Instinet Prepares for Research Regs 

Terry Flanagan

Instinet, the equity execution arm of Nomura Group, is launching a service to allow clients to pay for research in cash, rather than using trading commissions, as regulators in Europe debate the appropriate model for buying research.

Instinet Europe has applied to become a payment institution with the Financial Conduct Authority which allows it receive hard dollar payments for research and distribute funds to research providers on its commission management platform.

Adam Toms, chief executive of Instinet Europe, told Markets Media: “Clients can send us cash and we can make the research payments to more than 900 service providers. They can also continue to use our CSA technology such as broker vote tool and MIS of who they are paying.”

It is possible that the final MiFID II rules will ban client dealing commissions being used to pay for research. The European Securities and Markets Authority has proposed that fund managers buy research either with direct payments out of their own resources or from a separate research payment account which can be funded by a specific charge to the client. The FCA believes that these proposals are incompatible with the use of CSAs.

Toms said: “A movement to hard dollars will be dependent on regulation but we think there is still ground for CSAs to be slightly enhanced and meet the requirements of research payment accounts.”

Payments using commission sharing arrangements reached a record at Instinet last month according to the firm.

Sanford Bragg, chief executive of consultancy Integrity Research said in a blog that Instinet has stolen a march on investment bank competitors, many of which are actively lobbying the European Commission to forestall a ban on research payments using client dealing commissions.  Bragg wrote: “Even if the final MiFID II language permits the use of CSAs to pay for research, the FCA may choose to implement a more stringent hard dollar regime in the UK, which would put Instinet in the catbird seat.”

Toms added: “There is much debate around the final regulatory decision; our Payment Institution registration complements our existing CSA offering, bringing an additional payment services solution to clients, so they can make their own decisions.”

Neil Scarth, principal at Frost Consulting and author of a report co-sponsored by CFA Institute and CFA Society United Kingdom on investment research valuation approaches, discussed the potential implications of changes in research payments in a video on the CFA website. Scarth said: “It will force all research providers to migrate to areas where they really have top-rated analysts or significant comparative advantages. There will be limited appetite and a finite budget for mediocre research because it doesn’t add any value.”

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