Information about new liquidity management tools for investment funds
Liquidity management tools
As a result of an amendment to the German Investment Code (Kapitalanlagegesetzbuch, KAGB), capital management companies have the option of using new tools to manage the liquidity of investment funds.
In particularly volatile stock market phases, the use of these tools is intended to better protect investors and reduce the systemic risks of the capital market. Investment funds are thus able to respond in a targeted manner to increased issuance or redemption requests or special market conditions.
In future, capital management companies will be able to decide whether to apply redemption periods, redemption restrictions or "swing pricing" to safeguard liquidity. New funds as well as existing funds can use these instruments.
Specifically, the instruments are as follows:
a) Redemption period
The investment conditions of a fund may provide that units may only be redeemed after the expiry of a redemption period, whereby the declaration of redemption is irrevocable. This redemption period may not exceed one month. In the case of special AIFs (alternative investment funds, e.g. real estate funds), a longer redemption period may be provided for.
As a result, investors must take into account that they will not receive the equivalent value immediately if they return their fund units. In addition, investors bear the risk of fluctuations in value, i.e. the return may be at a unit value that is significantly lower than at the time when the investor submitted his redemption declaration. This is because the value of the fund units at the time at which the redemption actually takes place is decisive for the assessment of the unit value.
b) Redemption restriction
The investment conditions of a fund may provide that the capital management company may restrict the redemption of units if the investors' redemption requests exceed a certain threshold. Such a restriction on redemption may apply for a maximum of 15 working days. The redemption of units may be restricted if the assets of the Fund can no longer be liquidated appropriately in the interest of all investors upon fulfillment of the redemption requests. The capital management company must inform investors without delay on its website of any restriction on the redemption of units and of its cancellation.
In this respect, investors must take into account that the redemption of their fund units may not take place on the desired date or only partially. Moreover, they have to bear the risk that the redemption may only be effected at a unit value that is - possibly significantly - below the value of the units at the time the investor submitted his redemption declaration.
Details on the respective modalities of the redemption restrictions are contained in the sales prospectus of the respective fund.
c) Possibility of swing pricing
The investment conditions of a fund may provide for so-called swing pricing. With swing pricing, the capital management company can take into account the transaction costs arising from redemption or issue requests when calculating the issue or redemption price, so that the issue price is increased by the transaction costs or the redemption price is reduced accordingly. As a result, current or future fund investors are not burdened with the transaction costs, but the costs are distributed according to origin.
If investors return units, the transaction costs are deducted from the net asset value under swing pricing and the units are settled at a lower redemption price. If investors wish to purchase units, the transaction costs are added to the net asset value, so that the issue price is slightly higher than without swing pricing.
The investment conditions of a fund may provide for full or partial swing pricing. Full swing pricing is when this method is always used for the redemption and issue of units. In the case of partial swing pricing, swing pricing is only taken into account if a threshold value specified in the investment conditions is exceeded.
The investment conditions may also contain specifications as to the maximum percentage by which the net asset value may be increased or decreased by swing pricing.
d) Liquidity management tools of foreign funds
Foreign funds may also use these or similar liquidity management tools. Details on this can be found in the sales prospectuses of the funds.