Industry to Discuss MiFID II RPAs
Regulators and industry participants will be meeting on Monday to review a transactional method for funding research payment accounts which is being launched by Fidessa, the financial technology provider, and Commcise, a provider of cloud-based commission management technology.
Regulators have wanted to increase transparency by separating the costs of trading and research which have historically been combined in one trading commission. MiFID II, the regulations covering financial markets in the European Union from 2018, requires asset managers to either pay for research themselves out of their own revenues or set up research accounts for clients with agreed budgets.
Amrish Ganatra, managing director of Commcise, told Markets Media that the MiFID II delegated act allows asset managers to fund an RPA using either an accounting or transactional method.
Under the accounting method, a fixed charge is applied to each fund and a daily accrual is made which is collected and sent to the RPA administrator on a monthly or quarterly basis to make research payments independent of trading activity.
However the transactional method uses a research charge that is included alongside a trade to fund an RPA and this method has been adopted in the partnership with Fidessa. The MiFID II text said: “The research payment account should only be funded by a specific research charge to the client which should only be based on a research budget set by the investment firm and not linked to the volume and/or value of transactions executed on behalf of clients.”
Ganatra said: “We are holding a workshop on Monday with the Financial Conduct Authority, the Investment Management Association, brokers and asset managers to review our implementation of RPAs which we believe can be controlled at a fund, rather than client level.”
Commcise Buy, the buyside focused commission management platform, includes an algorithm that dynamically calculates research charges at allocation level for the asset manager. Fidessa has an AMS global post-trade utility to confirm and affirm trades which has been extended to support the buyside determined research charge so that it can be delivered directly into sellside settlement operations.
Approximately 75% of European fund managers currently pay for research using commission sharing agreements which bundle the cost of execution and research.
David Pearson at Fidessa, head of post-trade services at Fidessa, told Markets Media that funding RPAs on a transaction basis is different from traditional CSAs as the decision is made on a post-trade and not a pre-trade basis.
He said: “There is now no inducement to trade as the trading commission will only include execution. Once the trade has been executed the buyside can add a separate research charge.”
Pearson continued that reports can be generated for these research payments so that asset managers can prove they are evaluating the quality of the research they buy, another requirement under MiFID II.
Ganatra said: “As RPAs can be funded through commissions the system can also be extended from cash equities to fixed income and derivatives.”
The FCA had pushed for complete unbundling and wanted to ban the use of CSAs under MiFID II. Some asset managers have chosen to pay for research themselves, such as UK fund manager Woodford, while larger rival Legal and General Investment Management is giving each of its active equity funds a defined research budget.
“We are confident that this process will stand up to regulatory scrutiny and will be a way forward for the industry as it ticks all the boxes,” added Pearson.
More on research payments:
- Unbundling Opens New Opportunities
- CSAs Will Require Increased Controls
- ‘Champagne Corks Pop’ for CSAs
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