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Why US firms Must Pay Close Attention Ahead of MiFID II Implementation

Traders Magazine Online News, October 18, 2017

Daniel Carpenter

Weeks after CFTC Commissioner Sharon Bowen strongly endorsed U.S. adoption of MiFID II rules, American financial institutions are beginning to slowly realize that a paradigm shift is coming to the trading world in the way of investor protection. The days of ‘soft dollaring,’ the practice that allows for fund managers to pay executing brokers for research through trading fees, may very soon come to an end, though the practice has slowly been falling out of favor in recent years. The end of CSAs, or Commission Sharing Agreements is just one of the ways that increased transparency may come to the U.S. market with the implementation of MiFID II on January 3, 2018.

Come January, American firms doing business in Europe or with European clients will have to do more than ever to prove that they are getting investors the best deals. And that means saying goodbye to the cost of research being directly funded through trading commissions.

Some of the largest U.S.-based asset managers have already decided to cough up research costs from their own P&L. However, not all houses have decided on this approach, so it by no means signals an end to the research billing and commissions saga. On the contrary, significant implications as a result of a broker’s business are likely to be felt long beyond January 3rd. As fund managers begin budgeting and assessing research value, brokers are still left fielding the first wave of questions such as, “when and how am I going to be charged?” and “what exactly am I going to be paying?” The second wave of questions, such as, “Are all research providers invoicing in a standard pricing approach, standard format and frequency?” have not even yet arisen.

While those in equities research may be used to these questions (albeit with minimal contracts and invoices managed retrospectively and manually), Fixed Income, Currency and Commodity (FICC) intermediaries are on less familiar ground. You can already hear the cries from the research sales desk of, “I have never had to charge for this before, how do I go about recording and enforcing these agreements?”

Previously, FICC research was subsidized by the bank, who knew they were getting some revenue from trading. They now need to find a way to manage large numbers of global and regional research contracts and agreements, not to mention budgets and invoicing in regional currencies which will need to be converted to the base currency for global client servicing. All of this leads to a mountain of contractual paperwork and tracking of interactions.

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