UCITS funds: be prepared for the transaction costs for PRIIPs

Although UCITS are required to comply with the PRIIPs (Packaged retail and insurance-based investment products) regulations since the first of January 2023, they still have their work cut out. As of last year, UCITS already had to provide a Key Information Document. In addition, UCITS will be required to calculate implicit transaction costs using arrival prices. This requirement has to be met latest on December 31, 2024. If you are looking to understand these requirements, and get help in complying with them, Projective Group can offer valuable support.

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Background on PRIIPs

The PRIIP regulation was already implemented by the European Union in 2018 through (Regulation (EU) No 1286/2014 PRIIPs). The regulation aims to improve transparency and comparability and requires disclosure of all costs and fees associated with investments in products like investment funds. The objective is to protect investors through standardized key information documents (KIDs), so that they receive accurate and clear information to make informed investment decisions. In January 2023, with the go live of PRIIP KID of UCITS, additional amendments to PRIIPs regulations came into effects.

The evolvement of PRIIPS regulations is showcases in the illustration below:

Regulatory Implication regarding Arrival Price

Like MiFID II (the second Markets in Financial Instruments Directive), a key objective of the PRIIP legislation is to ensure full transparency and comparability of costs associated with investing in products like investment funds. The disclosure covers one-off charges, ongoing charges, incidental charges, and explicit and implicit transaction costs related to trading of underlying securities. The following illustration explains this more in-depth:

Two methods are used to calculate implicit transaction costs. The first method, outlined in points 12-18a of ANNEX VI Regulation (EU) 2021/2268, is based on actual transaction costs, taking the arrival price into account. The arrival price involves calculating the percentage difference between the market mid-price at order time and its execution price. The second method, known as the New PRIIPs method detailed in points 21-23 of ANNEX VI Regulation (EU) 2021/2268, uses the half spread (bid-ask spread) as the primary input.

The transaction costs should be calculated on an annual basis, derived from the transaction costs incurred by the PRIIP over the past three years. If the PRIIP has a track record of less than three years, the calculation of transaction costs must follow the methodology outlined in the regulation. In such situations, these costs can be determined either by:

• multiplying an estimate of portfolio turnover in each asset class with costs based on half spread method for each asset class.
• taking an average of the actual transaction costs (arrival price) incurred during the operational period and combining it with a standardized estimation for the remaining portion of the three-year period.

The conditions for using these two methods have been further modified, especially for UCITs funds, by the introduction of the new RTS Regulation (EU) 2021/2268. Starting January 2023, funds that were initially exempt from generating PRIIPs key information documents are now required to provide such documents.

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, UCITS funds must adopt the actual transaction cost method as described in ANNEX VI 12-18a of RTS 2021/2268. The actual transaction cost methodology requires a history of arrival prices over three years (2022 – 2024). To ensure adequate arrival price records for PRIIPs, funds should start the arrival price collection process earlier.

How Projective Group can help

From obtaining the trade profile to generating implicit transaction costs, several processes take place. We have created the following description outlines for the general operational model for sourcing transaction costs:

As expected, various challenges arise in different procedures. For instance, PRIIPs manufacturers may struggle with decisions such as selecting the optimal data vendor to maximize cost savings. Questions may arise about whether the client stores corrected data and under what conditions different transaction cost methods can be applied. Additionally, it is crucial to assess whether there are any regulatory compliance issues in the current operating model.

Projective Group provides support across diverse fields and help you to effectively address these challenges. Feel free to reach out to us.