In addition to the second Markets in Financial Instruments Directive (MiFID II), the PRIIPs Regulation (Packaged Retail and Insurance-based Investment Products) was brought into force by the European Union at the beginning of 2018 with Regulation (EU) No 1286/2014 PRIIPs.
These legislative measures aim, among other things, to ensure complete transparency and comparability of the costs associated with investments in products such as investment funds.The regulation primarily serves to protect investors and is intended to ensure that investors receive all relevant information for packaged investment products through standardized key information documents (KIDs) so that informed investment decisions can be made and comparability of investment products is ensured. The key information documents should also be sufficient for retail investors as a basis for an investment decision, as they must be formulated precisely, clearly and not misleadingly.
Due to these EU directives, it is mandatory to disclose all costs and fees related to investments in investment funds. This includes the obligation to reveal transaction costs involved in the acquisition and sale of the underlying securities within a fund.
The regulations mandate the separate disclosure of four distinct categories of costs associated with an investment fund. This disclosure is required both before the fund is sold to an investor and on an ongoing basis thereafter. These four categories include one-off charges (such as distribution fees, management fees, or redemption exit fees), ongoing charges (comprising annual operating and administration fees), incidental costs (including performance fees), and explicit and implicit transaction costs arising from the trading of underlying securities.
PRIIPs Regulation Change
The PRIIPs Regulation underwent additional amendments through Regulation (EU) 2021/2268. Consequently, starting in January 2023, funds initially exempted from generating PRIIP key information documents are now required to furnish such documents. The calculation method of transaction cost has undergone some changes as well.
The calculation of transaction costs involves two methods. The first method is based on actual transaction costs, outlined in points 12-18a of ANNEX VI Regulation (EU) 2021/2268, which considers the arrival price. The second method, known as the New PRIIPs method detailed in points 21-23 of ANNEX VI Regulation (EU) 2021/2268, utilizes the half spread as the primary input.
As per ANNEX VI 23b of RTS 2021/2268, the derogation of calculation method for transaction cost (New PRIIPs Method following ANNEX VI 21 of RTS 2021/2268) granted for UCITS funds will expire at the end of 2024. Subsequently, starting January 2025, the UCITs funds must adopt the actual transaction cost method outlined in ANNEX VI 12-18a of RTS 2021/2268. The actual transaction cost method necessitates three years of history (i.e. 2022-2024) of arrival prices. To ensure adequate arrival price records for PRIIPs, funds must initiate the arrival price sourcing process earlier.
AVS Methods for Transaction Cost
Aligned with relevant EU directives, AVS has formulated a framework and a comprehensive process for overseeing the entire conceptualization, implementation, and execution of transaction cost analysis and calculation.
AVS Arrival Price Waterfall developed by AVS Valuation helps our clients effectively source the arrival prices of exchange traded instruments (liquid and illiquid), ensuring compliance with RTS 2021/2268. Moreover, by integrating AVS Bid Ask Spread Matrix, hybrid method following RTS 2021/2268, 2021 and RTS 2017/653, 2017 ANNEX VI 21 (a)(b) can be employed in order to comprehensively address both exchange traded and OTC instruments.
In addition, AVS offers consulting services and fast and flexible customer support to assist our customers with the implementation of the PRIIPs regulation and transaction cost analysis.
Customers can use an audit-proof user interface developed by AVS in cooperation with its IT partner Wondersys to process, view and monitor their requests for transaction cost and have access to a wide range of configurations, such as detailed analysis, KPI tracking or a helpdesk.
Contact us for further information.