CSSF FAQ Concerning The Swing Pricing Mechanism

On 30 July 2019, the CSSF issued an FAQ concerning the swing pricing mechanism.

It outlines the principles applicable to all Luxembourg regulated undertakings for collective investment ("UCIs") (UCITS, Part II UCIs1 and SIFs2) applying 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...