MiFID II to Prompt Global Unbundling

Shanny Basar

The incoming rules separating payments for trading and research in the European Union will expand beyond the region and are likely to boost full unbundling of client commissions around the world.

MiFID II, the regulations covering financial markets in the EU, come into effect at the beginning of next year. One of the requirements of MiFID II is to separate payments for research from trading commissions to increase transparency and reduce conflicts of interest. Asset managers will have to either pay for research out of their own P&L or from research payment accounts, where they have agreed a budget with their clients. The requirements cover fixed income, currency and commodity markets for the first and the buyside will also have to track their consumption of research and evaluate its quality.

Rebecca Healey, Liquidnet

Rebecca Healey, head of market structure and strategy at institutional trading network Liquidnet, said in a note that a post-MiFID II world requires fund managers to deliver the best possible outcome for end-investors in both research and execution, so only the best providers of either service will survive.

“European firms subject to MiFID II inducements rules must comply with these requirements irrespective of the status or geographical location of the research provider,” Healy added. “We are now one step further in witnessing full unbundling of client commissions across the globe.”

The European Securities and Markets Authority last month published its latest guidance on how fund managers should ensure that the purchase and receipt of research or services do not constitute an inducement to trade. MiFID II requires firms to put a research policy in place which should include the criteria against which the quality of the research they purchase is assessed; how the research contributes to better investment decisions; and how costs can be allocated in a manner that is fair to all client portfolios.

Research providers should also be able to explain how they price their services, especially where they also provide execution services, to enable them to evidence that they are not influenced by payments for execution services. Under MiFID II firms cannot accept research for free. Healey said: “‘Waterfront’ subscription arrangements, Esma considers could be compatible with MiFID II rules, provided that the fee charged can be justified by the expected benefit to the client.”

Simon Gilbert, sales director based in Liquidnet’s London office, told Markets Media: “Large managers who implement MiFID II in London may be expected to be consistent across their global platforms. It seems the trend toward unbundling and best execution will cross the pond into the US.”

Gilbert was hired from Sterne Agee to be responsible for helping Liquidnet’s European members source institutional liquidity in US equities. “Liquidnet is investing in technology and ensuring that members are aware of the whole suite of products, such as algos, which are a powerful tool,” he added.

Liquidnet said US equities are showing great promise as Morningstar European fund flow data showed that US stocks recorded record inflows of €6.2bn in November last year, breaking the previous high in October 2014 by more than €1bn.

“Investors in Europe seem particularly interested in small and mid-cap US stocks and sectors including technology, consumer, healthcare and REITs,” added Gilbert.

Liquidnet has launched a partnership with ONEaccess, a corporate access and research valuation platform, to provide institutional investors with technology to manage, track, and pay for eligible research under MiFID II. The trading network already operates a commission management service to track and make payments from aggregated commission sharing arrangements and research payment accounts across brokers, currencies, and asset classes.

Research is expected to decrease at the beginning of next year as new unbundling rules come into effect but independent providers with specific expertise may benefit in the long run.

Maxime Mathon, head of communication and marketing at AlphaValue, told Markets Media last month: “There will be a massacre for research in the early months of 2018 as asset managers downgrade their budgets and sellside reduces coverage.”

However he continued that over time, once buyside firms have research budgets in place, then it will be viable for independent firms with specific expertise to provide more research e.g. covering small and midcap stocks. AlphaValue is an independent equity and credit research provider based in Paris that already charges fixed fees for research.

Last month AlphaValue, agency broker ITG and independent consultant FinFees hosted an event for the buyside on MiFID II unbundling. A poll of 87 asset managers at the event found that 89% are preparing for MiFID II, 3% are ready and 8% have not started.

More than half, 60%, of asset management companies  in the poll said they expect to wait until MiFID II launches on 3 January 2018  to implement unbundling. Nearly one-third, 31%, said they have not yet decided on how to pay for research, 28% said they will continue to use client funds to pay for research and 18% will use their own revenues.

Consultancy Celent said in a recent report that both the buyside and sellside are currently focussed on complying with the MiFID II requirements but then the long-term focus will have to shift to the commercial implications of how alpha-generating research should be monetized.

“Much like the fish that doesn’t see the water, the buyside has been swimming in non-priced investment research for so long that it has never considered what it was worth, how much it uses, the level of cross-subsidization, or frankly what it needs,” added Celent.

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