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Recent European-wide regulation requires all research to be separately priced and unbundled from execution, marking a considerable change in the way in which research is distributed by the sell side and consumed by the buy side. MiFID II states that asset managers can only receive research services which they pay for and cannot receive research for free. Sell side firms must price their research services and restrict access only to their paying customers. These major elements along with additional details have been covered by key pieces from the regulators which we have gathered below.

In Q2 2017, RSRCHXchange commissioned the largest survey of investor sentiment and awareness of the new research rules. Survation conducted an online poll of 562 respondents from over 450 different asset management firms, predominantly in Europe. The survey tracked changes in MiFID II sentiment compared to our Q4 2016 survey of 234 respondents from over 200 asset management firms. Click below to read the results.

Such was the success of the survey, Survation were commissioned by RSRCHX to repeat the survey in Q2 2018 on to see the impact the new rules in Europe have had and how attitudes globally have changed towards research unbundling. They canvassed the views of 418 respondents from over 30 countries, representing over 350 firms with over $30trn of AUM in aggregate. Click the link below to read the results.

Research Unbundling Survey June 2017
Global Unbundling Survey June 2018

MiFID II Delegated Acts

Key takeaways
Elements MiFiD II Delegated Acts Text RSRCHX Key Features
Budgets "Set and regularly assess a research budget" - Set, update and manage budgets
- Firm, team or individual level
Payments Payment methods include "direct payments by the investment firm out of its own resources" or "payments from a separate research payment account" funded by a "specific research charge to the client." Payments must be made "without any undue delay" - Centralised payments to one counterparty
- We handle CSAs, RPAs and hard dollar payment methods
- Automated, electronic invoicing ensures payments are auditable and made quickly
Audit Trails "...the investment firm shall also be required, upon request by their clients or by competent authorities, to provide a summary of the providers paid from this account, the total amount they were paid over a defined period, the benefits and services received by the investment firm, and how the total amount spent from the account compares to the budget set by the firm for that period..." - Consolidate your research relationships in one single platform
- Actively manage existing subscriptions, payments and new purchases creating a transparent audit trail
- Compare budgets and total expenditure in real time
- Automatically keep record of usage for the firm, team & individual
- All your data accessible directly on RSRCHX or exportable
Controls "The allocation of the research budget to purchase third party research should be subject to appropriate controls and senior management oversight" Budget setting, consumption, ratings, and payment analytics
- Variety of compliance and budget oversight set ups
- Upfront and ongoing due diligence and compliance checks
Research Quality "The investment firm regularly assesses the quality of the research purchased based on robust quality criteria..." "A clear audit trail of payments made to research providers and how the amounts paid were determined with reference to the quality criteria..." - Systematic and automated collection of essential, rich usage data
- Quantitative rating system
- Confidential written notes
Supporting content
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MiFID II Delegated Acts
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ESMA Q&A on Investor Protection Topics

Research inducement takeaways

RPA ownership

The nature of this deduction as a charge means that once it is deducted from a client, the funds belongs to the firm.

ESMA is of the opinion that it is important that the investiment firm makes it's best effores to align as much as possible the timing of the charges paid to the client by the firm, and the expenditure on research paid from the RPA by the firm to the research provider.

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"Free" research?

Firms should not accept research for "free".

"Where a firm does not want to accept research material, they should take reasonable steps to cease receiving it or avoid benefitting from its content"

"Firms need to have in place policies and systems to assess the nature of any service, benefit or material paid or provided by any third party to determine whether they can provide or accept it"

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The macroeconomics issue

"The assessment of whether material is substantive or not (and therefore can be viewed as a minor non-monetary benefit) should only be linked to its content and not to the qualification given/alleged by the provider"

"Firms should have in place policies and systems to assess the nature and scale of any service, benefit or material provided by any third party to determine whether it can be considered as a minor non-monetary benefit or as research"

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Research from banks & providers outside the EU

"Firms should therefore treat research from a third country provider in the same way as any other third party benefits"

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ESMA Q&A on Investor Protection Topics
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FCA Policy Statement

Takeaways on research unbundling

Beyond MiFID firms

"We will proceed with our proposals to extend the MiFID II requirements on inducements and research to most forms of CPM, including UCITS management companies, full-scope AIFMS and most small authorised UK AIFMs and residual CIS operators. We view the MiFID II reforms as bringing important transparency and accountability over research costs, which are equally relevant to investors in funds. "

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Future procurement

"It remains the case that firms should perform regular ex post assessments of the overall quality of the research services they have received, which should, in particular, be used to inform future procurement decisions and agreements with providers. While firms should have agreements in place with research providers prior to receiving substantive services, these should provide scope for service and payment levels to be reviewed on a regular basis (eg in-year) to ensure that research procured remains in the best interests of the client."

