Learn the basics about the tool intended to protect shareholders from account trading and market impact costs.
Swing pricing, which has been applied in Luxembourg for the past 15 to 20 years, has proven to be an efficient mechanism to protect existing shareholders from dilution associated with shareholder purchases and redemptions as well as an additional tool to help manage liquidity risks. In the United States, swing pricing is just now gaining traction, especially with new rules finalized and work underway to protect money market investors, the Securities and Exchange Commission has now shifted its focus to safeguards for shareholders of open-end mutual funds and certain exchange traded funds (ETFs). The SEC has proposed new rules and amendments to rules which seek to protect fund investors during periods of large investor withdrawals.
Join the Association of the Luxembourg Fund Industry (ALFI) and NICSA for this jointly produced and presented webinar. Hear perspectives from European and American experts on swing pricing.
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Moderator:
Rheeta Wise
President, MFS Service Center, Inc.
Panelists:
Elisa O’Keefe
Vice President, Fund Administration, State Street Global Services
Geoff Radcliffe
Managing Director of BlackRock (Luxembourg) S.A. and ALFI Board Member
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SEC Proposes New Liquidity Risk Management
Regulation
• The Proposal would:(1)
– Require funds to establish liquidity risk management programs under new Rule 22e-4;
– Permit, but not require, funds (except for money market funds, UITs and ETFs) to use “swing
pricing” in pricing their shares, under proposed amendments to Rule 22c-1; and
– Require funds to provide additional disclosures about redemptions, swing pricing (if
applicable), and liquidity on Form N-1A, proposed Form N-PORT, and proposed Form NCEN.
• The SEC is proposing to allow Funds to voluntarily employ swing pricing as an anti-dilution tool.
• The guidance set forth around the usage of a swing price closely aligns with the framework that is
used in the Luxembourg market.
• If a Fund so chooses to use a swing price, the swing factor and level of subscriptions and
redemptions that would trigger the application of a swing factor to the NAV would need to be
documented in a board approved policy and reviewed at least annually by the Fund’s board.
On September 22, 2015 the SEC proposed new regulations specific to
liquidity risk management.
(1) Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (the “Proposal” or the “Release”), available at
www.sec.gov/rules/proposed/2015/33-9922.pdf.
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Definition of Swing Pricing
The practice being proposed in the US borrows from the framework
outlined by the Association of the Luxembourg Fund Industry (“ALFI”).(2)
Swing Pricing
Is an anti-dilution technique
designed to reduce the impact of
subscriptions and redemptions on
“non-trading”/ existing investors in
a fund.
Is the process of reflecting in a
fund’s NAV the costs associated
with shareholders’ trading activity
in order to pass those costs on to
the purchasing and redeeming
shareholders.
Involves a step in the valuation
process, whereby a fund measures
daily net purchase or redemption
activity and adjusts (or “swings”)
the NAV upward or downward if a
pre-determined threshold is met.
* If fund is experiencing net
inflows, the NAV is adjusted
upwards.
* If the fund is experiencing net
outflows, the NAV is adjusted
downwards.
(2) See “Swing Pricing,” Association of the Luxembourg Fund Industry (2015), available at
http://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL_0.pdf
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Methodology
According to ALFI, important considerations in establishing a partial swing
pricing methodology include:(3)
1. Establishing a pre-determined net capital activity threshold (the “swing threshold”). The fund will
adjust its NAV only when it exceeds the threshold.
• Determining how high to set the swing threshold is the responsibility of the Fund’s
Board.
• Slide 6 will provide further details around the swing threshold and considerations by
the SEC.
2. Determining the adjustment factor (the “swing factor”): an amount by which the NAV is
adjusted, normally expressed as a percentage of the NAV.
• Traditionally in the European market, the Fund’s Board and/or their designated
“swing pricing committee” calculates and monitors the swing factor.
• Slide 7 will provide further details around the swing factor and considerations for
calculating it.
(3) See “Swing Pricing,” Association of the Luxembourg Fund Industry (2015), available at
http://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL_0.pdf
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Swing Threshold
The pre-determined amount of net purchases or redemptions of a fund,
which triggers swing pricing, expressed as a percentage of the fund’s NAV.
