Guest Blog: The content and level of detail in cost and charges reporting for 2018 according to MiFID II

By Jens Jørgen Holm Møller, Experienced executive - international expert in asset management and business strategy

In my first blog, I focused on the need for a specific 2018 file with realized costs in order to ensure compliance, and at the same time, promote cost efficiency and high quality information to investors. Moreover, I informed that a free utility was available HERE. This blog focuses on issues to consider when distributors and manufacturers work with the 2018 EMT file. 

 

Content requirements


The general rule is that ex post information shall be based on costs incurred and shall be provided on a personalized basis. Be aware that ESMA requires a rather detailed personalized ex-post information in their Q&A: “For calculating the total costs during the year (in which the costs of the fund are taken into account), first of all the holding period of the fund is needed. The firm will have insight in this. Secondly, an investment firm has to have annualized information on ongoing realized costs and charges with regard to the financial instrument.” On that basis investment firms need to consider the following issues:
 
A: Holding period: The clients’ holdings in any fund can change from day to day, and therefore investment firms (hereafter distributors) ideally must calculate the holding period with a daily indifference period. Distributors can of course consider using another indifference period - this can be necessary for practical reasons.

B: Annualized realized costs for the products need to be collected by distributors according to the definitions in MiFID II. The ordinary EMT reporting focuses on anticipated costs and cannot be used for the ex post reporting. Distributors need specific information on realized costs for 2018 in order to comply with the MiFID obligation; hence, the manufacturers must produce and distribute a specific year-end EMT file with realized costs for 2018. The template contains:
  • One-off costs for 2018: ESMA notes that the distributor has to account for these, based on the actual costs paid by the clients. The EMT data can only be used in the ex post context if they are identical to the clients’ actual costs.  
  • Ongoing costs for 2018: In general, manufacturers must report an annualized realized cost in the EMT, which will be correct for all clients that have had the same number of fund shares throughout 2018. For clients that have changed their holdings this solution it will also be correct unless the fund in question has changed costs during the year. The annualized 2018 reporting will be far better though than using the latest ordinary EMT that is valid only at the end of 2018.  
  • Transaction costs for 2018: Based on the realized costs in 2018.     
  • Performance fees for 2018: Based on the realized performance for 2018

 

Standards for the use of templates

 
Currently there are no practises defined for the proper use of the EMT template regarding the content and reporting deadlines. I mention some examples below:
  • Does an EMT file with a reporting date of 28 December constitute an end of year file? Alternatively, will a new EMT with a reporting date of 15 January replace it? Distributors can solve the challenge of identifying the actual end-of year file for 2018, if manufacturers report in a specific 2018 EMT file. If no end of year reporting has taken place yet, no file with costs and charges for 2018 will be available for the given product, and the distributors will be unable to perform their regulatory obligations  
  • If manufacturers report their year-end EMT for the 2018 reporting in the same file in which they report their ongoing EMT updates, new EMT data received on 31 January may override the 2018 information, if this has been provided at an earlier date, for example on 8 January. This challenge again calls for specific 2018 EMT reporting.
  • If a manufacturer uses a given fund in a fund of funds structure, it is even more important for the underlying funds to report the 2018 EMT file early to the market.     
 
In summary, because the manufacturers will all be reporting their end-of-year EMTs at different frequencies and intervals, distributors will have substantial challenges in isolating the year-end data and obtain an entirely clean dataset. In my opinion, reporting in a specific EMT file for 2018 will facilitate the task for distributors and enhance the data quality.
 

Final words

 
ESMA expects distributors to provide ex post information to investors as soon as possible, thus many of them will be expected to complete their client cost reporting during the first quarter of 2019. This differs though from market to market, according to national reporting practise. In my next blog, I will investigate differences in national deadlines if any in various countries. If material differences exist, the industry will have to consider further standardization for the use of the EMT. In addition, there will be a need to promote an open and effective architecture of the data exchange services.
 
Copenhagen, 13 December 2018
Jens Jørgen Holm Møller