FSB NAV Calculation Valuation Standard



NOTICE…OF 2017FINANCIAL SERVICES BOARDCOLLECTIVE INVESTMENT SCHEMES CONTROL ACT 45 OF 2002INVITATION FOR PUBLIC COMMENT ON THE PROPOSED NET ASSET VALUATION CALCULATION AND PRICING FOR COLLECTIVE INVESTMENT SCHEME PORTFOLIOS –I, Dube Phineas Tshidi, the Registrar of Collective Investment Schemes, hereby in terms of section 114(4)(b) of the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), publish for public comments draft Notice on the net asset valuation calculation and pricing for Collective Investment Scheme portfolios as set out in the Notice.Interested persons may submit written comments on the proposed notice no later than 31 July 2017 to: Marius de Jongh, Marius.deJongh@fsb.co.za.Or hand deliver to the FSB office address: Riverwalk Office Park, Block B, 41 Matroosberg Road, Ashlea Gardens, Extension 6, Pretoria, 0181, South Africa. Marked for the attention of Marius de Jongh.DP TSHIDIREGISTRAR OF COLLECTIVE INVESTMENT SCHEMESNOTICE Arrangement of sections TOC \h \z \t "H1,1 " 1.DEFINITIONS PAGEREF _Toc369097203 \h 32.PURPOSE AND APPLICIBILITY 43.APPLICATION PAGEREF _Toc369097205 \h 54.STRUCTURE OF NOTICE55.VALUATION AND RECORDING OF ASSETS (ASSET VALUATION)66.RECORDING OF INCOME 87.RECORDING OF EXPENSES98.CALCULATION OF THE PORTFOLIO NAV AND NAVE PRICE 109.CALCULATING AND PROCESSING PORTFOLIO DISTRIBUTIONS 1510.PUBLISHING OF PORTFOLIO DATA 1511.DEALING WITH ERRORS ....................................................................................................1812. SHORT TITLE AND COMMENCEMENT………………………………………………………...21DEFINITIONS In this Notice, “the Act” means the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), and any word or expression to which a meaning has been assigned in the Act has that meaning and, unless the context otherwise indicates—“accounting period” means the period beginning with the last ex-dividend date and ending on the day immediately prior to the following ex-dividend date as determined in the deed;“classes of participatory interests” or “class” means a category of participatory interests; “clean price”, also known as the ‘capital price’, means the total market value of all net assets held in a portfolio on a specific day less the net income, divided by the number of participatory interests in issue on that same day;“CNAV” means constant NAV;“ex-dividend date” means the first business day following the vesting of an income distribution to an investor;“fund administrator”, where it is not the manager, means the authorised agent responsible for accounting for a portfolio or maintenance of the investor ledger;“Income Tax Act” means the Income Tax Act, 1962 (No. 58 of 1962);“market value” means the fair valuation of all securities in a portfolio using the best available market information on the value of the securities;“NAV” means net asset value, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service charge;“NAV price” means the NAV divided by the number of participatory interests in issue for the portfolio, and “NAV pricing” has a corresponding meaning;“SARS” means the South African Revenue Service;“Shari’ah compliant portfolios” means portfolios which are identified as such and where the investment mandate specifies that the portfolio must be managed in a way which is consistent with Shari'ah principles; “service charge” means the periodical charge stipulated in the deed, and disclosed in all marketing material, to remunerate the manager for the administration of a portfolio or different classes of participatory interests in a portfolio; “TER” means total expense ratio which is a measure of the total costs associated with managing and operating a portfolio which is derived by dividing the total cost of the portfolio by its total assets to arrive at a percentage;“VAT on fees” means the amount calculated by applying the official Value Added Tax rate as specified by SARS to the respective fee;“valuation day” means the day on which the assets of the portfolio are valued;“valuation point” means the point in time on a pricing day at which the prices of participatory are calculated and shall be the time as determined in the deed; and“verifier” means a person that verifies the value of a security independently of the manager where the security cannot be otherwise valued.PURPOSE AND APPLICABILITY This Notice sets out principles, processes and procedures that must be applied by managers and fund administrators in relation to the valuation of portfolios and pricing of participatory interests of portfolios registered in terms of the Act. The purpose of this Notice is to-establish standards for fair and consistent disclosure;specify the principles to be adopted in the calculation of NAV and NAV prices of collective investment scheme portfolios;standardise practices, procedures and terminology used for calculating NAV and NAV prices; align domestic standards and procedures with international practice; andprovide guidance in the interpretation and application of the principles .This Notice applies to portfolios comprising collective investment schemes registered in terms of the Act, excluding collective investment schemes in participation bonds.PRINCIPLESAll pricing processes and procedures must conform to generally accepted accounting practice or the accounting practices for collective investment schemes as determined by the registrar.A manager