FICC markets are no exception to MiFID II research rules
Article by Vicky Sanders, co-CEO, RSRCHXchange
As published in FOW, 19 Oct 2015
MiFID II has made headlines for the best part of the last decade, yet there was a relatively last minute scramble in the city since late spring. Senior personnel from fixed income, currency and commodities (FICC) divisions of some of the city’s biggest banks put together a last ditch, coordinated lobbying effort against one particular section of the rules. MIFID II mandates that all research must be priced. Still assumed by most in FICC to be an equity-specific matter, the research rules (technically falling under the inducement to deal clause) have admittedly been a hot topic in equities. So much was the issue being ignored by the FICC world, the FCA, in its frustration, issued a paper to specifically address the fact that the research rules are not equity-only and that they adhere to all asset classes covered under MIFID II.
So why the confusion?
First of all, paying for research has long been a topic in equity. Ever since the Myners Report in 2001, equity players have been forced to address how fund managers pay for research. In fact, roughly 70% of the UK market now uses commission sharing agreements (CSAs) which allow for research service providers to be paid separately from a client’s execution counterparties. Cheques are written by CSA managers to providers of research, regardless of which institution handles execution, with the funds in the CSA pot siphoned off from the overall commission paid when trades are executed.
It’s because of this commission market structure that the MIFID II research rules are commonly perceived to be equity-specific. With much of FICC business traded on bid-offer spreads, many thought the rules just couldn’t structurally apply. Without a commission to be split, it’s impossible to create a separate charge for research, right? Wrong. Regulators don’t exist to place their stamps of approval on business models. They are here to protect widows and orphans (the main tenets of MiFID II are fairness and transparency), often with an implicit motive of substantially altering existing business models. Hence the lobbying.
Research must be priced
I’m not here to say whether the inducement to deal rules are right or wrong. They are coming. Fact. By January 2017, all research provided to asset managers covering the MIFID II asset classes, including commodities, fixed income and even property, must be priced. Large banks are faced with decisions to make over their business models: do they offer best execution or do they produce quality research which clients are willing to pay for?
Discerning research consumption is the way forward
Asset managers need to evolve in many ways. As with most new regulation, MIFID II introduces additional administrative costs – new systems must be put in place to track and monitor research usage and relationships, audit trails created and reports generated for the end investor. Being shown for the first time a line item for research spend, their largest cost second only to headcount, buy side firms are already questioning how much they’re paying and who they’re buying from. Fees must also be structured to cover the cost of research. By no means a necessary evil, research should be leveraged in marketing - end investors will want, and be willing to pay for, custodians of their capital who are accessing the best and most diverse information available.
Bulge bracket banks aren’t the only source of information. There are 2,000 independent research providers and hundreds of mid-tier and regional brokers globally. Beyond that there are new research houses forming, using technology to enable innovative approaches. Finally, the market for channel checking and end-market research, primarily consumed by corporates, is well-developed but has historically faced barriers to selling to the fund management community.
The new research rules open up a world of choice to asset managers and an opportunity to have more control over their inputs. The challenge lies in finding the right research and the best provider - only a technology-led aggregation platform can offer the solution.