CIRCULAR No. 12/CREPMF/2022 on the Valuation of Collective Investment Undertakings and Their Assets

WEST AFRICAN MONETARY UNION

CREPMF

REGIONAL COUNCIL FOR PUBLIC SAVINGS AND FINANCIAL MARKETS

CIRCULAR No. 12/CREPMF/2022

RELATIVE TO THE VALUATION OF CIUS AND THEIR ASSETS

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The General Secretariat of the Regional Council for Public Savings and Financial Markets (CREPMF) draws the attention of Collective Investment Undertakings (CIUs) and CIU Management Companies (MCs) approved on the UMOA regional financial market to the fact that, in accordance with current regulations, they must comply with the provisions of this Circular, which specifies:

• the criteria concerning the procedures for the correct valuation of assets and the calculation of the net asset value per share or unit;
• the professional guarantees that the external valuation expert must be able to provide to effectively perform the valuation function;
• the frequency of the valuation carried out for open-ended CIUs, which must be appropriate given both the assets held by the CIU and its issuance and redemption policy.

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

1. CIU Asset Valuation Policies and Procedures

The CIU Management Company establishes, maintains operational, implements, and reviews, for each CIU it manages, written policies and procedures that allow for a solid, transparent, complete, and duly documented valuation process. The policies and procedures address all important aspects of the valuation process for the CIU concerned and the procedures and controls in this regard.

The CIU Management Company ensures that fair, adequate, and transparent valuation methods are applied to the CIUs it manages. Valuation policies determine the valuation methods used for each type of asset in which the CIU may invest in accordance with the Instruction.

The CIU Management Company does not invest for the first time in a given type of asset before one or more appropriate valuation methods have been determined for that specific type of asset.

The policies and procedures establishing the valuation methods include data, models, and criteria for selecting price and market data sources. They provide that prices are obtained from independent sources whenever possible and appropriate. The process of selecting a given method includes an assessment of available methods, taking into account their sensitivity to changes in variables and how different strategies determine the relative value of portfolio assets.

Valuation policies define the obligations, roles, and responsibilities of all parties involved in the valuation process, including the governing bodies of the CIU Management Company. Valuation procedures translate the organization defined by these policies.

Valuation policies and procedures address at least the following points:

a) the competence and independence of the personnel members who actually perform the asset valuation; b) the specific investment strategies of the CIU and the assets in which it may invest; c) the controls applied to the selection of data, sources, and methods used for valuation; d) the escalation channels provided for addressing asset valuation differences; e) the assessment of possible adjustments related to the size and liquidity of positions or, where applicable, to changes in market conditions; f) the appropriate timing for closing the books for valuation purposes; g) the appropriate frequency of asset valuation.

When an external valuation expert is appointed, the policies and procedures establish an information exchange process between the CIU Management Company and this expert, to ensure that all information necessary for performing the valuation task is transmitted.

Valuation policies and procedures provide that the CIU Management Company performs diligent oversight of third parties designated to provide valuation services, prior to their mission and periodically thereafter.

When the valuation is performed by the CIU Management Company itself, the policies describe the safeguards put in place to guarantee the functional independence of the valuation task in accordance with Article 13 of the Instruction. These safeguards aim in particular to prevent or limit the exercise by any person of inappropriate influence on how another person conducts valuation activities.

2. Use of Models for Asset Valuation

If a model is used for the valuation of a CIU's assets, the valuation policies and procedures include an explanation and justification of the model and its main characteristics. The reasons for choosing this model and the reasons justifying their choice, as well as the limitations of model-based valuation, are appropriately documented.

Valuation policies and procedures provide that, prior to its use, the model is validated by a person who possesses sufficient expertise and has not participated in its construction. The validation process is appropriately documented.

The model is subject to prior approval by the governing bodies of the CIU Management Company. When the model is used by a CIU Management Company that performs the valuation function itself, the approval by the governing bodies is without prejudice to the model being verified by a valuation expert or an auditor.

3. Consistent Application of Valuation Policies and Procedures

The CIU Management Company ensures that the valuation policies and procedures as well as the chosen methods are applied consistently.

Valuation policies and procedures and the chosen methods apply to all assets of a CIU, taking into account the investment strategy, the type of asset, and, where applicable, the existence of different external valuation experts.

When no update is required, the policies and procedures are applied consistently over time, and the sources and rules used for valuation remain consistent.

