A Comparison Between the Technical Committee Report and the Emerging Markets Committee Report on Valuation and Pricing of Collective Investment Schemes

A COMPARISON BETWEEN THETECHNICAL COMMITTEE REPORT AND THEEMERGING MARKETS COMMITTEE REPORTON VALUATION AND PRICING OFCOLLECTIVE INVESTMENT SCHEMESJoint Report by the Technical Committeeand theEmerging Markets Committeeof theInternational Organization of Securities Commissions May 1999 1BackgroundThe IOSCO Technical Committee Working Group on Investment Management (‘TCWG5’), and the Emerging Markets Committee Working Group on InvestmentManagement (‘EMC WG5’), have produced reports flowing from mandates to studyregulatory approaches to the valuation and pricing of collective investment schemes(‘CIS’) and interests in CIS.Members of TC WG5 considered it useful to make a comparison between theinformation relating to valuation and pricing of CIS interests in their memberjurisdictions set out in their Summary report with the similar information in theEMC WG5 report. Such a comparison would promote a better understanding of thecommon issues that arise for members of the two groups, and would also identify areasof difference in regulatory approach or emphasis. This was considered particularlyuseful because of the increased CIS investment activities including cross-borderactivities that occur not only among TC WG 5 member jurisdictions but also involvingsome of EMC’s member jurisdictions.Substantial similarity between the two reportsBoth reports were prepared on the basis of information provided by the respectivemembers of the two groups in response to questionnaires dealing with valuation andpricing of CIS. The two questionnaires, although not identical in all respects, dealt withsubstantially similar aspects relating to valuation and pricing of CIS.The key questions in both questionnaires were designed to ascertain:• different regulatory approaches to, and methods of, valuation of CIS assets andpricing of CIS interests in member jurisdictions, depending on the nature of theunderlying investments;• disclosure obligations of CIS operators relating to valuation and pricing of CIS; and• regulatory controls that are used to minimise inaccurate valuations and pricing ofCIS.Due to the above common coverage, both reports provide significant insight intocommon practices in valuation and pricing of CIS in the relevant member jurisdictions(note - although the EMC WG5 main report does not identify the specific jurisdictionsin the individual analysis of each question, the attached summary of informationprovides this information).Both reports highlight the use by many member jurisdictions of market price andforward pricing for the purposes of sale and redemption of CIS interests. Thereports also highlight the common principles that underpin the valuation andpricing methods used in member jurisdictions. Such principles are consistent with orare premised upon the established IOSCO principles relating to valuation and pricing ofCIS. 2In particular, both reports highlight the importance of the IOSCO principle thatvaluation and pricing of CIS interests in member jurisdictions must strive topromote fair treatment of incoming, continuing and outgoing investors in CIS.Some differencesAlthough there is a substantial commonality in the coverage of the two reports, theapproach adopted in each report appears to be somewhat different. This differencestems from the fact that the two reports have different objectives.The EMC WG5 report was not intended merely to identify different regulatoryapproaches and methods of valuation and pricing of CIS in their member jurisdictions. Itwas also designed:• to identify to what extent the approaches and methods used in member jurisdictionsare consistent with the IOSCO principles relating to valuation and pricing of CIS;and• to develop, in light of that information, recommendations that will help thosemembers which are currently enhancing or developing their regulation of CIS topromote greater consistency with IOSCO principles relating to valuation and pricingof CIS.In contrast, the TC WG5 report was designed primarily to ascertain the regulatoryapproaches and methods used in the member jurisdictions for valuation and pricing ofCIS for the purpose of sharing information to promote a greater understanding ofjurisdictional differences. Therefore, the TC WG5 report does not contain anyrecommendations or best practice standards relating to valuation and pricing of CIS.It is also noteworthy that the TC WG5 report deals in greater detail with aspects relatingto regulatory mechanisms for dealing with errors and mispricing of CIS interests thanthe EMC WG5 report.Further, while both the TC WG5 report and EMC WG5 report address the valuation ofparticular types of CIS assets, the list of assets that is dealt with in the TC WG5 report ismore extensive than the list of assets that is dealt with in the EMC WG5 report. It ispossible that, at this stage in their developments, the member jurisdictions of TC WG5generally allow CIS to invest in a broader range of investments (such as derivatives,swaps and non-liste