All investment managers, fund managers and firms that promote and manage UCITS funds and other retail products are trying, in accordance with the PRIIPS Regulation, to measure and disclose the implicit costs of a transaction. This attempt, an effect of MiFID II, has come in for much criticism.

Let us imagine that at the moment when an investor (or the portfolio manager on his behalf) decides to perform a transaction on the market, the price of the share is x (the so-called arrival price). When the broker (or the execution desk on the instructions of the portfolio manager) executes the transaction, the price is y. The difference between x and y is known as the implicit cost, which includes slippage. Slippage is defined as the impact of any change in a security's price between placing and executing the trade. Regulators are trying to measure this difference over thousands of transactions to find out how efficient the execution process is and/or the effective cost of it. This is an impossible task. An implicit profit arises in the case of the stock going up in prices - in other words, there is a negative cost that accrues to the fund in question, or the different mandates or portfolios that the discretionary fund manager (DFM) might be managing on behalf of retail investors.

The three European Supervisory Authorities (the European Banking Authority or EBA, the European Securities and Markets Authority or ESMA and the the European Insurance and Occupational Pensions Authority or EIOPA) want to see the EU amend the PRIIPs Regulation. They still take the view that slippage is of value to retail investors' understanding of total transaction costs. They want the EU to make some amendments that ought to reduce the likelihood of negative transaction costs (see above) which, their feedback suggests, consumers find difficult to comprehend.

A negative transaction cost may occur if a price is not available at the time when a fund manager transmits an order. In this case, the ESAs envision the fund manager using the most recently available price (perhaps the previous day's opening or closing price, or at least some other price that is not purely fictitious or theoretical) in order to calculate the arrival price. In some cases the ESAs are prepared to tolerate the fund manager being exempt from having to calculate the arrival prices.

If there are very few transactions, or the value of the transactions is trifling, or transaction data is not available because (for instance) the illiquid stock in question is traded so infrequently that the latest trade happened three months ago, since when the price has doubled, the ESAs think that another strategy is in order.

In this case the ESAs think that the fund manager should be allowed to base an alternative measurement on an estimate of the turnover of the portfolio that he/it is managing plus the bid/offer spread. Future ESMA Q&As (lists of questions and answers, a method by which ESMA communicates its instructions to the public) are likely to dwell on how little transactional data there has to be before a fund manager can go down this route.

The ESAs' proposals are relevant to British fund managers who want to go on distributing funds and services to retail investors in the EU after the end of the UK’s "withdrawal transition period." The Financial Conduct Authority's response to the changes that the EU is proposing will be interesting. Last year, the FCA attributed the incidence of negative transaction costs to managers applying the PRIIPs requirements incorrectly but also indicated that it wanted to work with the EU to resolve the problems.

In an increasing number of areas, the EU only does unfettered business with firms in countries whose rules it considers 'equivalent' to its own and it reserves the right to withdraw its designation of 'equivalence' at will. The UK has introduced a new concept in its negotiations about 'equivalence' with the EU - equivalence of outcomes rather than approach. If the EU accepts this idea, it will count the UK to be 'equivalent' if it is working towards the same goals as the EU, but not necessarily if it is using the same procedures.

With 'slippage' calculations now likely to continue in the EU, on top of the many other rules associated with execution compliance that oblige firms to disclose and monitor data, will this be one of the first areas where the FCA tries to coax the EU into approving the equivalence of outcomes rather than the equivalence of approach when the transition period ends?

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk