Negative Trading Costs

Nathan

A few of us have been discussing what to do when it comes to disclosing negative trading costs. Myself and @benjaminfabi, someone who I respect, have differences of opinion as to whether or not they should be considered as part of the disclosure or not.

One side says that it is impossible to have a negiative trading cost and therefore they are ignored and the other says that you cant simply start disclosing what you deem appropriate to disclose and it should be as per the illustration.

I would be interested to hear what others are doing.

benjaminfabi

My view on this is (fairly) straightforward:

• I agree that the outcome of negative trading costs is unrealistic and arises from the calculation methodology.
• But the aggregated costs (OCF plus TCs plus Incidentals) are very rarely negative overall, and this aggregated figure is the one I typically use in the report (as per ESMA guidance on the aggregation level needed and also in the interests of making reports simple to understand).
• If we agree that some calculation outcomes are negative, and this is wrong, we can also agree that there are loads of positive calculation outcomes that are also wrong. Given this, who am I to decide which outcomes to challenge/misreport?
• A simple statement in the report to the effect that any costs above shown as negative are as such because of known flaws in the regulatory method of calculating costs, and this is a flaw that could result in the overstating or understating of any costs shown.
• I accept that if the impact is that the aggregated cost on a particular fund is negative this does appear like an investor is being paid to hold a fund(!) but how many funds at the time of writing are still in this situation?

I'd just add that almost every firm I work with operates CIP portfolios that don't have this problem. If I was dealing with it day in day out I might have a different opinion.