Regulatory Frequently AskedQuestions78

According to regulations 2017/653 and 2021/2268, updates are required at least once per year. However we advice to calculate and monitor on quarterly or bi-annually basis. The monitoring is needed to ensure material changes are captured and reflected in the KID. Additionally, this gives a deeper understanding of how the final transaction cost values are derived. 

This is a common question that many hesitate to ask. Here’s a simple breakdown:

EU Transaction Costs: Here the overall value of the transaction cost is floored at the level of the explicit transaction cost. Negative implicit transaction costs, Anti-Dilution Levies (ADL) or Swing Proceeds can not bring the total transaction cost below the explicit cost. If explicit costs are zero, the total transaction costs disclosed will be at least zero as well and cannot be brought below zero.

UK Transaction Costs: If the explicit and implicit costs combined are positive, the ADL can be substracted but it cannot bring the total cost below zero. Hence in this case a floor of zero applies. However, if the explicit and implicit costs combined are already negative, no ADL can be further deducted and it cannot impact the total transaction cost to become more negative or further below zero. Please note that in the latter case, the total reported UK transaction cost can be negative. Note that the FCA released a new CCI proposal that will make the implicit transaction cost no longer required for UK Product Summary Documents.

As of January 2025, the transaction cost calculations covers the period 2022 up to 2024. Therefore, it is indeed possible that those who started collecting arrival timestamps in 2024, they are still missing this important datapoint for the initial part of the period where transactional data is available. In such a case, one has to deal with several missing arrival timestamps, in which case one must follow the PRIIPs RTS-prescribed waterfall method:

First: Use a justifiable independent price as arrival price if available.

If unavailable: Use the opening price of the same day.

If still unavailable: Use the closing price of the previous day.

Ultimate fallback: Apply the half-spread for the asset class to which the instrument belongs.

Clarification on arrival timestamps: it should equal the time when an order to transact is transmitted to another person. There are the four key timestamps which should be distinguished:

Order timestamp: When the order is created/accepted by the submitting system (e.g., trader/OMS/EMS). Applies to any order type (market, limit, stop, etc.).

Arrival timestamp: When the order arrives at the execution venue or broker’s execution system (i.e., when it becomes actionable for routing/execution).

Execution timestamp: When an execution (fill) occurs, i.e., when the trade is matched/filled.

Settlement date: The contractual date when delivery-versus-payment occurs: securities are delivered and cash is paid.

For regular market orders, the order timestamp equals (approximately) the arrival timestamp. However, for limit orders, these can differ significantly. Hence it is important for the PRIIPs regulation to use the prescribed arrival timestamps. 

Transaction costs are explicit costs or charges incurred when buying or selling investments. They must be calculated on an annualised basis, using an average of transaction costs over the previous 36 months. Where the fund has existed for less than three years, transaction costs must be calculated on a reasonable alternative basis.

Trades are gathered from a variety of systems and repositories: portfolio management systems, order management systems, fund accounting systems, etc...We identified two major categories of issues:

 1) Incorrect Data:

Inclusion of cancelled trades or option exercises, which do not impact slippage calculations and should be excluded.

Timestamp errors, such as using local time instead of a fixed timezone like UTC.

Some participants have corporate actions (stock-splits, dividend payments,...) nested amongst the bulk of the transactions,  

2) Incomplete Data:

Unclear currency denominations, such as confusion between pounds and pence.

Missing MIC codes, which are essential to identify the trading market for trades identified by the ISIN number of the underlying asset.

For a new consumer composite investment, transaction cost estimates must be assessed for reasonableness by comparing them with the transaction costs of consumer composite investments that have a similar structure, investment strategy, and underlying assets.