Buy Side Awaits FICC Research Costs

Shanny Basar

The majority of asset managers intend to pay for research in fixed income, currency and commodities themselves but nearly half are still waiting for an approach from their FICC research providers.

MiFID II, the regulations coming into force in the European Union at the start of next year, requires fund managers to either pay for research themselves from their P&L or to use a research payment account, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but still have to track their consumption of research and assess its quality.

A survey this week from the International Capital Market Association’s asset management and investors council on the MiFID II unbundling of FICC research found that 67% of firms intend to pay for research from P&L. However, nearly half are still waiting to hear from their FICC research providers.

“With only two months left, it is concerning that up to 46% of respondents state that they have not yet been approached by a significant majority (75%) of their existing FICC research providers,” said the report. The survey was conducted in the last two weeks of October 2017 among ICMA buyside members and nearly half, 44%, had more than $100bn (€86bn) of assets under management.

The majority of respondents, 58%, expect their FICC research spend to increase even though they will use a smaller number of research providers. ICMA said: “Overall independent research providers are expected to get a larger slice out of the shrinking pie.”

In equities, a survey from consultancy Greenwich Associates, As MiFID II Looms, European Fears Subside, found that investors expect only a 1% average decrease in their research budget over the next 12 months.

William Llamas, Greenwich Associates

William Llamas, Greenwich Associates relationship manager, said in the report: “What changes lie ahead in 2018 are also uncertain. Many asset managers will begin 2018 with budgets that mirror previous years.”

One trader at a UK-based hedge fund said in the Greenwich report: “The only benchmark we have in our arsenal is the amount we’ve spent previously.”

European respondents are expecting a 2% decrease in their use of research from global investment banks, increasing to 5% among the largest asset managers. They also expect that 2% of this spend will go to smaller, specialized, independent research providers.

Greenwich continued that a growing number of firms have publicly announced they plan to pay for research out of their own P&L which is the intended outcome from regulators.

“For passive-oriented firms and the larger institutions that have the infrastructure and money to support such a move, paying for research themselves may be the most popular decision,” added Greenwich. “For the majority of asset managers, this won’t be an easy task.”

Even though MiFID II only applies to the EU, it is having global implications as many US asset managers have European operations and asset owners are likely to want greater fee transparency on a global basis. Last month the US Securities and Exchange Commission issued guidance giving market participants the ability to comply with the MiFID II research requirements without breaking US securities law.

A majority, 61%, of firms in the ICMA survey said they plan to unbundle their research consumption globally.

This month Smartkarma, an independent investment research provider in Asia which launched last year, announced it had raised new financing for expansion as MiFID II is due to roll out.

Smartkarma closed a Series B round of finacCing led by venture capital firm Sequoia India, which brings the company’s total funding to $21m. Existing investors, including Wavemaker Partners, Jungle Ventures and Spring Seeds, joined the Series B round.

Shailendra Singh, managing director of Sequoia Capital (India) Singapore, said in a statement: “The traditional equity research model has been broken for a while. Smartkarma is empowering independent researchers and creating a new paradigm of transparent pricing in this industry.”

Smartkarma said it will use the funds to consolidate its leadership position in the Asia Pacific region and expand internationally. In September Smartkarma launched a UK office as a hub to build out its independent research analyst community in Europe and support its buyside clients. More than 400 independent analysts covering more than 2,400 companies across 15 Asian markets contribute to Smartkarma’s cloud-based platform which is used by more than 150 institutional asset managers, according to the firm.

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