Industry Welcomes French Guidance on Unbundling

Shanny Basar

The industry welcomed the approval of the L’Autorité des Marchés Financiers, the French financial regulator, for using commission sharing arrangements to pay for research under MiFID II, the new regulations covering financial markets in the European Union from 2018.

The costs of trading and research have historically been combined in one trading commission but regulators have wanted to increase transparency. Approximately three-quarters of European fund managers currently pay for research using commission sharing agreements which bundle the cost of execution and research.

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.

Sanford Bragg, chief executive of consultancy Integrity Research, said in a blog: “The AMF interpretation is generally balanced and suggests that the French will try to be accommodating to industry concerns so long as they do not conflict with the MiFID II language.”

Bragg added that the AMF was a vocal proponent of continuing to allow fund managers to pay for research using client commissions, as the regulator feared that full unbundling would favor larger UK asset managers at the expense of smaller French asset managers.  In contrast, the UK Financial Conduct Authority had pushed to completely ban the use of trading commissions to pay for research.

“It is therefore no surprise that the AMF consultation paper endorses the use of commission sharing arrangements to fund research payment accounts,” said Bragg.

David Pearson, head of post-trade services at financial technology provider Fidessa, said in an email that it is good to see the French regulator providing guidance on MiFID II and that the consultation will help pan-European brokers identify the differences between jurisdictions and avoid the risk of penalties.

Pearson added: “The AMF’s support for the existing CSA process as a means of payment for research is good for the post-trade process and means that, at least in France for now, the industry can use the existing plumbing to support some of the new regulation.”

The consultation said execution fees will need to be charged separately from research costs, which is different from how CSAs are currently used. Bragg gave the example of a typical CSA which a fee of 15 basis points, with execution consisting of seven basis points. Under MiFID II the execution fee will be charged to the client account, but the remaining eight basis points will be charged to the research payment account so the client has more transparency.

Vicky Sanders, co-founder of RSRCHXchange, the online marketplace for institutional research, told Markets Media:  “The French were vocal in the negotiations on taking the other side to the FCA so there was an expectation they might do something unusual. The fact that the AMF are indicating an intention to literally transpose the directive will go down well with the industry.”

She expects there may be slightly different interpretations of the MiFID II unbundling requirements by national authorities and said the online platform and development team was set up with that intent.  RSRCHXchange was launched last year to allow fund managers to buy research from a variety of providers using either subscriptions, cash or research payment accounts.

“We have seen a pick up in activity and, as MiFID II is just five quarters away, payment for research has become an agenda item,” Sanders added. “Many firms want to be prepared in advance as there will be a huge change to their workflows and they want a testing period.”

Fidessa and Commcise, a provider of cloud-based commission management technology, have launched a platform for managing research payments under MiFID II.

They said fund managers can use either a CSA (the transaction method) or a direct charge to their clients (the accounting method)  to fund the MiFID II research payment accounts.

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.

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, so there is no inducement to trade.

Amrish Ganatra, co-founder of Commcise, told Markets Media: “The AMF consultation provided some much-needed clarification on the levels at which budgets can be managed, which has been worrying the industry.”

He added that the AMF has not mandated that research budgets be managed at the individual fund level.

Ganatra said: “The French regulator has given fund managers the leeway to make their own decision provided they can justify they are spending their clients money wisely by regularly assessing the quality of service they consume and have the ability to provide granular reporting to their clients and the AMF themselves.”

He gave the example of seeing some Scandinavian firms using the accounting method and some UK asset managers using the transaction method. Under MiFID II he said an asset manager could predominantly use the transaction method but also use the accounting method for a big pension fund that wants a clear limit on costs.

In addition, he added that the AMF allows asset managers cover any shortfall in a research budget provided that firms ensure that this is not to the detriment to their other clients.

Ganatra said: “It was disappointing that the AMF did not provide further guidance on other asset types such as fixed income and currencies.”

Bragg said the AMF also raised the issue of counterparty risk and said investment firms should ensure that the legal security of accounts held with their intermediaries is satisfactory.

“For this reason, we expect that CSA aggregators which offer physical aggregation, such as Instinet or Westminster, will have an edge over virtual aggregators such as Markit or Cogent, particularly where the accounts are ring-fenced,” added Bragg.

Bragg continued that the AMF had also taken the opposite stance  to the FCA on corporate access, which the French regulator said can be simply bundled together with standard analytic coverage, rather than being paid for separately.

The deadline for responses to the AMF consultation is October 28. Bragg concluded that the timing of the AMF’s consultation paper was designed to pre-empt the FCA’s consultation paper, especially in light of the UK’s vote to leave the European Union.

“The FCA is required to implement MiFID II, but after Brexit it will no longer have a seat at the Esma table,” Bragg added. “Moreover, London must remain compatible with European regulation, otherwise asset managers will be forced to move to other domiciles for distribution of investment product in Europe.”

More on unbundling:

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