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Pricing practices of New Zealand fund managers

3 February 2005

Pricing practices of New Zealand fund managers

The Securities Commission has completed its inquiry into the pricing practices of fund managers.

The Commission found that neither market timing nor late trading was commonly practised in New Zealand.

“Market timing” is trading in units based on an out of date price. Short-term investors use market timing to make quick trades to exploit a stale fund price. A fund price is stale when the price of the units in the fund does not reflect all the available information about that fund.

“Late trading” is the buying and selling of units after the close of trading but using a price that was current when the market closed. Late trading allows certain preferred investors to trade after the cut-off time for accepting buy or sell instructions.

The inquiry followed concerns raised last year in the United States, and subsequently in Australia, about certain practices that may be detrimental to investors, particularly market timing and late trading.

In New Zealand both historical and forward pricing methods are used by fund managers to price their funds. Forward pricing is when the price of the units in the fund is determined after the buy or sell instructions have been received from the investor. Historical pricing is when the price of the units in the fund is determined before the investors’ buy or sell instructions are received.

There is a greater potential for market timing where historical pricing, rather than forward pricing, is used. This is because a forward pricing model ensures that the price of the units is not publicly known at the time buy or sell instructions are issued by investors.

The Commission notes that most fund managers have taken steps to detect and deter market timing activities. The Commission supports these steps.

The Commission:

supports the move of fund managers to using forward pricing for managed funds;

supports the use of procedures such as limiting switching privileges, switching fees or transaction costs, the suspension or spreading of payments, the ability to re-price funds, the ability to review transactions and disclosure in offer documents of fund managers’ pricing practices including general information about measures in place to prevent or deter abusive practices, where historical pricing is used or where the fund invests in international equities;

supports the use of strict cut-off times to prevent late trading;

supports procedural checks such as management reviews, compliance checks, internal and external audits, etc., to ensure that cut-off times are adhered to;

recommends that fund managers and trustees of funds actively monitor procedures and protections in place to detect or deter market timing and late trading activities.

The Commission conducted its inquiry by seeking written and signed statements from fund manager firms. The Commission’s findings are based on the information provided by those firms.


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