UCITS Asset Valuation

Introduction

The Central Bank reviews valuation provisions contained in the constitutional document during its assessment of an application. This note provides guidance on the Central Bank’s application and interpretation of Regulation 108(1) of the UCITS Regulations and Regulation 34(2)(b) of the Central Bank UCITS Regulations.

Paragraph 1 of Schedule 5 of the Central Bank UCITS Regulations requires that valuation shall be the closing or last known market price. A responsible person should determine which one of the following is to be the closing or last known market price:

It may be more appropriate to use an offer price or offer quotation in certain circumstances (e.g. to value a short position or in the context of a dual pricing investment fund (see paragraph 8 below).
Securities listed or traded on a regulated market, but acquired or traded at a premium or at a discount outside or off the relevant market may be valued taking into account the level of premium or discount at the date of the valuation.

Matrix pricing (i.e. valuing securities by reference to the valuation of other securities which are considered comparable in rating, yield, due date and other characteristics) may be an appropriate method of valuation for fixed income securities, where reliable market quotations are not available. Provision may be made for matrix pricing provided the securities used in the matrix are comparable to the securities being valued. Matrix pricing should not ignore a reliable market quotation. The matrix methodology should be compiled by the persons listed in paragraph 2(a) to (c) of Schedule 5 of the Central Bank UCITS Regulations.

A constitutional document may provide that, notwithstanding the detailed valuation rules, valuation of a specific asset may be carried out under an alternative method of valuation if the responsible person deems it necessary. The alternative method of valuation should be approved by the depositary and the rationale/methodologies used should be clearly documented.

The value of an asset may be adjusted by the responsible person where such an adjustment is considered necessary to reflect the fair value in the context of currency, marketability, dealing costs and/or such other considerations which are deemed relevant.

A constitutional document may provide for the calculation of a separate bid and offer price on its units, i.e. dual pricing.

A responsible person may provide for valuation of a UCITS assets on a mid-market basis, a bid basis or, in the case of dual pricing, on a bid and offer basis. It can also provide for valuations on an offer basis where total subscriptions on a dealing day exceed total redemption requests, or for a switch from mid-market to bid basis when total redemption requests, on a dealing day, exceed total subscriptions. Regulation 34(3)(c) of the Central Bank UCITS Regulations requires that the valuation methodologies, including provisions which allow for a switch from a mid-market to a bid or offer basis, are applied on a consistent basis throughout the life of a UCITS. There may be some exceptions to this principle because an offer quote is not available.

The responsible person should pay particular attention to and closely monitor valuations provided by parties in respect of illiquid or unlisted securities and OTC derivatives to ensure that they remain competent for this purpose.