Circular No. 14/CREPMF/2022 on Liquidity Management Tools

UNION MONETAIRE OUEST AFRICAINE crepmf CONSEIL REGIONAL DE L'EPARGNE PUBLIQUE ET DES MARCHES FINANCIERS

CIRCULAIRE N°14/CREPMF/2022

RELATIVE AUX OUTILS DE GESTION DE LA LIQUIDITE

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The General Secretariat of the Regional Council for Public Savings and Financial Markets (CREPMF) reminds approved Collective Investment Schemes (CIS) and CIS Management Companies (CMC) on the regional financial market of the UMOA that, in accordance with current regulations, they must comply with the provisions of this Circular, which specifies liquidity management systems and procedures, the implementation modalities for stress testing simulations, the methods that a CIS may use to temporarily suspend the redemption or repayment of its shares or units, and the conditions that a CIS must meet following the adoption of a temporary suspension of share or unit redemption or repayment.

For the purposes of this Circular, the term "Instruction" refers to Instruction No. 66/CREPMF/2021 on Collective Investment Schemes and their Management Companies on the regional financial market of the UMOA.

1. Liquidity Management Tools

A CIS may include in its Prospectus the following liquidity management tools:

• redemption caps or "gates";
• adjusted net asset value or "swing pricing";
• adjusted fees;
• asset segregation or "side pockets";
• temporary suspension of redemptions.

2. Implementation Modalities for Redemption Cap Mechanisms ("Gates")

a) The implementation of redemption caps must be precisely described in the Prospectus as well as in the Rules or Articles of Association. When a CIS prepares a Key Information Document, it must mention the redemption cap and refer to the Prospectus and the Rules or Articles of Association describing its operation.

b) The introduction or modification regarding redemption caps in the Rules and Articles of Association of an existing CIS marketed to non-qualified investors must be approved by the Regional Council, followed by specific notification to unitholders or shareholders, offering them the option to exit the CIS without fees.

c) The threshold beyond which redemption caps may be triggered must be justified based on the CIS's NAV calculation frequency, its management orientation, and the liquidity of its held assets. Its level must not completely undermine the possibility for a unitholder to redeem their shares or units under normal market conditions. This threshold is stated in the CIS's Rules or Articles of Association and complies with the following provisions:

Frequency of NAV Calculation	Cap Threshold (% of Net Assets)
Daily	5%
Weekly	10%
Monthly	15%
Quarterly or less frequent	20%

d) The trigger threshold for redemption caps corresponds to the ratio between:

• the difference, on the same centralization date, between the number of CIS shares/units for which redemption is requested or the total amount of these redemptions, and the number of shares/units of the same CIS for which subscription is requested or the total amount of these subscriptions; and
• the net asset value or the total number of shares/units of the CIS.

The threshold for orders that will not be executed must be determined immediately after the centralization date, to specifically inform affected unitholders as soon as possible and allow them to oppose the deferral of their order, if they wish and when provided for in the Rules or Articles of Association, for the unexecuted balance while respecting notice periods.

For CIS with multiple share/unit classes, the trigger threshold for redemption caps must be the same for all classes. The cap trigger calculation is performed at the end of order centralization, but net redemptions against subscriptions are expressed in amount (number of shares/units multiplied by the latest NAV) and then compared to the net asset value of the latest NAV of the entire CIS, not compared to the NAV of the specific share/unit class.

If an indicative NAV has been calculated, it may be used for the threshold calculation. Generally, the CIS Management Company must make corrections it deems necessary to determine the reference net asset value to account for information obtained since the last NAV calculation. However, net redemptions (numerator) and the net asset value used (denominator) must be calculated in the same manner, notably based on the same NAV.

Subscription and redemption operations for the same number of shares/units, based on the same NAV and for the same unitholder or economic beneficiary (so-called round-trip operations) may be exempt from redemption suspension, provided the Rules or Articles of Association allow it. This provision prevents a unitholder executing a "round-trip" operation from having their redemption order split while an equivalent subscription order neutralizes the impact of that redemption order on the CIS.

e) The triggering or non-triggering of the redemption cap mechanism provided in the CIS's Rules or Articles of Association is a decision under the responsibility of the CIS Management Company. The CIS Management Company must justify that exceptional circumstances require it and that the interest of unitholders/shareholders or the public dictates it. This is the case when, independent of the routine implementation of the management strategy, redemption requests are such that, given the liquidity conditions of the CIS's assets, they could not be honored under conditions preserving the interest of unitholders/shareholders ensuring fair treatment, or when redemption requests occur under circumstances undermining market integrity.

f) The CIS Management Company may decide to honor redemption requests beyond the provided cap and thus partially or fully execute orders that could be blocked. The application of this decision must not differ based on unitholders/shareholders who submitted a redemption request on the same NAV. In this case, the decision and trigger conditions must be documented by the CIS Management Company. These documents are kept available to the Regional Council.

g) Once a CIS Management Company triggers the redemption cap, it must inform the Regional Council as soon as possible.

h) Unitholders or shareholders whose fraction of an order was not executed must be specifically informed under the conditions mentioned in the Prospectus and the CIS's Rules or Articles of Association. Other unitholders/shareholders, the public, and potential investors must also be informed of the redemption cap trigger. This information must be included in the next periodic report to unitholders/shareholders.

