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CIS 4.8 Valuation

Application

CIS 4.8.1R

This section (CIS 4.8) applies to authorised fund managers.

Purpose

CIS 4.8.2G

This section (CIS 4.8) protects investors by stating some basic requirements which apply to the valuation of the scheme property of an AUT or an ICVC for the purposes of determining the price of a unit in it. CIS 4.8.5 R and CIS 4.8.6 R provide for the frequency of valuation and when there are to be valuation points. A valuation which refers to a time that is not a valuation point will not cause that time to become a valuation point.

Valuation: requirements

CIS 4.8.3R
  1. (1)

    An investment included in the scheme property for which different prices are quoted according to whether it is being bought or sold must be valued at its mid-market price.

  2. (2)

    Any part of the scheme property of an authorised fund that is not an investment must be valued at a fair value, but, for property schemes, this is subject to CIS 12.3.2 R (Functions of the standing independent valuer) and CIS 12.3.3 R (Special rules for pricing).

  3. (3)

    For the purposes of (1) and (2), any fiscal charges, commissions, professional fees or other charges that were paid, or would be payable, on acquiring or disposing of the investment or other part of the scheme property, must be excluded from the value of an investment or other part of the scheme property.1

  4. (4)

    The value of the scheme property of an authorised fund must be determined in accordance with the relevant provisions of the instrument constituting the scheme, except to the extent that this rule (CIS 4.8.3 R) or CIS 5.2.5 R (Valuation) or CIS 5A.2.5 RCIS 12.3 (Property schemes) applies.2

  5. (5)

    To determine the price at which units of any class in an authorised fund may be issued, cancelled, sold or redeemed, the authorised fund manager must carry out a valuation of the scheme property or of the scheme property attributable to a sub-fund at each valuation point for the authorised fund or the sub-fund (as the case may be).

Valuation: method

CIS 4.8.4G
  1. (1)

    CIS 4.8.3 R(4) requires that, subject to the exceptions in it, the value of the scheme property of an authorised fund must be determined in accordance with the instrument constituting the scheme. Accordingly, the method of valuing scheme property should be set out in this instrument.

  2. (2)

    In accordance with CIS 4.8.3 R(1), where different buying and selling prices are quoted for an investment, it should be valued at its mid-market price. The instrument constituting the scheme should set out the valuation method that will apply where a single price for buying and selling a security is quoted and where separate buying and selling prices are quoted.

  3. (3)

    In the context of SETS, The London Stock Exchange publishes an "official mid-market price" for each security, calculated as the average of the best bid and best offer price, unweighted by deal size. Either the official mid-market price or the last trade price should provide an appropriate basis of valuation. The authorised fund manager should, however, document the choice of methodology and ensure the procedures are applied consistently and fairly. The basis on which the scheme property is to be valued must also be set out in an authorised fund's prospectus as required by CIS 3.5.2 R(17)(2).

  4. (4)

    Where the authorised fund manager has reasonable grounds to believe that:

    1. (a)

      no reliable price exists for a security at a valuation point; or

    2. (b)

      the most recent price available does not reflect the authorised fund manager's best estimate of the value of a security at the valuation point;

    he should value the investment at a price which, in his opinion, reflects a fair and reasonable price for that investment (the fair value price).

  5. (5)

    The circumstances which may give rise to a fair value price being used include:

    1. (a)

      no recent trade in the security concerned; or

    2. (b)

      the occurrence of a significant event since the most recent closure of the market where the price of the security is taken.

    In (b), a significant event is one that means the most recent price of a security or a basket of securities is materially different to the price that it is reasonably believed would exist at the valuation point had the relevant market been open.

  6. (6)

    In determining whether to use such a fair value price, the authorised fund manager should include in his consideration:

    1. (a)

      the type of authorised fund concerned;

    2. (b)

      the securities involved;

    3. (c)

      the basis and reliability of the alternative price used; and

    4. (d)

      the authorised fund manager's policy on the valuation of scheme property as disclosed in the prospectus.

  7. (7)

    The authorised fund manager should document the basis of valuation (including any fair value pricing policy) and, where appropriate, the basis of any methodology and ensure that the procedures are applied consistently and fairly.

  8. (8)

    Where a unit price is determined using properly applied fair value prices in accordance with policies in (7), subsequent information that indicates the price should have been different from that calculated will not normally give rise to an instance of incorrect pricing.3

Regular valuation points

CIS 4.8.5R
  1. (1)

    There must be at least two valuation points in each calendar month and if there are only two valuation points in any calendar month they must be two weeks or more apart.

  2. (2)

    Paragraph (1) does not apply to geared futures and options schemes or to warrant schemes or to a sub-fund which is permitted to invest entirely in warrants and there must be at least one valuation point for them on each business day.

  3. (3)

    The frequency of regular valuation points must be specified in the prospectus.

  4. (4)

    Despite (1) and (2), no valuation points are required during the period of any initial offer.

Additional valuation points

CIS 4.8.6R

The authorised fund manager must inform the depositary if the authorised fund manager determines to have an additional valuation point for the authorised fund or any sub-fund, but this does not prevent the authorised fund manager carrying out a valuation at a time that is not a valuation point.

Market movement

CIS 4.8.7R
  1. (1)

    This rule (CIS 4.8.7 R) applies when an authorised fund manager is operating on the basis of historic prices and decides to carry out an additional valuation for the purpose of paragraph (9) (Market movement) of CIS 4.7.5 (Forward or historic pricing).

  2. (2)

    When the rule applies:

    1. (a)

      the valuation must be at an additional valuation point and the authorised fund manager must inform the depositary of that valuation point;

    2. (b)

      the valuation may be made by reference to fluctuations in an index of property whose composition is reflected by the scheme property, if the authorised fund manager having taken reasonable care determines, and the depositary agrees, that an adequate valuation may be obtained in that way.