MiFID II Unbundling Has Global Impact

Shanny Basar

Frost Consulting, a provider of research valuation solutions, has expanded its database globally as the unbundling requirements in European Union regulation spread outside the region.

MiFID II, which came into force this month, requires asset managers to either pay for research themselves from their P&L or to use a research payment account funded by clients, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but still have to track their consumption of research and assess its quality.

The database, FrostRB, gives asset managers the ability to compare their fund/strategy research budgets to anonymized indexes of their peers in similar products but does not provide access to research reports. Frost Consulting said in a statement that 300 managers and more than 1,500 multi-asset class funds/strategies have been boarded onto the system since it launched 18 months ago.

Neil Scarth, Frost Consulting

Neil Scarth, principal of Frost Consulting, said in an email to Markets Media: “The product is being launched globally. MiFID II is having an impact globally by focusing asset owners on research spending even in regions where it’s not required.”

The majority of fund managers have chosen to pay for research themselves, rather than having to administer research payment accounts. For MiFID II-compliant institutions the median annual full-service budget is just over $200,000 for each bulge-bracket broker according to a survey this month from Greenwich Associates. The consultancy surveyed 39 European and 21 US MiFID II-compliant institutions and 49 US firms that will not/do not need to be compliant with MiFID II in November last year.

Scarth said in a statement: “For P&L managers, this data will help them construct research budgets that balance the priorities for both short-term profitability and the medium-term alpha generation that drives asset manager franchise value.”

Only US fund managers who manage money for European clients must comply with MiFID II unbundling. However the report from Greenwich, MiFID II is Here: How Investment Managers Have Prepared, found that many US investment managers are considering unbundling.

William Llamas, who helps lead Greenwich Associates relationship management and marketing initiatives with the buy side, said in the report: “However, a growing number are considering following the same guidelines as their European counterparts. While only 9% of US respondents are electing to be MiFID II-compliant, that percentage could grow in the coming year.”

One US-based head trader said in the report that pressure from clients to maintain the same reporting standards as European rivals had forced him to act. He said: “I believe it’s inevitable that eventually every global manager will pay for research out of their own P&L … I just didn’t expect the wheels to be turning this quickly.”

However, further action from the US Securities and Exchange Commission is required for widespread US adoption. In October last year the SEC issued a no-action relief letter, giving US brokers the ability to comply with the MiFID II research requirements without breaking US securities law for 30 months following the implementation of new regulation.

A majority of firms, 61%, said they plan to unbundle their research consumption globally in a survey last year from the International Capital Market Association’s asset management and investors council  The ICMA survey also said the majority of asset managers intend to pay for research in fixed income, currency and commodities themselves.

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