05.21.2015
By Terry Flanagan

Research Payment Changes Vex Managers

Paul Squires, head of trading at Axa Investment Managers, said the proposed changes on paying for research in Europe will have a significant effect on the fund manager’s business.

Squires told Markets Media: “The biggest impact on our business will be the changes to payments for research if we cannot use dealing commissions and CSAs,” or commission sharing agreements.

Under the new MiFID II regulations covering financial markets in the European Union, the European Securities and Markets Authority had initially wanted all research to be paid for directly by fund managers and to ban the cost from being included in dealing commissions in order to reduce conflicts of interest.

However in December, after industry comments, Esma proposed allowing asset managers to either pay for research from their own resources or make payments from a specific research account funded by a client. However the UK Financial Conduct Authority has said it believes that commission sharing arrangements are not compatible with Esma’s new guidelines.

Fund managers in North America are closely watching, as the proposed changes would hold implications for their businesses in an increasingly global marketplace.

Two-thirds of buy-side respondents said they would use less research if they were required to pay cash according to a new survey by Convergex, an agency-focused global brokerage, and its Westminster Research Associates commission management business. The survey was conducted from May 6 to May 8, and addressed the research and regulatory regimes of North America and Europe.

Paul Squires, Axa

Paul Squires, Axa

Timothy O’Halloran and Christopher Tiscornia, co-presidents of Convergex, said in comment letter to Esma in March: “The use of CSAs in the United States and in the UK has been successful to date, and the EU would be prudent to implement a similar framework. To experiment with an untested hard dollar research market model will most likely harm the investment industry, local economies, the growth of valuable research, and most importantly, the investing public.”

The Association for Financial Markets in Europe, which includes pan-EU and global banks, brokers, law firms and investors, also expressed concerns that Esma’s equity research proposals will harm smaller firms in its comment letter.

Squires said: “The regulators are pushing unbundling in every context so evidencing best execution becomes more significant and the FCA Thematic Review on best execution will continue to have a bigger focus.”

Squires spoke about research payments and the challenges of sourcing liquidity and achieving best execution at Markets Media’s European Trading Network, which was held today at the London Stock Exchange.

“For smaller buy-side firms it is important they get a fair assessment of best execution from their brokers,” Squires added. “For larger fund managers we need to take more responsibility and provide evidence as to our decision making: for example why we use certain algos or why we have used capital commitment and apply a menu of execution commission rates to supplement such an audit trail.”

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