Factors to be
considered
include:(4)
The size, frequency, and volatility of historical net purchases or net
redemptions of fund shares during normal and stressed periods
The fund’s investment strategy and the liquidity of the fund’s portfolio
assets
The fund’s holdings of cash and cash equivalents, as well as borrowing
arrangements and other funding sources
The costs associated with transactions in the markets in which the fund
invests
The proposed SEC amendment does not stipulate a minimum threshold amount.
(4) Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (the “Proposal” or the “Release”), available at
www.sec.gov/rules/proposed/2015/33-9922.pdf.
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Swing Factor
The amount, expressed as a percentage of the fund’s NAV, by which the
fund adjusts its NAV per share when net purchases or redemptions exceed
the swing threshold.
• The “swing factor” would be the amount, expressed as factors should include:(5)
– any near-term costs expected to be incurred by the fund as a result of net purchases or
net redemptions that occur on the day the swing factor is used (including any market
impact costs, spread costs, and transaction fees and charges arising from asset
purchases or asset sales); and
– the value of assets purchased or sold by the fund as a result of net purchases or net
redemptions that occur on the day the swing factor is used, if that information would
not be reflected in the current NAV of the fund computed that day.
• A fund could impose an upper limit on the swing factor, effectively capping the amount by
which the fund could adjust its NAV on a given day.(5)
• Determinations of the swing factor must be reasonably segregated from the fund’s portfolio
management function.(5)
(5) Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (the “Proposal” or the “Release”), available at
www.sec.gov/rules/proposed/2015/33-9922.pdf.
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Governance
Approval and Administration
• The fund’s board, including a majority of the independent directors, would be required to
approve the fund’s swing pricing policies and procedures, along with any material changes to
them.(6)
• The fund’s board also would designate the fund’s investment adviser or officers to be
responsible for administering the swing pricing policies and procedures;(6) commonly referred
to as the swing pricing committee.
– 70% of asset managers in Europe operate a single committee that is responsible for the
governance of swing pricing.(7)
• Swing Factor Review:
– The SEC has not provided any guidance on the frequency of review of the swing factor.
However, in the recent ALFI 2015 survey, almost half (47%) of asset managers continue to
review swing factors on a quarterly basis; with 20% who review factors only monthly .(7)
• Swing Threshold Review:
– The proposed amendments would require funds board to review at least annually their
swing thresholds.(6)
(6) Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (the “Proposal” or the “Release”), available at
www.sec.gov/rules/proposed/2015/33-9922.pdf
(7) See “Swing Pricing,” Association of the Luxembourg Fund Industry (2015), available at
http://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL_0.pdf
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Additional Considerations to Implement Swing Pricing
Transfer Agents/ Intermediaries
• The Fund needs to confirm if their Transfer Agent and/or Intermediaries will be able to
provide net capital activity on a same day / T+0 basis.
• The SEC recognizes that funds would need net fund flow information prior to their deadlines
for striking their NAVs, so that they could make any necessary NAV adjustments.(8)
• Under the proposed amendments, the person determining whether the fund’s level of net
purchases or net redemptions has exceeded the fund’s swing threshold may make such
determination on the basis of “information obtained after reasonable inquiry”.(8)
• To this end, the SEC suggests that “a fund may wish to arrange for interim feeds of flows from
its transfer agent or distributor in order to reasonably estimate its daily net flows for swing
pricing purposes.(8)
(8) Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (the “Proposal” or the “Release”), available at
www.sec.gov/rules/proposed/2015/33-9922.pdf.
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Reporting and Recordkeeping
The proposed SEC Liquidity Rules would require certain disclosures of swing pricing
in fund documentation, as follows:
Prospectus Disclosure • Include a statement confirming the fund has the ability to swing its price.
• Provide a brief disclosure of the swing price mechanism; however they are not required
to disclose the swing threshold or swing factors.
• Identify a list of funds that are included and/or excluded from swing pricing.
Financial Reporting • To the extent the NAV is swung on a semi-annual or year end, the financial statements
are to reflect the swung NAV with a high level disclosure in the Notes to the Financial
Statements as to what swing pricing is and the impact.
Performance Reporting • Calculations of NAV-based performance fees, and financial statements, the SEC indicates
that funds should use NAVs as adjusted pursuant to their swing pricing policies and
procedures.(9)
Recordkeeping • The SEC is proposing amendments to Rule 31a-2 under the Investment Company Act of
1940 to require a fund that chooses to use swing pricing to create and maintain a record
of support for each computation of an adjustment to the NAV of the fund’s shares based
on the fund’s swing pricing policies and procedures.(9)
(9) Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (the “Proposal” or the “Release”), available at
www.sec.gov/rules/proposed/2015/33-9922.pdf.
