Subscribe to our newsletter

Stay up to date with acarda RegTech News

  • *Please complete all fields marked with an asterisk.

acarda Platform Demo

acarda platform

See the acarda Platform in action

We can demonstrate what the acarda platform can do using real-life scenarios in your company. If you are interested in this, let us know using this email for If you are interested in this, let us know using this email form:

  • *Please complete all fields marked with an asterisk.
 

Amended PRIIPs RTS draft: What’s next?

On 21 July, 2020, the European Supervisory Authorities (ESAs) informed the European Commission of the outcome of their review on the Key Information Document (KID) for packaged retail and insurance-based investment products (PRIIPs). The review of the PRIIPs Delegated Regulation pointed out the main issues that had been identified following the October 2019 Consultation Paper, in particular regarding information on risk and performance measures and transaction costs.

As a result, the draft regulatory technical standards (RTS) to amend the technical rules on the presentation, content, review and revision of KIDs were not adopted by all three ESA Boards. The EBA and ESMA Boards agreed on the draft RTS while the EIOPA Board did not give them the support of a qualified majority, although many members agreed with the draft. The EIOPA Board members that did not support the technical standards generally argued that a partial revision of the PRIIPs Regulation is not appropriate at this stage.

The final report, published along with the letter, summarises the findings of consumer testing conducted by the European Commission. It proposes amendments to the PRIIPs for KID based on the feedback received.

This article will focus on the two relevant topics covered in the draft RTS i.e. risk and performance measurement and the methodology used in transaction cost calculation.

what will happen now?

The draft RTS not having been adopted by all boards result might mean that the last agreed version of the RTS will come into effect on 1 January 2022. Another potential outcome is that we will have to produce and distribute the UCITS Key Investor Information Document (KIID) and PRIIPS KID to our clients in parallel.

Independently, if the UCITS KIID can be produced after 2021 and risk and performance are calculated with UCTIS, the PRIIPS transaction cost methodology using the current basis point method will no longer be applicable from 2022. It will only be able to be able to be applied to new funds for which a history is not available.

Many German, French and Austrian asset managers use this simple method, but we anticipate this no longer being possible.

Whatever the case, acarda is prepared for any eventuality with our regulatory reporting platform arep. We can set-up for each country an own version.

risk and performance

As shown by the survey conducted in response to the drafted RTS, many respondents opposed using the proposed performance scenarios computations that employed dividend yield methodology to estimate growth instead of using historical growth returns. This current methodology tested by the ESAs indicates uncertainty over the computation of future projections across the market. It is also opposed by the view that such projections cannot be relied upon to provide optimistic outcomes. The flipside is also reflected by stakeholders of AIFs or UCITS bond funds who are of the view that using historical performance data would create confusion. As a response to this, the ESAs also strongly support employing historical performance data in the form of graphs (already present within the UCITS KIID): this data would be included in the PRIIPs KID rather than ina separate document.

It is important to understand that the analysis conducted by ESAs focused on technical practicality and comprehensibility for consumers. In light of this, the ESAs proposed the use of scenarios forecasted from actual price history of the fund or a relevant benchmark for non-structured investment funds and PRIIPs. Meanwhile, for structured products, the ESAs proposed using the existing methodology provided that the PRIIPs manufacturer is allowed to use lower percentiles of estimated future returns to practice conservatism. This is in line with the ESAs current guidelines that provide extensive optimism in outcomes. Moreover, the ESAs suggestion regarding the time horizon for historical performance (a minimum period of 10 years) to encompass both positive and negative market scenarios is also supported by the current COVID-19 situation.

transaction cost

The second topic discussed in the report underlines the issues pertinent to transaction cost calculation and its methodology. The consultation paper presents two options and the report discusses the positives and negatives of both.

  • Option I – Introduction of a proportionality threshold to the current full PRIIPs methodology that exempts PRIIPs with a small number of transactions or low portfolio turnover
  • Option II – A new “principles-based” approach that is less prescriptive for the arrival price method by using a justified “reference” price and providing more derogation to alternative approaches for a higher number of situations.

It is worth noting that the ESAs have been supporting the slippage methodology as a more accurate reflection of cost compared to the bid-ask spread. However, with the aim of improving transaction cost representation to consumers, the ESAs have also prescribed exemptions to the methodology where products do not generate sufficient transactions to eliminate market movements, or where there has been low portfolio turnover over the previous three years.

This calls for a comprehensive market data sourcing strategy that enables asset managers to rise their reporting challenges.

what are the implications?

