The Markets in Financial Instruments Directive II (MiFID II), to be launched on January 3, 2018, will unbundle research by separating trading commissions from investment research payments. As a result, asset managers would have to pay for the research they use.
The asset managers could pay for the research in two ways:
- Funding research through their own account and charging it to the P&L
- Setting up a Research Payment Account (RPA) that is funded by the client and based on research budget
The buy-side would have to ensure transparency in unbundling research and making payments by developing a system to:
- Track research consumption
- Assess the quality of research analysis
- Fix a research budget
- Manage payments directly or through an RPA
Impact on US Asset Managers
According to an ITG survey, most US asset managers do not believe that MiFID II applies to them. In contrast, ITG’s head of Global Commission Management, Jack Pollina, stated: “MiFID II is going to have a significant impact well beyond the shores of Europe, as institutional investors require asset managers to change the way they budget, fund, price, and pay for research.”
According to the survey, 82% of North American firms plan to “fully unbundle all of their brokers globally.” It also said that 59% planned to continue paying for research on the basis of the Commission Sharing Agreement (CSA), 33% could use a combination of CSA and RPA to make payments, and the remaining 8% plan to set up a new RPA.
As capital markets cannot work in isolation, the acceptance of MiFID II beyond the EU is growing. Experts believe that it will not take long for US research brokers and asset managers to adapt to MiFID II, especially because all non-EU companies would have to comply with the regulations if:
- They have Europe-based branches
- They are trading in European securities or servicing such clients
- They are competing against other Europe-based brokers
- They are competing for mandates against European investment firms
As all US fund managers with operations in the EU would have to comply with MiFID II, their other global offices are expected to follow suit because it would be difficult to operate under two regimes simultaneously. Moreover, given the transparency and benefits of MiFID II for buy-side clients, fund managers might prefer to comply with it globally.
Regulatory Roadblocks
The pace of implementation might slow down because the changes must be approved by a local regulatory body. For instance, in the US, changes in the operations of investment and brokerage firms require approval from the Securities and Exchange Commission (SEC).
The biggest reason why the implementation of MiFiD II in the US has faced problems is that companies that charge money for analysis and advice are deemed as investment advisors. If US brokers register themselves as investment advisors, they would have to comply with additional regulations that could hurt their business. If they decide to receive money for research, they would be breaching the Investment Advisors Act. The big banks have thus been lobbying the SEC to approve a regulation that allows US brokers to receive payments from European clients who are subject to MiFID. The SEC has granted a 30-month reprieve to the brokers to comply with the regulations without overhauling their operations.
The SEC has also issued three no-action relief letters that allow:
- Broker dealers to temporarily receive research payments in dollars
- Money managers to aggregate orders for mutual funds and other clients
- Money managers to rely on an existing safe harbor when paying broker dealers
In conclusion, MiFID II is expected to have a significant impact on US asset managers and brokerage firms. All global companies are expected to adopt it as markets cannot operate in isolation. However, this would require regulatory bodies to be more flexible to ensure that a single process for procuring research is adopted across all geographies.
For more information on how the new rules will affect a variety of market players across the industry, read our free whitepaper: Demystifying MiFID II – The Future of Sell-Side and Buy-Side Research
