On 30 July 2019, the Commission de Surveillance du Secteur Financier (CSSF) published a FAQ on the topic of swing pricing mechanism.
The principles outlined below apply to all regulated funds in Luxembourg (UCITS, UCI part II, SIF) which apply the swing pricing mechanism (hereafter "UCI").
Articles of incorporation, management regulations
The CSSF confirmed that the articles of incorporation or the management regulations of a UCI should permit adjustments to the net asset value in order to counter the dilution effects of capital activity.
Changes that would be required in the prospectus should be included at the next update.
In regards to the prospectus of a UCI, the following items in relation to the application of the swing pricing mechanism should be included as a minimum:
- details on the NAV adjustment mechanism and the threshold for the application of the swing pricing mechanism;
- the reasons and benefits for investors for applying the swing pricing mechanism;
- the impacts of using the swing pricing mechanism, especially the fact that the mechanism is applied on the capital activity and does not address individual transactions;
- the maximum swing factor applicable (as a percentage of the NAV or in monetary value);
- the components underlying the swing factor, e.g. the bid/ask spread, the transaction costs and taxes etc...
- the decision process to apply the swing pricing mechanism ;
- the sub-funds of a UCI in scope of the swing pricing mechanism
Changes that would be required in the articles of association or management regulations should be included at the next update.
Disclosures in annual and semi-annual financial statements
The CSSF highlights that the annual and semi-annual financial statements should provide a description of the swing pricing mechanism and more specifically details on the NAV adjustment mechanism, and the threshold for the application of the swing pricing mechanism and information on the maximum swing factor applicable ( as a percentage of the NAV or monetary value).
A list of sub-funds that have applied the swing pricing should also be provided to the investors either in the financial statements or via a website.
Application of Circular 02/77
The CSSF also confirmed that CSSF Circular 02/77 applies to an administrative error in relation to the application of the swing pricing mechanism and provides an illustrative example of the application.
Swing pricing procedure
The CSSF considers that Investment Fund Managers ("IFM"), should have processes and procedures in place governing the application of the swing pricing and the related operational risks. They should establish a detailed swing pricing policy that will be approved by the board of the IFM and the Board of the fund and operational procedures to manage the day-to-day application. The FAQ contains further details on the expected content of the policy.-
The FAQ can be found under the following link.
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.