and the fund administrator must ensure that accounting for a portfolio and determining the NAV price is performed on an accrual basis.A manager must ensure that portfolio pricing is correct and that the process of portfolio pricing adheres to the following four principles:Fairness: processes must be free from bias or discrimination.Consistency: processes must be applied consistently over an accounting period. Transparency: processes must be clearly documented and the data must be readily available for review in sufficient detail to enable a detailed analysis and audit.Processes for accuracy must be designed and implemented to ensure that the inherent accuracy thereof is demonstrated.4.APPLICATIONA manager must ensure compliance with this Notice. A manager may delegate fund administration services to an independent service provider or another entity in the group of companies of which the manager forms part, in accordance with section 4(5) of the Act.This Notice is intended as a minimum standard and a manager may adopt additional standards that would provide increased levels of adherence and support to the principles established by this Notice and the Act.Where this Notice is silent on a matter related to the valuation of securities in a portfolio and determining the NAV price of a participatory interest, a manager must implement alternative solutions which are consistent with the principles of this Notice and the Act.Where any deed is in conflict with the provisions of this Notice, this Notice takes precedence over the deed.Where a manager anticipates any failure or inability to comply with any provisions of the Notice, the manager must- (a)notify the trustee and the registrar in writing of the reasons for the non-compliance; and(b)provide a solution to address the non-compliance.5.STRUCTURE OF NOTICEThe NAV of a portfolio and participatory interests pricing is determined through-the recording and valuation of assets within the portfolio;the recording of income received and accrued to the portfolio;the recording of expenses paid and owed by the portfolio;the allocation of proportionate values to participatory interests and pricing of the portfolio; andthe calculating and processing of income distributions from the portfolio to investors.This Notice-deals with each component under sub-paragraph (1) by-stating the principles applicable to the component;providing detailed requirements in the application of the principle; andincludes a worked example in the Addendum.The Notice further sets out-the methodologies applicable to different classes of participatory interests;the requirements for publishing of portfolio data; and how to address portfolio valuation errors.The Addendum serves to provide guidance on the practical effects of the principles contained in the Notice and is therefore not legally enforceable.VALUATION AND RECORDING OF ASSETS (ASSET VALUATION)Principles of valuationThe overriding principle is that any asset must be valued at its fair market price.Despite sub-paragraph (1), when valuing assets of a money market portfolio, the assets may be valued at amortised cost, provided that the relevant deed permits the use of a CNAV.Application of principle In order to achieve a fair market value, a manager and the fund administrator must ensure that- the price of each security is retrieved on a consistent basis and at valuation point on each valuation day in a manner which is consistent with the deed; wherever possible and practical the price of each security is validated for reasonability by, among others-comparing multiple sources; andreviewing the price against the previously retrieved price.where a current price is not, for any reason, available at the valuation point, the latest available price may be used subject to verification by the verifier that this price is fair and reasonable in the circumstances; in the event that a current price is not available due to suspension in the trading of that security, a fair and reasonable price is determined , with the consent of the trustee, taking into account all available information and the potential effect of such price on the overall value of the portfolio;where the price of a security that is traded on an exchange is unavailable or is not representative of fair value due to suspension, delisting or termination, such security is valued at the value at which the security will probably be realised using applicable valuation techniques for unlisted instruments, as certified by a competent person, an independent verifiable source, or the verifier, to be fair in the circumstances;where no market mechanism such as that provided by a clearing house or an exchange exists to facilitate the valuation process, such security is valued daily, based on a generally recognised methodology, to determine the fair value of the security at a point in time and by a person acceptable to the trustee;the methodology referred to in sub-paragraph (f), is clearly described in the accounting policy and may include- discounted cash flow techniques which involve applying a market-related discount rate for similar instruments according to a manager’s best estimate of future cash flows; andpricing models that consider, among other factors, contractual and market prices, correlation, time value of money, credit risk, yield curve volatility factors and prepayment rates of the underlying positions;The