On 20 March 2020 the CSSF published an updated version of its frequently asked questions on swing pricing mechanism (the “Updated FAQs”). The original FAQs first released on 30 July 2019 included set of rules on disclosure in constitutional documents, prospectus and organisational arrangements applicable to all regulated funds UCITS, UCIs part II and SIFs (the “UCIs”) when any form of swing pricing mechanism is used (please refer to BSP newsletter for more information).
The Updated FAQs have been published in order to answer questions from various stakeholders in the context of financial market developments caused by the COVID-19 outbreak. The CSSF added three additional questions relating to the circumstances in which the swing factor applied on the NAV can be increased:
1. INCREASE OF THE SWING FACTOR UP TO THE MAXIMUM LEVEL FORESEEN IN THE PROSPECTUS.
According to the CSSF, the swing to factor can be increased up to the maximum level disclosed in the UCI’s prospectus without prior notification to the CSSF.
2. INCREASE OF THE SWING FACTOR BEYOND THE MAXIMUM LEVEL
In a case, where the UCI’s prospectus provides for the circumstances in which the swing factor can be increased beyond the maximum level which is disclosed, the board of managers or where applicable, the management company can decide to do so, provided that the CSSF (officer in charge of the UCI's file), as well as current and prospective shareholders are notified.
Due to the current market situation related to the COVID-19 outbreak, those UCIs whose prospectuses do not foresee such provisions are allowed to temporarily extend their swing factors beyond disclosed limits. This decision, taken by the board of directors, or where applicable the management company, must be notified to both shareholders and the CSSF. Moreover, an update of the UCI prospectus to formally allow the increase of the swing factor beyond the maximum disclosed level must be made as soon as possible.
3. LEVEL OF SWING FACTOR INCREASE
In case of the increase of the swing factor disclosed in the prospectus, the CSSF reserves the right to request the UCI to justify on an ex-post basis the level of the swing factor applied and to provide documentary evidence that such factor was an accurate representation of prevailing market conditions.
The maximum swing factor can be increased on a temporary basis provided that: (i) the increase is the result of a robust internal governance process and is based on the methodology allowing for an accurate NAV which reflects prevailing market conditions and (ii) an appropriate communication is made to investors through the usual communication channels.