Recently, the Swedish government has submitted a proposal to the Swedish parliament with suggestions for improved possibilities to counter liquidity risks in funds. The proposal includes the introduction of regulations on so-called swing pricing, a liquidity tool for funds.
With the use of swing pricing, costs incurred by a fund can be redistributed among the unitholders. Swing pricing means that the costs deriving from inflows or outflows, such as transaction costs and taxes, are allocated to the unitholders whose activities created such costs by adjusting either the net asset value or the sale and redemption price of the fund units. The possibility to use swing pricing can prevent existing or remaining unitholders from being negatively affected by transaction costs in net inflows or outflows from the fund. It can also reduce the incentives for unitholders to redeem fund units before other unitholders in order to take advantage of a higher redemption price, which contributes to the fund managers’ ability to handle large cash flows into or out of the funds. Thus, the risk of rapid outflows can be reduced and the tool can have a stabilizing effect on net flows in funds.
The proposed legislative changes prescribe that the use of swing pricing requires permission from the Swedish Financial Supervisory Authority. The granting of such permission is conditional upon the fund manager having the organization, systems and competence required for the application of adjusted net asset value. Additionally, the procedure applied by the fund manager must be compatible with the common interest of the unitholders and provide for adequate opportunities for transparency and control. Furthermore, the fund rules must specify whether adjusted net asset value is applied and, if so, which method is used for the calculation.
The legislative changes are proposed to enter into force on July 1, 2023, and apply to both collective investment undertakings and management companies when managing common funds, as well as AIF managers when managing special funds.