applicability of a chosen methodology is regularly assessed to ensure that it remains fair and reasonable in the prevailing circumstances;where fair value cannot be reliably determined, the value of a security is reflected at cost provided that this is fair and reasonable in the prevailing circumstances and that all expenses directly attributable to the acquisition of the security are included in such cost;a security purchased at a discount or premium to the nominal value is accounted for on a yield to maturity basis in accordance with section 24J of the Income Tax Act;a security denominated in a currency other than that of the portfolio base currency is converted at the appropriate ruling exchange rate and the conversion rate is calculated at a time that is consistent with the portfolio valuation point on each valuation day;brokerage, securities transfer tax, initial charges on the acquisition of any security or participatory interest and any other charges directly related to the acquisition of a security are treated as a capital expense.RECORDING OF INCOMEPrincipleIncome must be accrued- at the same time as the valuation of the portfolio; and in a manner which accurately reflects the source and nature of the income.Application of principleThe frequency of accruing income must accord with the frequency stipulated in the deed. When the portfolio is valued in terms of the deed, all income accruals since the previous valuation date must be included in the new valuation.Income must be clearly distinguishable as either domestic or foreign income.The nature of income must be clearly distinguishable as falling into one of the following categories-dividend income; interest income; orother income, and in each income category set out in sub-paragraphs (a), (b) or (c), the respective withholding tax amounts must be separately identifiable.For purposes of this Notice, other income contemplated in paragraph (4)(c) is limited to-foreign exchange gains or losses incurred on income receivable, including costs incurred that are related to the foreign exchange transactions;rental income;scrip lending fees; manufactured dividends as contemplate in the Income Tax Act; andany other income as may be determined by SARS. Section 24J of the Income Tax ActAll premiums charged and discounts received on the acquisition of securities must be recognised as income in accordance with section 24J of the Income Tax Act.The frequency of the calculation and processing of interest as determined in section 24J must, as a minimum, align to the distribution frequency of the portfolio.Premiums charged and discounts received on the acquisition of securities must be distributed to investors.RECORDING OF EXPENSESPrinciplesThe expenses of the portfolio must be accrued at the same time as the valuation of the portfolio. Expenses which may be regarded as negligible in relation to the value of the portfolio, including bank charges, if applicable, may be recorded on a receipted basis, provided that such exceptions are agreed with the trustee in advance and in writing.Application of principles All expenses must be accounted for inclusive of applicable taxes. The permissible deductions set out in the Act must be calculated, accrued and paid in accordance with the provisions of the applicable deed.In the case of Shari’ah compliant portfolios, income that is not permitted for distribution in terms of Shari’ah laws must be removed from the portfolio through an appropriate expense line item clearly describing the nature of the expense.CALCULATION OF THE PORTFOLIO NAV AND NAV PRICE9.1Principle A portfolio must be priced and transacted on future pricing basis, which means that the NAV price is calculated based on each day’s closing prices and then applied to all transactions for which instructions were received during that same day prior to the point in time determined by the deed by when offers to repurchase participatory interests must be received, which may not be later than the valuation point.9.2Differentiation For the purposes of describing the process of portfolio valuation, the manager must differentiate between-portfolios consisting of different classes of participatory interests; money market portfolios pricing participatory interests at CNAV; andall other portfolios.Portfolio pricing The portfolio NAV price/pricing is determined using the following method:Establishthe market value of all assets in the portfolioParagraph 6Addthe income received and receivables to the portfolioParagraph 7Deductthe expenses paid and payable from the portfolioParagraph 8Divided bythe participatory interests in issue for the portfolioThe pricing process facilitates the determination of the-clean price (capital value);income price (capital value plus income); and NAV price.Portfolios with different classes of participatory interestsThe principles applicable to the administering of different classes of participatory interests include:The sum of the market value of all the classes must in aggregate always be equal to the market value of the portfolio.A class may only be distinguished on the basis of fees applicable to that particular class.Participatory interest movement in one class may not impact the price of any of the other classes of participatory interests of that portfolio.All transactions in a class must be applied to both the capital and revenue portions of the NAV price in