19 March 2018

Helping you manage your transaction costs calculation under PRIIPs and MiFID II

Across the industry, there are multiple variations of transaction cost calculations being applied differently by market participants. As we are still in a phase of regulatory uncertainty, with the prescribed PRIIPs methods being challenged by the industry.

When looking at the current regulatory requirements, with a focus on the word current, there are clear obligations for asset managers within the PRIIPs RTS, while the MiFID II directive allows for more interpretation. The best practices of the industry are becoming more apparent but, as of the publishing of this blog, remain unclear. These will take into account the most efficient handling of client and market data for a result that follows a standard and allows for comparison.

Asset managers calculating transaction cost in-house are likely to spend a huge amount of time and money maintaining their calculations. For example, a firm with just 20K transactions per year can easily expect an employee to spend 20 hours a week on transaction cost calculations. This includes data gathering, market data retrieval, calculation, and result validation.

Asset managers may be asking themselves “How much time do I really need to spend on transaction costs calculation?”, “Which method is the best to aim for?”, ”What do I do if the market best practice or regulatory requirements change?”, “How do I ensure to keep my EPTs, EMTs and where applicable KIDs up to date?” while looking to the future and how the industry may influence the shape of the regulation and ensuring compliance.

Once these hurdles have been overcome more technical questions arise. Of the various calculation methodologies for Transaction Cost Calculation under PRIIPs and MiFID, three are defined in the current PRIIPs regulation and 2 additional variations based on best practices.  Which do you choose to focus on? What happens when and if it changes?

Following our transaction costs webinar, held in partnership with Thomson Reuters last month which you can watch here, we ran a survey to the participants and the feedback was clear.

Over 75% of respondents signalled that market data availability was a key challenge that needs to be addressed.

To follow up, we analysed our actual transaction data along with market data sourced from Thomson Reuters. When using the arrival price method, the results show that the mid-price, open-price and close-price all heavily influence the calculated result of the transaction cost. Where the vast majority of market data is the mid-price, the overall transaction cost will be lower compared to the results using only opening and/or closing prices.
In consequence firms calculating transaction costs with the latter will likely be disclosing their funds with higher transaction costs to the market.
To make transaction cost calculation, maintenance and publication easier and more accurate, KNEIP has developed a digital calculation engine. It is simple to use and helps asset managers operate more efficiently while disclosing accurate cost figures to the market.

As a member of various industry associations, we follow the developments of market best practices closely from the source to keep our solution up to date. Clients remain flexible at any time to choose the method they go with. If a new methodology arises, we also make sure to include it at no extra cost to our clients.

With our automatic processing, calculation and monitoring, if you upload 1 million transactions or more, there’s no need to go through every transaction manually to confirm that the result is OK. At the click of a button the client can define the method used while our automatic feed pulls the market data in, covering not just exchange trades securities, but also OTC trades with evaluated prices.

Clients are able to do all of this themselves and push the results directly through to their KNEIP PRIIPs and MiFID II production and dissemination services. The goal being to simplify the way you work so you can concentrate on what’s important.

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