Debunking the myth: Not all listed securities will have an arrival price

Introduction
 

With the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulatory deadline for arrival price transaction costs fast approaching, the migration from the new PRIIPs (NP) to the arrival price (AP) methodology is raising some concerns over market data availability.

AP methodology
 

AP refers to the mid-price at the moment an order is transmitted for execution. The spread between AP and the order’s execution price is used to compile the implicit transaction costs.

The PRIIPs Regulation (Delegated Regulation [EU] 2017/653 and its supplement from 2021), particularly its Annex VI, underlines the key requirements for applying this methodology. Today, some UCITS funds still use the NP methodology to approximate each security’s transaction costs, depending on their asset class’s liquidity assessment.

By the end of 2024, UCITS funds will need to integrate the AP compilation methodology into their transaction cost calculations instead of the NP methodology, emphasizing the PRIIPs Regulation’s commitment to transparency on hidden costs and investor protection.

Market data availability
 

If AP data is unavailable or timestamps cannot be sourced, the PRIIPs Regulation allows the use of open prices (OP) or previous close prices (PCP) as a fallback. Therefore, these are technically considered as PRIIPs-compliant arrival prices.

The PRIIPs Regulation assumes that full coverage of AP, OP or PCP on listed financial securities will be available. However, this is not the case in practice, and the regulation does not allow for a scenario where this fallback data is lacking.

Deloitte’s benchmarking analysis of more than five data vendors uncovered data gaps due to less liquid securities, such as small-cap equities or high-yield corporate bonds. Figure 1 displays the results of this analysis by aggregate view per asset class.

Figure 1: AP retrieval per asset class

Different asset classes bear different retrieval rates due to their respective liquidity level. Investment-grade corporate bonds enjoy higher data availability compared to high-yield corporate bonds

Figure 1 shows most of our participants boast high market data retrieval rates, peaking at 98% for some asset classes like large-cap equities in developed markets. The market data availability for all categories of fixed-income and equity trades averages at 92.4%.

Still, 92.4% is not 100%. What are market participants using if this information is unavailable, and should they not account for implicit transaction costs? The most commonly observed fallback approach is reverting to the independent spreads of an NP approach, like it is mentioned for over-the-counter (OTC) securities in the 2021 PRIIPs regulatory technical standards (RTS).

We would also like to point out that AP availability does not necessarily mean it is used in the calculation. This depends on each asset manager’s assumptions and methodology for accepting or rejecting the AP spreads obtained.

Conclusion
 

As the 2024 AP deadline approaches, investment funds must prioritize its integration in their transaction cost reporting processes to ensure they comply with the PRIIPs Regulation. However, our benchmarking analysis shows that full coverage on listed securities will not be guaranteed.

Deloitte can help you benchmark your use of AP per asset class compared to your peers, including your average AP spreads per transaction and total transaction costs obtained.