Updates to the Packaged Retail and Insurance Based Products (PRIIPs) regulation, due to take effect from January 1^st, 2025, will force asset managers to change the way they calculate their implicit transaction costs.

With the deadline rapidly encroaching, Broadridge outlines what firms need to do to become compliant.

 Managers get to grips with PRIIPs’ changes

Under PRIIPs, managers must disclose information about implicit and explicit transaction costs in a standardised Key Information Document (KID). From the beginning of the regulatory requirement firms have been allowed to adopt various approaches to transaction cost calculations. However, under Annex VI of EU 2017/653, from the 1^st January 2025 firms must adopt the arrival price methodology when calculating implicit transaction costs.

The arrival price methodology headache….What does it mean for asset managers?

While some asset managers have already adopted the arrival price methodology into their calculations not everyone has, mainly because of the volume of data required but also because of a reluctance to take action until it has seemed necessary. 

 A lot of asset managers and order management systems, do not capture and store arrival prices. When the arrival price is unavailable, most managers have defaulted to fallback prices or benchmark spreads as a last resort. However, relying on fallback prices can lead to increased slippage costs, particularly in a rising market.

 Although EU regulators gave managers a generous grace period to collect the necessary arrival price data going back three years, the deadline is fast approaching now, and some firms are beginning to worry.

The good news is that firms trading broadly “vanilla” securities, i.e. equities and even illiquid equities will not have too much difficulty obtaining the arrival prices for those assets. However, managers with more esoteric holdings, e.g. emerging markets debt, will find it much harder to obtain accurate pricing data on their underlying securities.

The right partner can make all of the difference

 To ensure compliance, firms are increasingly turning to experienced third parties, such as Broadridge, for help.

We have been helping clients calculate their implicit cost disclosures using the arrival price methodology since the changes in Annex VI of EU 2017/653 were announced, because we have always believed it reflects the actual costs much better.

 Our experience performing these types of calculations puts us in an excellent position to support the industry moving forward. For existing clients, there is no heavy lifting required, as our transaction cost calculations are already using the arrival price methodology.

 We also pride ourselves on accuracy, which is why data and calculations go through a rigorous validation process, so that any anomalous results are immediately identified and flagged to the client.

Next steps

 The rule changes are imminent, so firms do not have much time to get their operations in order.

 Although the migration to the arrival price methodology will not be totally frictionless, it is perfectly manageable.  Engaging with a provider, such as Broadridge, who is well-versed in calculating implicit transaction costs will be vital if firms are to avoid any potential mis-steps.

 To find out more about how we can support you with arrival price methodology for transaction cost calculations please read more here:

https://www.broadridge.com/article/asset-management/portfolio-transaction-cost-calculations