Get Ahead of Circular 24/856 Investment Breach Monitoring Before It's Too Late
The global financial landscape is constantly shifting, and new regulations and amendments are often the driving force. With decades of experience in navigating the complexities of multi-jurisdictional regulatory changes, we are equipped to guide you through the maze with our blog series: Emerging Regulations Watch, where we provide insights & analysis on new rules as they emerge.
In this series, we unpack the most impactful regulatory changes on the horizon, identify potential risk areas, and present practical strategies to help you navigate the evolving regulatory landscape.
Today’s blog focuses on the New CSSF (Commission de Surveillance du Secteur Financier) Circular on Investment Rule Breaches and NAV errors, and the challenges this places on Luxembourg-based funds.
Circular 24/856 in a Nutshell
Before examining the emerging regulation, let’s first look at the aims of the regulation:
The CSSF’s new circular (Circular 24/856) aims at protecting investors in the event of investment rule breaches and NAV calculation errors.
The circular enters into force on 1 January 2025
The circular will repeal circular 02/77.
With less than one year to go, the circular widens the type of entities subject to the requirements and the type of breaches covered by the rules
The notification processes have also expanded
What Does Circular 24/856 Include?
Now turning to the emerging rule changes. The new CSSF investment breach rules include the following changes:
Valuation of assets and liabilities: Going forward in scope investment firms will have to ensure reliable valuation of their assets and liabilities, this means we will see an increase in the use of software to calculate a shadow NAV
Statutory requirements: Determination of the NAV in accordance with statutory and contractual requirements will be key
Minimise NAV calculation errors: To minimise the risk of NAV calculation errors software running on a daily basis will be needed
Further, the CSSF has extended its investment breach monitoring requirements to improve its ability to monitor and assess UCITS. To reduce inconsistencies in the NAV data reported to the CSSF the new rule specifies new NAV calculation thresholds. These new CSSF rules are scheduled for implementation on January 1, 2025. It will be challenging for investment funds to ensure they are ready by January 01, 2025.
Investment Breach Monitoring
Circular 24/856 does not consider passive or involuntary breaches. Monitoring must be on a pre and post-trade basis. Post-trade monitoring must be made by the time the next NAV is determined. The management body and depositary must be alerted of investment breaches without delay. The investment breach must be rectified promptly, particularly in the case of liquid assets. Like Circular 02/77, a NAV calculation error is defined as ‘significant’ if the error exceeds certain materiality thresholds (the “Materiality Thresholds”). Materiality Thresholds do not apply if a NAV needs to be recalculated following the occurrence of an Investment Breach.
NAV Calculation Errors
Circular 24/856 requires open-ended UCIs and their Investment Fund Managers to take actions to correct significant NAV calculation errors, remedy any prejudice for the UCI and its investors resulting from a significant NAV calculation error and indemnify the UCI and its investors, as applicable, for losses or damages incurred as a result of a significant NAV calculation error. The Materiality Thresholds are based on the type of asset class and permit adjusting the Materiality Threshold in light of the type of investors admitted to the UCI.
For example, in the case of UCITS, Part II UCIs and AIFs that qualify as ELTIFs held by retail investors, the following asset class Materiality Thresholds apply:
MMFs = 0.20% of the NAV
Bonds and other debt instruments excluding loans = 0.50%
Mixed investment policy = 0.50%
Public stocks and similar instruments = 1% of the NAV
Private Equity and Loans (in the instance of AIFs) = 1% of the NAV
For professional investors higher materiality thresholds may be applied up to 5% of the NAV.
Remediation of NAV Calculation Errors
Circular 24/856 outlines the procedure for remediation of any significant NAV calculation errors. Remedial plans must now detail the process for identifying and correcting the NAV calculation errors; the process for determining the corrected NAV for a relevant calculation period; and the process to apply the corrected NAV to any subscriptions and redemptions during the relevant period. Also included in the remedial plan will be the process for adapting the accounts and records of the fund and the mechanism for notifying the error and the remedial plan to the investors.
From January 1, 2025, any significant NAV calculation errors must be notified to the CSSF within four to eight weeks of discovery.
Other errors
The Circular expands the type of errors covered by circular 02/77 to include:
Erroneous application of swing pricing or other anti-dilution measures
Erroneous payment of fees and expenses for the UCI
Erroneous application of cut-off rules
Errors in investment allocations
How to Get Ahead of Circular 24/856
Navigating the complexities of regulatory changes like Circular 24/856 demands proactive measures to mitigate risks effectively. As Luxembourg-based funds face the imminent challenges outlined in this analysis, the significance of leveraging technology solutions becomes paramount. By adopting advanced technology solutions, tailored for investment breach monitoring and NAV calculation, firms can streamline operations, minimise errors, and uphold regulatory standards. As the deadline for Circular 24/856 approaches, investing in technology is not just a necessity—it's a strategic imperative for safeguarding investor interests and sustaining long-term success in an evolving financial landscape.
AQMetrics understands the complexities of Investment Breach Monitoring and can answer any questions you may have on the best practice preparation steps that can be taken by Luxembourg-based funds in 2024 to mitigate risk.
Let AQMetrics technology simplify your compliance journey. Get in touch today to find out how.
