European Regulation’s Delegated Acts will Intensify Inspection of Research and Execution Costs


NEW YORK & LONDON, June 16, 2016 – Though industry participants breathed a collective sigh of relief following publication of the Delegated Acts by the European Commission in April 2016, TABB Group expects this relief may be short-lived. Intended to improve market transparency and integrity, the regulation will ultimately lead to the demise of the bundled service model. TABB’s latest equities research, “Unbundling: Opening Pandora’s Box,” reviews the far-reaching consequences unbundling will have not only for the payment of research, but for European capital markets overall.

Shifting from a predominantly commission sharing agreement (CSA) managed research and execution program to full unbundling and integration of the proposed Research Payment Account (RPA) will be a steep challenge for many firms. Only 10 percent of European buy-side participants perceive themselves as fully unbundled currently, versus 23 percent in the U.K. Sayena Mostowfi, report co-author, principal and head of equities research at TABB, explains that few participants anticipated the extent of the proposed changes and the majority of firms we interviewed were relying on the continued use of CSAs. Using CSAs in RPAs, stand-alone RPAs, or even paying directly will require increased resources, governance and oversight.

“Once the unbundled interrelationship between the buy-and sell-side unravels to the extent regulators propose, every single aspect of a trade, from initial investment idea to settlement, will be under scrutiny,” Mostowfi said. “With these changes, unbundling has extended its reach beyond research payment models to overhaul current procedures and evidence best execution.”

Under the Markets in Financial Instruments Directive II (MiFID II), buy-side firms will be required to detail, monitor, and report on execution policy. These public mandates include providing execution quality data, an assessment of venues accessed, and an annual summary of the top five execution venues in the preceding year by instrument. With these requirements in mind, TABB found dissatisfaction with current transaction cost analysis (TCA) offerings is growing, with 37 percent of surveyed buy-side respondents putting their TCA provider under review.

The 22-page, 17-exhibit report is now available for download by TABB’s Research Alliance equities clients and pre-qualified media at https://research.tabbgroup.com/search/grid. For more information or to purchase the reports, contact info@tabbgroup.com.  

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