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  • Current

    Effective: 1 April, 2022
    Categories: Benchmarks
    Source: GIPS Standards Technical Committee

    A benchmark provider announced that it will incorporate transaction costs into the calculation of total return for its fixed-income indices beginning in July 2022. The transaction cost will be calculated at the security level and will be based on the bid–offer spread of each security as a percentage of its price. The return adjustment will be applied to new additions to the index, as well as to any security whose weight in the index increases at each monthly rebalancing. The benchmark provider said it will also continue to make available the returns for these indices without transaction costs. Can we present benchmark total returns that are net of transaction costs? If so, is there anything we need to disclose?

    Firms may present benchmark total returns that are net of (reduced by) transaction costs. These costs typically take the form of brokerage commissions, exchange fees and/or taxes, and/or bid–offer spreads from either internal or external brokers. The benchmark description should include the fact that benchmark returns reflect the deduction of transaction costs and also identify for which periods transaction costs are deducted.

    In the situation described, this new benchmark return calculation approach would also qualify as a prospective benchmark change. The date and description of the prospective benchmark change must be disclosed for as long as the GIPS Report includes returns for the prior benchmark. For example, “Effective July 2022, benchmark returns reflect the deduction of transaction costs that are calculated using the bid–offer spread for all new additions to the index, as well as any security whose weight increases in the index at each monthly rebalancing, beginning with the 30 June 2022 rebalancing. The beginning-of-month calculated transaction cost adjustment is applied to index returns daily for the following calendar month. Benchmark returns prior to July 2022 do not reflect the deduction of transaction costs.”

    The firm should label the benchmark returns to make clear that the benchmark returns are reduced by transaction costs—for example, “XYZ Fixed Income Index (net of transaction costs).” The firm is not required to disclose the basis point difference between the benchmark returns with transaction costs and the benchmark returns without transaction costs.