the same proportions as those capital and revenue portions exist in the NAV price, therefore-in the event that all participatory interests in a class are redeemed, all accruals and provisions attributable to that class must be brought to a nil value; andsubsequent to the application of sub-paragraph (i), the books of account for this class may not reflect any amount with respect to income instead of, or a reserve carried for the capitalisation of shortfall in the revenue account.A new class may be launched-between distribution points without a need for special distribution where a manager’s systems are able to accurately account for daily income and expenses for each class, thus ensuring that all income due to the class of investors, less expense borne by them, are distributed at each distribution point, in a fair and accurate manner; provided that the implementation date in the deed is suitably amended and the trustee confirms in writing that the manager is capable of properly accounting for the introduction of classes at any time; orafter a special distribution; orat the beginning of a new accounting period.A manager must ensure that, despite the pricing method employed, pricing is undertaken in a manner that affords investors equal rights and equal treatment regardless of their respective class of participatory interests.The pricing and fees charged in different classes may not result in cross subsidisation of fees across classes. Portfolios with different classes may be valued using any one of the following methodologies:The participatory interest-in-issue-methodology where non-class specific transactions and values are allocated to an individual class per the following ratio:[T Class PI’s in issue] / [T Fund PI’s in issue]Provided that-new classes may be created - (aa)at the beginning of a new distribution period; (bb)after a special distribution; or (cc)any other time as may be determined in the deed; andnegative income will not require capitalisation.The NAV methodology where non-class specific transactions and values are allocated to an individual class per the following ratio:([T-1 Class NAV] + [T Class NAV Flows]) / ([T-1 Portfolio NAV] + [T Portfolio NAV Flows])The mixed NAV/Capital methodology where non-class specific transactions and values are allocated to an individual class per the following ratio:([T-1 Class NAV] + [T Class Capital Flows]) / ([T-1 Fund NAV] + [T Fund Capital Flows])The Capital methodology where non-class specific transactions and values are allocated to an individual class per the following ratio:([T-1 Class Capital] + [T Class Capital Flows]) / ([T-1 Portfolio Capital] + [T Portfolio Capital Flows])A manager may switch from one methodology to another, with the consent of the trustee or independent fund administrator in the case of a hedge fund without a trustee, where applicable, and subject to sub-paragraph (1)(a)(i).9.5Money market portfolios pricing at CNAVThe pricing of money market portfolios pricing at CNAV must be consistent with the pricing of other portfolios with the following exceptions:The daily NAV price per participatory interest of a money market portfolio must be fixed at 100 cents, so that the NAV price consists of a capital portion only.The net income per participatory interest must be calculated on a simple interest basis, accrued and declared daily within the portfolio accounts and investor ledger, despite actually paid to investors monthly.Assets in the portfolio must be valued on the basis of amortised cost plus daily accrued interest income.Any premium or discount on the purchase of an asset must be amortised and recognised in the daily net income calculation.Any capital loss or gain resulting from the sale of an underlying asset must be accounted for in the income account of the portfolio on the day it occurs and must be reflected in the yield for that particular day.The objective of the money market portfolio daily yield is to indicate to investors a compounded annual return and may not be used for income distribution purposes.The money market portfolio daily yield must be calculated as follows and the rounding convention is indicated in brackets: The sum of the daily accruals for distribution over the previous seven days, in cents per participatory interest, is divided by seven and multiplied by 365 (366 days for leap years) to obtain the average annual nominal yield ( indicated at not less than six decimal points).The average annual nominal yield is divided by the number of distribution payment periods to obtain the periodic effective rate (indicated at not less than six decimal points).The periodic effective rate must be divided by 100, plus one and the sum of the numbers must be raised to the power of the number of income distributions per year, subtract one and multiply by 100 to obtain the annual effective yield (not less than two decimal points ).(4)A money market portfolio that is priced at a variable NAV must adhere to the provisions in paragraph 9.2, subject to the following:Money market instruments that do not have a known traded market value must be valued daily -on an appropriate money market yield curve as described in the approved deed of the portfolio; oron an appropriate money market yield curve as determined by the registrar; or by holding the instrument to maturity and valuing it at cost price plus interest accrued.The yield curve must be updated daily.A compounding formula must be applied to the yield curve which is to provide for the term of interest payments, that is whether the instrument pays interest annually, semi-annually, or quarterly.Each instrument’s market value yield is interpolated using the curve and an all-in price is formulated by discounting the future cash flows at the specified rate.? Once the all-in price is calculated, the accrued interest is calculated. The clean price is then calculated by taking the difference between the all-in price and the accrued interest CALCULATING AND PROCESSING PORTFOLIO DISTRIBUTIONSPrincipleThe following accounting principles must be applied per class, where applicable. The overriding principle is that all income received and accrued to the portfolio must be distributed to investors so that it is taxed in the hands of the investor and that the nature of the income is preserved in the process. In the case of money market portfolios using CNAV all realised gains and losses must be included in the calculation of the amount available for distribution.Application of principlesNegative net income, that is where charges exceed income, must be accounted for as follows:Where there is a shortfall in income that persists for more than three months, the negative income amount may be deducted from capital subject to the mandate and investment objectives of the portfolio.If a portfolio has the aim of revenue generation or dividend growth, the manager would reasonably be able to expect that any current shortfall is temporary and hence it may not be paid from capital.The distribution data must contain the following details-the date of declaration; andthe distribution amount, in cents per participatory interest, broken down into the different components as may be determined by SARS.Portfolio expenses and payments instead of income accruals must be apportioned across the components in subparagraph (2)(b) in the ratio in which the components have been accrued.PUBLISHING OF PORTFOLIO DATANAV PricesThe rounding convention must be used in the publication of NAV price and must be disclosed as follows:The NAV price that is disseminated to the market must be truncated (rounded down) to not less than two decimal places in cents per participatory interest.The number of participatory interests must be rounded to not less than two decimal places in all systems and communications with industry participants.NAV prices must be published in the media in the manner determined by the registrar.NAV price data must be supplied daily to the Statistics Service Provider appointed by the registrar for data collation and as specified in sub-paragraph (4).The daily NAV price information supplied to a Statistics Service Provider must contain the minimum following columns:Portfolio name, including the class name.Maximum initial fee expressed as a percentage of NAV.Date of the NAV price.NAV price of latest trading day in cents per participatory interest.DistributionsThe rounding convention must be applied as follows:For non-money market portfolios, the distribution cents per participatory interest must be rounded off to not less than four decimal places (i.e. R0.0000) and any surplus must be carried over to the next distribution period at portfolio level.For money market portfolios, the daily distribution cents per participatory interest must be rounded off to no less than six decimal places (i.e. R0.000000), with distributions allocated in terms of the rules for a normal distribution.The distribution must be allocated within the investor ledger rounded off to two decimal places of the Rand value (R0.00) and any surplus is to be credited to the income account of the portfolio for distribution in the next distribution period.Distribution data must be published as follows:All distribution data in cents per unit must be supplied to the Statistics Service Provider on the ex-dividend date as set out in sub-paragraph (3). Detail on the declared distribution of all classes of all portfolios of a manager must be published on the manager’s website on the first business day following the day of distribution within the portfolio.All declaration data must be supplied to the Statistics Service Provider appointed by the registrar for data collation.The distribution data provided to the Statistics Service Provider and published on the manager’s website must contain-the date of declaration;the distribution amount (in cents per unit) broken down into the different income components; andTER.11.3YieldsA manager may only publish the yield in respect of -money market portfolio yield as provided for under paragraph 9.5(4); andany other portfolio predominantly invested in interest bearing instruments as calculated on a historic basis.The yield must be calculated monthly per portfolio class, based on the actual distributions declared in the last 12 months for that class divided by the average daily NAV price for the portfolio class over the same period. A manager -may, with regard to a newly launched class, which has not been in existence for 12 months but whose portfolio has been in existence for 12 months, calculate a yield based on the other existing classes adjusting for the difference in the fee being charged for the new class; may, with regard to a newly launched fund, which has not been in existence for 12 months,-calculate the yield after six months and annualize