Valuation procedures and the chosen methods apply consistently to all CIUs managed by the same CIU Management Company, taking into account the investment strategies, the types of assets held by the CIUs, and, where applicable, the existence of different external valuation experts.

4. Periodic Review of Valuation Policies and Procedures

Valuation policies provide for a periodic review of the policies and procedures, including valuation methods. This review is conducted at least once a year and before the CIU embarks on a new investment strategy or invests in a new type of asset not covered by the existing valuation policy.

Valuation policies and procedures describe how and under what circumstances valuation policies, including valuation methods, should be modified. Recommendations for modifying policies and procedures are addressed to the governing bodies, by whom any changes must be examined and approved.

5. Review of Asset Values

The CIU Management Company ensures that all assets held by the CIU are correctly valued at their fair value. The CIU Management Company records in writing, for each type of asset, the terms according to which it determines whether each asset is correctly valued and at its fair value. The CIU Management Company is able to demonstrate, at any time, that the portfolios of CIUs it manages are correctly valued.

Valuation policies and procedures provide for a process for reviewing asset value when there is a significant risk of incorrect valuation, i.e., in particular in the following cases:

a) the valuation is based on prices that can only be obtained from a single counterparty or a single broker; b) the valuation is based on illiquid market prices; c) the valuation is influenced by parties related to the CIU Management Company; d) the valuation is influenced by other entities that may have a financial interest in the performance of the CIU; e) the valuation is based on prices provided by the counterparty that is the originator of the instrument, particularly when it also finances the CIU's position on that instrument; f) the valuation is influenced by one or more persons belonging to the CIU Management Company.

Valuation policies and procedures describe the review process, which includes sufficient and appropriate checks and controls regarding the reasonableness of each valuation. Reasonableness is assessed based on the existence of an appropriate degree of objectivity. Checks and controls include at least:

a) verification of values by comparing prices obtained from counterparties and comparing prices over time; b) validation of values by comparing realized prices with recent accounting values; c) examination of the reputation, consistency, and quality of the valuation source; d) comparison with values generated by a third party; e) examination and compilation of exceptions; f) search and highlighting of any difference that appears unusual or varies according to the valuation criterion established for the type of asset in question; g) search for stale prices and implicit parameters; h) comparison with the prices of all related assets or their hedges; i) examination of the data used for price formation based on a model, particularly those to which the price obtained with the model shows significant sensitivity.

Valuation policies and procedures include escalation measures to address differences or other asset valuation problems.

6. Calculation of Net Asset Value per Share or Unit

The CIU Management Company ensures that, for each CIU it manages, the net asset value per share or unit is calculated in accordance with the subscription and redemption policy and, in any case, at least once a year.

The CIU Management Company ensures that the procedures and method provided for the calculation of the net asset value per share or unit are fully recorded in writing. The calculation procedures and methods, as well as their application, are subject to regular verification by the CIU Management Company, on the basis of which written documents are modified.

The CIU Management Company ensures that corrective procedures are put in place to remedy, where applicable, an incorrect calculation of the net asset value.

The CIU Management Company ensures that the number of shares or units issued is subject to regular verification, with a frequency at least equal to that of the calculation of the price of the share or unit.

7. Professional Guarantees

The external valuation expert provides, upon request, professional guarantees demonstrating that it is able to perform the valuation function. The external valuation expert provides the professional guarantees in written form.

The professional guarantees attest to the qualifications and aptitudes of the external expert, enabling it to perform a correct and independent valuation, and at least:

a) that it possesses sufficient human and technical resources; b) that its procedures are adequate and guarantee a correct and independent valuation; c) that it has adequate knowledge and understanding of the CIU's investment strategy and the assets it is called upon to evaluate; d) that it enjoys a sufficiently good reputation and sufficient experience in valuation.

8. Frequency of Valuation of Assets Held by Open-Ended CIUs

The valuation of financial instruments held by an open-ended CIU is carried out each time the net asset value per share or unit is calculated pursuant to paragraph 1, point 6 of this Circular.

The valuation of other assets held by open-ended CIUs is carried out at least once a year, and each time there is evidence indicating that the value determined last is no longer fair or correct.

This Circular takes effect from its publication.

Done in Abidjan, on 03 JAN 2022

The General Secretary

Ripert BOSSOUKPPE