Group Co.
Under Pressure
How MiFID II Will Affect U.S. Brokers and the Research They Produce
Traders Magazine Online News, March 16, 2017
The only thing constant in this world is change. And for the U.S. brokerage world, that axiom holds particularly true especially now in the face of looming regulation regarding payment for research.
Research, whether from a broker dealer or other source like a boutique research provider, is the genesis of any trade or portfolio strategy. Research generates the idea behind a trade and can mean the difference between generating alpha or just beta - preferably the former. Research drives the trading bus, plain and simple.
And up until now, the buy-side's payment for research has come in several forms - commission sharing arrangements, client commission arrangements, "soft dollar" or "hard dollar" agreements, etc. But now that the Markets in Financial Directive II (MiFID II) is set to go into effect in Europe January 3, 2018, things are going to change as to how the buy-side is going to pay for its research from the sell-side across the Pond.
But its effects are not going to be limited to just Europe, traders and investment pros note, as trading is not limited by geographies any more. And now more than ever, North American regulation seems to be going in the same direction. MiFID II compliance will affect U.S. brokers as much as the European brokers the legislation is targeting.
Eric Noll
Game Changer
MiFID II upends the traditional linkage between trading commissions and investment research in ways both the money management and brokerage industries have yet to fully understand, wrote Eric Noll, CEO at Convergex, in a recent paper. "It will force both the explicit pricing of sell-side research and the defense of those expenses to asset owners by money managers. Moreover, while this is an EU directive, we expect many global asset owners to eventually embrace its core principles of explicit pricing and transparency."
In other words, US research providers and brokers need to take heed. MiFID II requires investment managers to rethink how they pay for brokerage firm research both abroad and here. No longer will they be able to bundle commission payments for trading execution and research services. Payments will need to outright in cash or via a Research Payment Account (RPA), to be funded either with an explicit fee charged to the investment firm's clients or with commissions explicitly carved out of trading executions.
"While this is currently an EU-only mandate, how will it change both the creation and consumption of research in the U.S. and elsewhere," Noll asks. "Once asset owners see the process start to take hold in Europe, they may well ask their managers in other markets for similar disclosures. MiFID II could well become a global standard for research pricing and disclosure, even if the actual payment mechanisms (commissions in the U.S., for example) remain unchanged."
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