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Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

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MiFID II - Five months to implementation

Published by Charles Gubert

In less than five months, the Markets in Financial Instruments Directive II (MiFID II) will become UK law. The asset management industry – certainly in the UK – has faced a number of disruptions over the preceding 12 months including a hard-hitting Financial Conduct Authority (FCA) market study, and Brexit. 

Brexit remains an unknown, but it is an obvious priority for managers distributing UCITS or AIFMs into the EU. It is understandable that some managers may have been morepreoccupied with formalising or contemplating the best way to navigate Brexit than MiFID II

Analysis of 562 asset managers of all sizes in June 2017 by RSRCHXchange found 54% of firms said they did not have enough information about research unbundling. Fortunately, only 2% of managers said they were unaware of unbundling, although arguably this statistic is 2% higher than what it should have been.  

Most managers are seemingly leaving MiFID II compliance until the last quarter of 2017, although 60% told RSRCHXchange that they had already set or begun to set their research budgets, and decisions were in train about how they would pay for the research. Managers are now – after all – not allowed to use equity commissions to pay for research. 

Most managers are either choosing one of; a transactional research payment account (RPA); an RPA funded by a direct charge to investors; incorporating research into overall profit & loss; or a hybrid model. Managers in different markets have their own preferences for how they will pay for research going forward. It appears managers in the UK, Benelux and Germany are happy to incur the cost of research into the P&L, while client funded RPAs are more popular in Scandinavia and Spain. 

The debate about research is highly sensitive. It is true that some managers may find themselves deciding not to acquire research, which could undermine their ability to trade. Others warn it creates operational problems, particularly if research is sourced by a foreign subsidiary of an EU firm from a bank which operates in an ex-EU market.  Lawyers have warned those subsidiaries could be prevented from passing on research to their EU colleagues. 

The extraterritorial nature of MiFID II also presents issues for EU managers obtaining research from US brokers. Under Securities and Exchange Commission (SEC) rules, only US-based entities registered as investment advisers can receive payments for research. In other words, MiFID II will complicate the lives of many US broker-dealers as they are not allowed – because of US securities laws – to be remunerated for providing research to the buy-side in the EU. The SEC is aware of this issue, and it is expected to give an opinion in the fourth quarter of 2017 outlining its stance. 

Firms which have yet to clarify their research budgets generally blame a lack of information on how research will be priced. Around 23% of respondents to RSRCHXchange said that research providers had not given them any pricing information, and some have complained there are significant disparities in terms of the costings being provided to big and small managers.  

However, a number of NCI members have acknowledged a lot of research they receive is of limited value, and being deprived of it would not be a problem. Most firms – if they feel the research is of sufficiently high quality – will pay for it. Even so, research charges at some organisations could be quite high. 

An article in the Financial Times said major investment banks were proposing charges of up to $1 million and more for annual subscriptions to their research platforms. It added smaller banks in Europe, or those with a fixed income as opposed to an equities bias – were charging less, quoting sums between $100,000 and $500,000. Others expect research to be priced in a fairly bespoke fashion depending on how frequently managers use it. Despite this, those research costs are not trivial and some boutiques may struggle with the overheads.