Slippage Methodology & Navigating Evolving Transaction Cost Requirements

As the European asset management landscape continues to evolve, many firms seek solutions to streamline and scale their approach to ongoing cadenced reporting like PRIIPs. Challenges arise in the details of the execution, however.  

One distinct category of calculations - transaction costs – presents a unique set of challenges. Firms face a strict deadline to adopt so called slippage methodology before the end of 2024, and the inclusion of UCITS funds extends the requirements for these calculations.  

As a result, asset managers realise that delivering transaction cost calculations at scale requires bulletproof data management, impeccable bookkeeping and airtight operational consistency.  

PRIIPs as a Bellwether to a Changing Landscape  

Transaction costs challenges came into sharp focus alongside the controversial and often confusing PRIIPs regulation, which covers investment funds, structured products and derivatives. The inclusion of transaction costs for Key Information Documents (KIDs) demands unprecedented levels of transparency in the industry. 

Because these costs are divided into two main categories (explicit costs, such as direct broker fees and implicit costs, which include less visible expenses like bid-ask spreads and price movements between trade decisions and executions), centralised calculations must leverage data from disparate data sets, whenever reporting is done. This isn’t the only challenge however.   

The Uncertainties of the Slippage Methodology 

The "slippage methodology" requires precise tracking of price movements between trade decisions and executions. Slippage refers to the movement of a price from the moment of the buy decision to the moment the order is executed. This delay can result in an execution price that is different from the expected price at the time of the buy decision and can account for either a cost or a profit.  

Facing the challenge of tracking and reporting on these transaction costs at scale, asset managers will also need to grapple with the possibility of negative transaction costs, which can be difficult to explain to investors and regulators. While none of these factors are under a fund manager’s control, fund managers are still required to track, report and explain the change in price.  

Meanwhile, there is no guarantee that the slippage methodology requirement will even remain in place. The constant state of flux demands adaptability – along with robust systems capable of accommodating methodological changes without disrupting ongoing reporting processes. 

Impeccable Data Management 

At the heart of accurate implicit transaction cost calculation lies the monumental task of data management. Asset managers must record precise "arrival" prices for every trade, which demands meticulous attention to detail and sophisticated technological infrastructure. The sheer volume of price data, often measured in millisecond intervals, presents a significant data storage and processing challenge. Ensuring data consistency over the required three-year period adds another layer of complexity, as historical data will need to be maintained and readily accessible.  

A Tight Timeline 

The looming deadline for mandatory adoption of the slippage methodology by the end of 2024 necessitates rapid development and implementation of new systems and processes. If firms are required to work with only two years of historical data instead of the intended three, the restructure will require creative solutions to avoid compromising the integrity of the calculations.  

Unfortunately, for many firms this compressed timeline leaves little room for error and demands highly efficient project management and resource allocation to ensure timely compliance. Even as standards change, regulators will always expect strict adherence to their deadlines.   

Resource Allocation 

Meeting the demands of transaction cost calculation requires time, technology and people power. Most current systems are simply not equipped to track and report on this level of data accurately.  The need for active monitoring of fluctuations necessitates dedicated personnel or automated systems capable of triggering alerts when updates are required. 

Further, implementing pages of legal documentation into a technology solution is a daunting task. Firms will be required to invest in order management system upgrades to capture all necessary data points with the required precision. If integration with market data providers is required, more IT resources will need to be on standby.  

Then, of course, there’s distribution. The creation of compliant, branded KIDs that meet regulatory standards demands both design and compliance expertise. And distribution to appropriate channels and filing with local market authorities adds another layer of logistical complexity, requiring robust distribution networks and regulatory knowledge. 

Work Smarter, Not Harder  

In a scenario where an asset manager calculates the transaction costs, each time the SRI changes, the client needs to republish their PRIIPs KID. To do so, they need to update the transaction costs calculation, download it and upload it into the FE fundinfo system to then re-publish the KID.  

We step up this process and provide a layer of automation by continuously calculating this data point so our clients could publish the new report with minimum effort, without worrying about generating these calculations any further, because we always keep them up-to-date. And just to add, we can also automatically trigger the European PRIIPS Template (EPT) creation or its update as a result. 

Given these challenges, many asset managers are turning to specialised third-party vendors like FE fundinfo for comprehensive solutions. This strategic move offers several benefits.  

With decades in the business, FE fundinfo brings expertise in complex methodologies so we can capture accurate data and deliver accurate calculations at scale. With 13mn+ data points processed monthly, our data solutions are robust enough to handle large volumes of price data with the necessary precision.  

More than that, firms love FE fundinfo for our ability to scan the regulatory horizon across 70+ jurisdictions, keeping abreast of changes and adapting our solutions accordingly. When working with a proven partner like FE fundinfo, asset managers gain the freedom to focus on their core business, not the changing whims of regulators.  

A complete solution that tracks regulatory changes, handles complex calculations, then compiles and distributes documents presents a necessary economy of scale for most firms. Our broad distribution network of 30+ platforms, 60+ life & pension companies, 120+ banks & brokers and 300+ third parties & partners, means we can put the right documents in the right hands at the right time and provide full visibility to the regulatory status of each of your funds.  

Take the Next Step to Operational Excellence  

Evolving regulatory standards including transaction cost calculations place yet another burden on asset management firms. How firms manage that burden – either with revised in-house protocols or through outsourced solutions – will impact their ability to deliver for their clients while remaining compliant.  

By partnering with specialised providers like FE fundinfo, asset managers can ensure compliance without compromising efficiency. This approach allows them to transform a regulatory burden into a strategic advantage, enhancing transparency, reducing risk, improving operational processes and ultimately building stronger relationships with their clients.