MiFID II Transaction Cost Calculations Continue to Cause Issues for Asset Managers
Under MIFID II, asset managers were free to use different methods for calculating transaction costs – either by interpreting the MIFID II requirements themselves or, as most firms have done, by leveraging PRIIPS methodology. However, the PRIIPS methodology has its own challenges, particularly on how implicit costs are calculated. Depending on data availability, the implicit costs can be based on the average spread of the instrument, the arrival price at the time the order is submitted or, as a fall-back, may even be based on the open or closing price of the security.
As a result of these different methodologies and data inputs, funds with similar strategies are showing vastly different transaction costs. Analysis by Silverfinch, a regulatory data exchange platform, shows that almost 700 funds have reported negative transaction costs and Morningstar data shows that more than 670 funds reported transaction costs greater than 1%. Asset managers showing these abnormally high costs are now urgently reviewing their cost calculation methods to bring them in line with those of their peers.
The Investment Association, the leading UK trade body for investment managers, has called on the regulators to review the calculation methods. These objections are not new and regulators were warned ahead of the effective date that rather than providing transparency, the regulation could leave investors confused as to how to interpret the data.
It is doubtful if the regulators, at least in the short-term will provide any respite to asset managers. Instead asset managers will continue to refine their transaction cost calculations. Working groups and forums organized by industry bodies continue to drive for common reporting standards and calculation methods. Vendors also have a vital role to play as technology matures, the calculation method is refined and data quality improves. By building standard data sets and calculation methods to support their clients, vendors can reduce the overall cost for clients as the service becomes more vanilla.
No doubt calculation methods and data will improve – in the meantime, firms should continue to monitor the how they compare to their peers and investors should treat transaction cost data with caution.