MiFID II and PRIIPs Count down for asset managersAugust 2017

Executive summary On 10 July 2017, the European Securities and Markets Authority (ESMA) clarified in their Q&A for MiFID II/MIFIR Investor Protection that asset managers need to provide transaction cost according to the PRIIPs regulation. This puts further pressure on asset managers, since now the broader fund range (i.e., all UCITS) are affected by the PRIIPs regulation, which will come into force at the same time as MiFID II as of January 2018.

EY supported intensively the European Working Groups to define a standard for data exchange between asset manager and insurer for PRIIPs, the European PRIIPs template (EPT), and as well between asset manager and distributors for MiFID II, the European MiFID II Template (EMT).

The EMT includes the target market definition, distribution strategy and costs and charges for ex-ante and ex-post.

Readiness checklistTarget market defined for various investor groups?

New market data (bid & ask ticks, opening prices and index constituents) sourced for transaction cost calculation?

Engine in place to calculate transaction cost using the new PRIIPs/estimate and arrival price methodology for broader fund range (e.g., UCITS, fond en euros)?

Engine in place to calculate summary risk indicator and performance scenarios?

Engine in place to report for MiFID II (EMT) and PRIIPs (EPT, KID) and UK pension scheme (FCA/IA code)?

Due diligence performed on first tier distributors?

Dissemination channel defined and setup for distributors (MiFID II EMT) and insurers/fund of funds (PRIIPs EPT)?

Fund distribution at risk due to target market, cost disclosure (including transaction cost calculation) and dissemination challenge

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Asset manager’s new reporting requirements for MiFID II, PRIIPs and UK pension scheme

PRIIP transaction cost calculation also required for MiFID II and FCA/IA code

New cost disclosure

New PRIIP performance scenarios

New PRIIP summary risk indicator

Investment €10 000Scenarios 1 year 3 years 5 years Stress scenario What you might get back after costs €9,778.26 €8,660.30 €7,882.97

Average return each year 97.78% 95.32% 95.35%Unfavourable scenario What you might get back after costs €8,901.03 €8,884.26 €9,243.40

Average return each year 89.01% 96.13% 98.44%Moderate scenario What you might get back after costs €10,685.19 €12,184.43 €13,894.03

Average return each year 106.85% 106.81% 106.80%Favourable scenario What you might get back after costs €12,800.74 €16,676.31 €20,841.81

Average return each year 128.01% 118.59% 115.82%

Estimate per PRIIP asset class

Costs per PRIIP asset class• NON-OTC products: use of index

constituents data • OTC-products: survey

Turnover• Deriving turnover per each PRIIP

asset class by classify each transaction into an asset class

One-off costs

Entry costs 5.00%

Exit costs 0.00%

Ongoing costs

Portfolio transaction costs

0.60%

Other ongoing costs 1.40%

Incidental costs Performance fees 0.00%

Arrival price method

Arrival price• At the time, when trade has been transmitted to the market• Sourcing of opening prices and bid & ask price ticks• Heavy effort to collect and to push data through the value chain

PRIIPs

EPT

KID

CEPT

MiFID II

Dis

trib

utor

sEMT

...

UK Pension scheme

FCA/IA code

LGP

S c

lient

sW

DC

P c

lient

s

Type of clients to whom the product is

targeted

Knowledge and experience

Financial situation with a focus on the

ability to bear losses

Risk tolerance and compatibility of the risk/reward profile of the product with the target market

Clients’ objectives and needs

Target market and product governanceThe identification of a target market should be based on both quantitative and qualitative information

Governance arrangements to be implemented throughout the product’s life-cycle

• Product review• Sales information• Governance

arrangements• Product offering

compatibility

• Product selection process• Distribution agreements• Distributor’s target market• Information to investors

• Product approval process• Conflict of interest• Scenario analysis• Product feature• Charging structure

• Manufacturer’s target market• Distribution strategy

and channels• Information to distributors

Design

Product Governance

Monitor

MarketDistribute

Lower risk Higher risk

1 2 3 4 5 6 7

Actual costs per transaction

Purchase/sale-1/1

Transaction costs

Net realized execution price of the

transactionArrival price Units=

=

- XX

X

!

Estimate of portfolio turnover in each asset class

!Cost per each

asset class

!

Inve

stor

sIn

sure

rs

Ongoing managed service and monitoring of regulatory changes

EY Regulatory Reporting Service

Why EY?

EY assists you in a fast implementation of these new regulations and offers as well a managed service for ongoing regulatory reporting to your distributors/investors:

We monitor regulatory changes for you, implement in a fast-track approach and provide a comprehensive regulatory reporting service:• Flexible interfaces and connection to third party administrators• Calculation engine including transaction cost• Sourcing of required market data• Flexible reporting engine• Open dissemination platform• No black box – client dashboards through EY’s managed service

platform

Initial scope determination and implementation

Lifecycle Management

Data Management Production Distribution

Data gathering

• Data collection and formatting from multiple sources

• Content managment covering all KID sections, target market,...

Time of provision

• Regular distribution of• EMT• (C) EPT• FCA/IA Code

• KID version management (material changes/annual review)

Calculation, translation, reporting

• Calculation of risk, performance scenarios and costs

• Calculation of transaction cost• Translation of narratives • Generation of (C) EPT, EMT, FCA/IA• Production of KID document

Consistency review

• Assistance in the content consistency with other product documentation

• Data quality checks

Dissemination

• Dissemination of (C) EPT, EMT, FCA/IA code and KID to identified target recipients (distributors, investors)

• Publishing of the KID

Contact

Client dashboard

Bernhard Bittner Executive Director EMEIA Regulatory Reporting Service Leader +352 42 124 8913 Bernhard.Bittner@lu.ey.com

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