Since 1st January 2023, UCITs funds are required to comply with the PRIIPs Regulation and need to provide their investors with a PRIIPS Key Information Document (KID). AIF marketed to retail investors shall as well provide that same document to their investors.
Data collection is crucial
One of the trickiest aspects of a PRIIPS KID is the disclosure of transaction costs. These costs must be calculated on an annualised basis, based on an average of the transaction costs incurred by the UCITS over the previous 3 years. This new disclosure obligation means significantly greater data collection and verification of such data on the part of in-scope UCITS management companies.
Transaction costs include both explicit and implicit transaction costs.
- Explicit transaction costs include costs such as commissions paid to brokers or other intermediaries, stamp duty or market taxes, contract fees and execution fees for OTC derivatives, where relevant. These costs are calculated on the basis of fund accounting data.
- Implicit transaction costs refer to the difference between the mid-price at which an asset is valued when the investment manager is transmitting its order to a third-party for execution (the arrival price) and the price at which it is actually traded (the execution price). These costs reflect the best execution of transactions, but also take account of market movements if the time required for execution is too long. While explicit transaction costs are easily calculated, the implicit ones require the use of data points that are not necessarily captured by asset managers and that are not available to a fund administrators.
It is important to take action now
UCITs funds are required to calculate implicit transaction costs using arrival prices by the latest on December 31, 2024. This deadline allows UCITs funds to align with the requirements of PRIIPs. AIFs in scope of PRIIPs should already calculate their implicit transaction costs using arrival prices.
efa produces PRIIPs KIDs, EPTs or EMTs in which this cost information is included. However, efa is unable to calculate implicit transaction costs on the basis of arrival prices due to a lack of data (e.g. timestamps, arrival prices).
Clients can therefore either calculate the implicit transaction costs themselves and communicate them to efa, or, for those who can't, request support: clients provide efa with a set of transaction data, including timestamps. efa searches for arrival prices on this basis and calculates the implicit transaction costs as required by regulation. The results of the calculation are then automatically taken into account in efa's PRIIPs KID production process.