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Countries where Price Swinging
is used in mutual funds
Countries
• Australia
• Cayman
• Finland
• France (2014)
• Hong Kong
• Ireland
• Jersey, Channel Islands
• Luxembourg (c.1996)
• Norway (new)
• Switzerland (2007)
• UK (2002)
Luxembourg
• Swing Pricing Guidelines 2015
• Swing Pricing Survey 2015
ALFI.LU
http://www.alfi.lu/sites/alfi.lu/files
/Swing-Pricing-guidelines-final.pdf
http://www.alfi.lu/sites/alfi.lu/files
/ALFI-Swing-Pricing-Survey-2015-
FINAL_0.pdf
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ALFI Swing Pricing Survey 2015
asset manager breakdown
• Strong bias by asset managers of US; UK; Swiss, and French origin to apply swing pricing.
• Managers of Belgian, German and Italian origin tend not to apply swing pricing.
• Of those asset managers that did not apply swing pricing, seven confirmed they were currently considering
implementing it, while four stated that they had included the permission within the prospectus, even though
they were not actively operating it.
• 29/30 managers use Partial Swinging. 1/30 uses Full Swinging.
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Dilution through Timing Dilution through Value
• The security price in the nav will not be the
same price achieved when portfolio
management buy or sell the underlying
securities
• bid/ offer spread, market impact, taxes,
transactions charges, commissions
• Can portfolio management invest into the
markets and achieve the same security
values that are given to a subscriber/
redeemer ?
• Are net cash flows known prior to the
valuation point ?
• Are the underlying security markets open?
liquid?
Dilution occurs where cash received/ paid does not equal the cost of
investment/ disinvestment
Dilution impacts the existing / long term investors in a fund and fund
performance
Price Swinging looks to protect against dilution through Value
Swing Pricing is all about Protecting Fund Shareholders against Dilution
ALFI Swing Pricing Guidelines 2015
Dilution
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Estimated Net Cash
Flows
from Capital Stock
Activity required prior
to or within an hour
of the fund valuation
point
Net Subscriptions
Swing fund to offer
Net Redemptions
Swing fund to bid
Full Swinging
Swing every day there
is a net flow
Partial Swinging
Swing on days when
net flows exceed a
threshold
Swing Factor
NAV Adjusted by a
pre-approved Swing
Factor
Only one Official
NAV
This adjusted NAV is
the official and only
NAV issued and which
is also used for subs/
reds.
How does it work?
Transfer
Agent
Partial swinging is the most common form of
swinging in operation
Fund
Accountant
Fund
Accountant
Fund
Accountant
Fund
Accountant &
Transfer
Agent
Ant-dilution protection
included in the NAV
Outsourced daily activities
Swing is at fund
level
Distributors
Governance
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• The impact on fund performance is directly linked to the number of swings and the size of
the swing factor.
• If a fund has a quiet period with limited subscription/ redemption flows, or inflows and
outflows that largely match, and/or where the swing factor is relatively low then application
of the swing process may not be much of an impact on fund performance.
• Conversely if a fund has significant subscriptions/ redemption flows over a period and has a
relatively high swing factor then there will be a noticeable impact on fund performance.
• A BlackRock study in 2011 over a 12 month period quantified the following performance
enhancements. Subsequent studies support the findings.
Impact on Fund Performance
Number of
swings
during the
period
Base ccy
price at
beginning
of period
Base ccy
price 30
June 2011
Class Base
performance
Performance
without
swinging
Performance
benefit
BGF Asia Tiger Bond Fund 72 27.25 29.19 7.11% 4.59% 2.52%
BGF Global High Yield Bond Fund 60 14.59 16.79 14.24% 12.11% 2.13%
BGF US Dollar High Yield Bond Fund 42 19.69 22.64 14.94% 14.25% 0.69%
BGF World Technology Fund 12 10.39 13.33 28.34% 27.89% 0.45%
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ALFI Swing Pricing Guidelines 2015
Key Areas
Determining
the Swing
Threshold
Determining
the Swing
Factor
Governance Transparency
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