied the mechanism.

4. APPLICATION OF CSSF CIRCULAR 02/77 TO AN ADMINISTRATIVE ERROR

If an administrative error (by using the swing pricing mechanism) leads to a material NAV calculation error, the procedures provided for in the CSSF Circular 02/77 should be applicable.

However, the CSSF considers that if the impact of the swing pricing mechanism error is below the materiality threshold as determined in accordance with CSSF Circular 02/77, the UCI should still be compensated when it was not protected from the level of dilution it should have been.

5. ORGANISATIONAL REQUIREMENTS

In accordance with the requirements of the laws governing UCIs, to have sound administrative and accounting procedures as well as adequate internal control mechanisms, investment fund managers should have robust policies and procedures governing the application of any swing pricing mechanism. A detailed swing pricing mechanism policy should be approved by the board of the investment fund managers and the board of the fund.