As a rule, the latest official market closing prices must be used to value publicly-traded securities, otherwise a ‘fair market value’ must be provided. This is designed to offer protection against late trading, market timing and other practices that can affect the value of a fund.
There are also prescribed rules for valuing certain assets such as short-term commercial debt and OTC derivative instruments (short for over the counter) that are not listed or traded on public exchanges. The management company of a UCITS fund must put in place valuation procedures for derivatives that are appropriate to their level of complexity, and details of the process must be disclosed to investors. The manager may appoint an outside firm to carry out such valuations. If it does so in-house, the process must be independent of the portfolio management to avoid conflicts of interest.