i) Redemption caps can only be introduced on a temporary basis. The CIS's Rules or Articles of Association must specify the maximum duration of the cap. This duration must be justified and should not exceed the number of NAVs defined in the following table:

Frequency of NAV Calculation	Maximum Number of NAVs for Which a Redemption Cap May Be Applied	Estimated Maximum Cap Duration
Daily	20 NAVs over 3 months	1 month
Weekly	8 NAVs over 6 months	2 months
Monthly	5 NAVs over 6 months	2.5 months
Quarterly or less frequent	3 NAVs over 6 months	3 months

j) At the end of the period set in paragraph i, the CIS Management Company must terminate the redemption cap and consider another exceptional solution mentioned in point 1.

k) The CIS Management Company must determine and specify in the CIS's Rules or Articles of Association whether unexecuted orders will be cancelled or automatically rolled over to the next NAV, considering the overall liquidity management framework. It must also account for the risk that rollover modalities might incentivize unitholders to anticipate redemption requests or place orders larger than intended, knowing they will be partially executed. Furthermore, regarding the possibility for unitholders/shareholders to revoke an unexecuted order, the CIS Management Company must ensure the operational feasibility of the chosen scheme with relevant stakeholders. The processing and rollover modalities for orders must respect the following conditions:

• redemption orders must be executed in the same proportions for all unitholders/shareholders who requested a redemption since the last centralization date. When orders exceeding the threshold for redemption caps are not executed, order reduction rules must ensure fair treatment of exiting unitholders/shareholders;
• unexecuted redemption orders are cancelled or automatically rolled over to the next NAV;
• the portion of unexecuted redemption orders automatically rolled over may be revoked by the affected unitholders/shareholders, under conditions provided in the Rules or Articles of Association. When the CIS Management Company gives unitholders/shareholders the option to oppose the rollover of unexecuted orders, it must provide operational modalities to track rolled over or revoked redemption orders while respecting notice periods in the Rules or Articles of Association;
• rolled over orders do not take priority over new redemption orders placed for execution on the next NAV. If redemption splitting is reactivated on this NAV, they are therefore split under the same conditions as new orders.

l) The CIS Management Company must ensure there is no possibility to modify orders after the centralization date, including through cancellation requests that could be treated as "late trading".

m) The CIS Management Company must maintain strict confidentiality regarding the level of subscription and redemption orders received so that no unitholder can benefit from information on the likelihood of the redemption cap being triggered or not.

3. Implementation Modalities for Temporary Suspension of Redemptions

Under the circumstances mentioned in point 2.e, CIS Management Companies may decide on the total, temporary suspension of CIS share or unit redemptions.

In the case mentioned in paragraph 1, the provisions of points 2.a to 2.j and 2.m apply. For the purposes of point 2, "redemption caps" is replaced by "redemption suspension".

4. Implementation Modalities for the Adjusted Net Asset Value or "Swing Pricing" Mechanism

The adjusted net asset value mechanism allows maintaining a single NAV at each calculation date and compensating for portfolio rebalancing costs and their impacts on the CIS's long-term performance. This mechanism is described in the CIS Prospectus and its Rules or Articles of Association.

CIS Management Companies that have implemented an adjusted NAV mechanism formalize an adjusted NAV policy, which notably describes the methodology for calculating the total portfolio rebalancing cost and its parameters. This policy is not made public but is made available to the Regional Council.

The CIS Management Company may decide to implement a partial adjusted NAV mechanism with a trigger threshold when net subscription and redemption flows exceed the threshold defined in the Prospectus, Rules, or Articles of Association of the CIS.

In the case mentioned in paragraph 3, the provisions of points 2.a to 2.j and 2.m apply. For the purposes of point 2, "redemption caps" is replaced by "adjusted net asset value".

5. Implementation Modalities for the Adjusted Fees Mechanism

The adjusted fees mechanism allows charging the exiting or entering unitholder the sales or purchase fees incurred during portfolio rebalancing, without adjusting the CIS's NAV. This mechanism is described in the CIS Prospectus and its Rules or Articles of Association.

CIS Management Companies that have implemented an adjusted fees mechanism formalize an adjusted fees policy, which notably describes the methodology for calculating the total portfolio rebalancing cost and its parameters. This policy is not made public but is made available to the Regional Council.

The CIS Management Company may decide to implement a "partial" adjusted fees mechanism, in which case adjustable fees are only charged when net subscription/redemption flows exceed a certain threshold.

In the case mentioned in paragraph 3, the provisions of points 2.a to 2.j and 2.m apply. For the purposes of point 2, "redemption caps" is replaced by "adjusted fees".

6. Implementation Modalities for the Segregation or "Side Pockets" Mechanism

A CIS Management Company may decide to segregate the assets of a CIS it manages when the sale of certain assets would not be in the interest of unitholders or shareholders. In this case, a CIS is created to receive the assets whose sale would not be in the interest of unitholders/shareholders (FIA side pocket) and another to receive the remaining assets (Replica CIS).

In this case, the provisions of Articles 64 to 73 of the Instruction apply.

This Circular takes effect upon its publication.

Done in Abidjan, on 03 JAN 2022

The General Secretary Ripert BOSSOUKPE