the distributions to have a comparable figure; or not calculate a yield at all;must ensure that the minimum published yield may not fall below 0.00% and may not reflect a negative yield. DEALING WITH ERRORSPrinciplesSubject to sub-paragraph (3), an investor may not be prejudiced as a result of a valuation or administrative error.An investor, whether redeeming, entering or remaining in the portfolio, may not be prejudiced in the process of rectifying, as a result of a valuation or administrative error, and must be treated equally.Despite sub-paragraphs (1) and (2), and subject to the materiality provisions described in paragraph 12.3, a manager may apply a materiality calculation to the error to determine whether or not to rectify the error.Subject to paragraph 12.3, any materiality calculation must take into account various factors, including the-extent of the error, provided a loss to the investor of more than 0,5% is regarded as material;effect on the value of any single investor’s investment. Where an investor has been unduly enriched at the expense of another investor, or a manager or a third party administrator, the manager or third party administrator may take steps to recover the undue benefits from the investor by agreement between the manager and the third party administrator, subject to the same materiality policy applicable to investors.A manager is accountable and liable for losses of a portfolio as a result of errors.The sources of errorsIn dealing with errors, a manager must distinguish between-occasional instances of technical or clerical valuation errors; and errors caused by weaknesses in internal controls which result in frequent errors of the same nature.Where an error is of a nature envisaged in sub-paragraph (1)(b), the manager must, immediately and prior to rectifying the error, rectify the cause of the error. Errors which must be rectified include-portfolio and security valuation errors;transaction processing errors; calculation errors;income classification errors in distributions; andthe incorrect application of tax.Determining materiality and resolution For purposes of this Notice, a pricing error is material if a reasonable investor would consider it important, and in determining materiality the sum of all effects must be considered. A manager must-undertake error rectification to return an affected investor to the position the investor would have been in had the error not occurred; andprovide the registrar with its plan for rectification within 10 days of identifying the error. A manager must apply a maximum tolerance for materiality of an error which is 0,5% based on the NAV price unless specified otherwise, provided that a manager may apply stricter tolerances for certain portfolio types if deemed appropriate.Despite the percentage specified in subparagraph (3), any error in an amount, in total, below R50.00 per investor may be considered as immaterial.The provisions in subparagraphs (1) to (4) do not vary the contractual or other legal rights of investors which might be legally enforceable.A manager must, in order to resolve errors once detected-determine the period between the first occurrence of the error and its identification;identify the cause of the error;determine the extent of the error, and-the effect on daily NAV prices;the number and value of purchase and repurchase transactions during the period; andany income distributed;determine the corrective action required to rectify the error;identify all transactions where investors have been prejudiced or benefited;determine materiality of the error and identify the cases where correction is required;if action is required at investor level, determine whether the portfolio must be compensated for undue benefits received by affected investors;agree any corrective action between the administrator, and where applicable, the trustee.when implementing the corrective action, avoid any further delay and any further impact on the portfolio and investors;ensure that relevant staff are able to deal with any queries regarding the error;consider the nature and extent of the error in terms of the need to communicate with investors or the media; andonce the error has been corrected, analyse the causes and determine if the error may be regarded as an isolated event or if systems or procedural deficiencies must be addressed to prevent any recurrence of the error.No reimbursement of losses is required if-no transactions were processed during the period affected by the error; the error was not material; or no investor was prejudiced by the error. A manager must ensure that, where it has provided payments or additional participatory interests to an administrative financial services provider, authorised in terms of the Financial Advisory and Intermediary Services Act, 2002 (Act No 37 of 2002), as a result of valuation or administration errors, that the administrative financial services provider conducts a correction process as set out in this Notice, to compensate its clients for the error, and considering that it holds participatory interests on behalf of investors in a bulk account.SHORT TITLE AND COMMENCEMENTThis Notice is called the NAV calculation and pricing for collective investment scheme portfilos standard and comes into operation on date of commencement (for consultation purposes)*. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download