At this point, the discord in submitting the draft RTS delays the process of adopting the new PRIIPs Regulation. It also challenges the acceptability of the proposed changes to the Regulation. Although the UCITS exemption for providing a KID remains set to expire on 31 December 2021, a further delay in the adoption of the new Fund KID report may provide ground for yet another extension, if no agreement is reached.

a) risk and performance

The issues are currently under discussion include those pertaining to the present guidelines involving future projections versus historic performance disclosures. It is likely that the acceptability of the proposed changes will remain in debate. While the current impasse creates an uncertain situation, to say the very least, it has steered the industry towards incorporating historical information. This aligns with the method of providing such information as part of the PRIIPs KID, something that has been flexibly incorporated into our regulatory reporting platform arep.

b) transaction cost

The paper presents the view that transaction costs should be calculated as an aggregation way of costs over a three-year period, thus eliminating the impact of the market movements. Slippage cost methodology is therefore a more accurate representation than the half-spread approach.

On page 91 the Draft propose that Annex IV (14) of 2017/653 is given a new 23b clause: The clause stipulates that until 31 December 2021 transaction costs may be calculated using the methodology laid down int the Annex for funds and insurance products or which a Member State applied by 31th December 2021 rules on the KIDs)This means that the exemption or estimation method will still be permitted until 2024.

The exemption method allows clients to allocate a benchmark to each fund and apply this cost to the transaction. We suppose that using any external base point table e.g the AFT table will no longer be not allowed.

acarda, as a leading full-service provider in the compliance and regulatory domain is continuously on the look-out for changes in the regulatory landscape. We keep a close watch on the current situation in the market and review proposed amendments to the RTS

acarda´s reporting and data management platform, arep, incorporates a comprehensive PRIIPs reporting solution. Its modular capability ensures flexibility at times when new regulations are introduced or changes to existing regulations are prescribed for regulators in risk and performance calculation. It also uses a hybrid approach that combines comprehensive market practices, the basis points for a sample of transactions and the arrival price methodology through an optimised waterfall strategy, with the option of using several market data providers.

We thank our colleagues Osama Khan and Agata Cichecka for their contributions to this article.

More news…

European Commission considers to extend the exemption period of UCITS KIID following the postponement of new PRIIPs RTS

As anticipated, the European Commission published a consultation paper on 15 July 2021 requesting to extend the exemption period for the UCITS KIID until 30 June 2022.

More

CRR II: new reporting regulation from July 2021. What to consider now.

By the end of June 2021 the updated Capital Requirement Regulation (CRR II) came into force. The goal of the EU regulation is to introduce a more risk-sensitive framework for management credit risks. One of the key outcomes of CRR II will be a stricter client reporting and disclosure regime.

More

New standards for PRIIPs-KIDs as of July 01, 2022

According to information from the German Investment and Asset Management Association (BVI) dated May 21, 2021, the EU Commission plans to delay the start of PRIIPs-KIDsby six months. A package of measures, which will include not only technical adjustments to Level 2 but also a selective amendment to the Level 1 Regulation, is to be forwarded by the EU Commission to the EU Parliament and Council before the end of June 2021.

More

European Commission considers to extend the exemption period of UCITS KIID following the postponement of new PRIIPs RTS

As anticipated, the European Commission published a consultation paper on 15 July 2021 requesting to extend the exemption period for the UCITS KIID until 30 June 2022.

More

CRR II: new reporting regulation from July 2021. What to consider now.

By the end of June 2021 the updated Capital Requirement Regulation (CRR II) came into force. The goal of the EU regulation is to introduce a more risk-sensitive framework for management credit risks. One of the key outcomes of CRR II will be a stricter client reporting and disclosure regime.

More

New standards for PRIIPs-KIDs as of July 01, 2022

According to information from the German Investment and Asset Management Association (BVI) dated May 21, 2021, the EU Commission plans to delay the start of PRIIPs-KIDsby six months. A package of measures, which will include not only technical adjustments to Level 2 but also a selective amendment to the Level 1 Regulation, is to be forwarded by the EU Commission to the EU Parliament and Council before the end of June 2021.

More

ESMA updates its FAQs on AIFMD

On 28th May 2021, ESMA published an update on its FAQ on the application of the Alternative Investment Fund Managers Directive (AIFMD).
Three new questions related to Annex IV reporting were added to the document. In the Section III question number 84, 85 and 86, ESMA provided detailed explanations and examples on the reporting obligation of NET DV01, NET CS01 and NET Equity Delta of the AIF.

More

acarda adds InReg for increased European regulatory monitoring

acarda, a leading European RegTech company and part of LPA Group, has announced a coorperation with InReg, a regulatory maintenance provider that specialises in monitoring changes occurring within the regulatory updates for the asset management and life insurance sectors.

More

acarda GmbH

Eschersheimer Landstr. 14
60322 Frankfurt am Main
Germany

acarda Luxembourg

68, Avenue de la Liberté
L-1930 Luxembourg

acarda London

c/o LPA
7 Westferry Circus
Canary Wharf
London E14 4HD
United Kingdom

© 2021 acarda GmbH | Alle Rechte vorbehalten | All rights reserved
text