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Free trials - buy side

" The conditions include that an investment firm (a) can only receive a trial for up to three months; (b) should not be required to provide any monetary or non-monetary consideration to the research provider for research received during the trial; and (c) should not accept a new trial with the same provider within a 12 month period from the date on which a previous trial, or existing research agreement, ceased. An investment firm must also ensure that receiving research for a trial period is consistent with the other conditions for acceptable minor non-monetary benefits, as noted above, and should keep adequate records to allow them to demonstrate that each research trial received is compliant with these conditions. At the end of a trial period, in order to avoid further research from a provider constituting an inducement, a firm would need to either cease receiving it or establish a research agreement and payment terms."

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Unsolicited research

"ESMA's IR Q&A 3 clarifies how investment firms can deal with unrequested research provided free of charge by explaining that firms have to have in place mechanisms to determine the nature of any service, benefit or material paid or provided by third parties to decide whether it can be deemed acceptable. If they do not wish to pay for it, firms should take reasonable steps to either stop receiving or cease benefiting from the content of this research. Ways to achieve this may include automatic filtering of senders and materials where practicable or using the compliance function to monitor, assess and determine whether the incoming material can be consumed in compliance with the MiFID II rules. Training of front-office staff to recognise what research or other material can be accepted or not is also likely to be appropriate."

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Free trials - sell side

"An investment firm supplying free research trials should also consider their own inducements obligations. In particular, where a firm is subject to COBS 2.3C, it should ensure that the supply of a free trial is not unduly influenced or conditioned by levels of payment for execution services."

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A more transparent and priced market

"We also consider that a more transparent and priced market should be supportive of a more diverse and competitive landscape for the generation and supply of value-adding research across the whole market. "

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Supporting content
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FCA Policy Statement PS17/14
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FCA Consultation paper

FCA Consultation Paper Takeaways

Pricing research

"A firm providing both execution and research services must price and supply them separately."

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Fixed income as well

"Research related to fixed income or other non-equity instruments is equally subject to such onsiderations and the restriction on material inducements for the relevant firms.."

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Block insolicited content

"Investment managers and independent advisors will also need mechanisms to enable them to block the receipt of unsolicited research or other benefits that would otherwise constitute an inducement in relation to their services to clients."

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Transparent priced research market

"a transparent, priced research market emerges where recipients and providers establish upfront pricing based on agreements linked to the quality and quantity of goods and services to be supplied, and the expected benefit to investors"

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Minor non-monetary benefits?

"Recital 29 in the MiFID  II Delegated Directive provides an indication of items that may be considered as minor non-monetary benefits. These include ‘non-substantive material or services consisting of short term market commentary on the latest economic statistics or company results for example.' This does not depend on the label attached to such material, but requires a consideration of the substance of its content.."

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Charging models

"Brokers may need to review their business model to develop charging models and service agreements with investment firms for the supply of research, and to adjust their execution costs and charges accordingly"

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FCA Consultation Paper CP16/29
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SEC Letters and Third Countries

SEC No Action Letters

"The no-action relief provides a path for market participants to comply with the research requirements of MiFID II in a manner that is consistent with the U.S. federal securities laws. More specifically, and subject to various terms and conditions: (1) broker-dealers, on a temporary basis, may receive research payments from money managers in hard dollars or from advisory clients' research payment accounts; (2) money managers may continue to aggregate orders for mutual funds and other clients; and (3) money managers may continue to rely on an existing safe harbor when paying broker-dealers for research and brokerage."

During the period of the temporary relief, the staff will monitor and assess the impact of MiFID II's research provisions on the research marketplace and affected participants in order to determine whether more tailored or different action, including rulemaking, is necessary and appropriate in the public interest.

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Third Country Broker Dealers

"Based on the current practice of national competent authorities, a third country-broker dealer may receive combined payments for research and execution as a single commission when providing such services to a MiFID II Portfolio Manager or its Third Country Sub-Advisor, as long as the payment attributable to research can be identified."

"In the absence of a separate research invoice, the MiFID II Portfolio Manager or its Third Country Sub-Advisor may decide, among other things, to consult with third parties, including the third country broker-dealer, with a view to determining the charge attributable to the research provided."

"The supply of and charges for those benefits or services shall not be influenced or conditioned by levels of payment for execution services."

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SEC release on MiFID II research provisions
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