Nine months into the second Markets in Financial Instruments Directive, asset managers are still feeling the pinch around research.
The directive prohibits unpaid research leading to a trade. This means that all research costs are absorbed by the firm, through a research payment account (RPA) by clients, or leverage credit support annex (CSA) brokers.
Research funding may be cut by as much as 20%, according to Greenwich Associates.
“With most asset managers absorbing research costs within their own P&Ls,” says Mehdi Sunderji, Managing Member at Nucleus195, “there is still a push to further cut the number of research counter-parties they engage with – leaving them, in most cases, with access to just the larger research providers but cut off from the smaller players.
“This is limiting their access to broader exposure of content to help them with the alpha generation.”
Sunderji expects that Mifid II will be amended – though to what degree is unclear. The European Securities and Markets Authority (Esma) is open to make amendments to the directive, and national competent authorities (NCAs) in each member state can interpret it as it’s implemented into regulation.
“There will be tweaks and changes, but I don’t believe that we will see that until we have had enough data to see what has worked and what hasn’t,” says Sunderji.
Mifid II went live on January 3, and although there had been a year long postponement of its implementation, Esma and NCAs were still working on the running right up to the go-live date. That put firms with exposures in European markets in a precarious position – not least those involved in any form of research, including many in the asset management sector. But while there’s been a lot of pain around the new rules, Sunderji says most firms have been able to comply thanks to fintech developments.
“We have to remember that there are good intentions behind MiFID II and anytime you implement a change of this scale it is going to be overwhelming at first,” he says. “But it seems with the speed of technology, most firms have managed to get themselves compliant.”
The new Mifid II world created problems for firms, meaning new processes had to be put in place to ensure the validity and source of information. “We don’t standardize or cross check the content. We are not involved in the quantification of the content, but merely a conduit for access,” says Sunderji. “Our content providers are members of their local stock exchange, members of a registered association or established IRPs.”