Instinet, the equity execution arm of Nomura Group, has been approved to allow clients to pay for research in cash rather than using trading commissions, while new European regulations are due on how to buy research.
Instinet Europe has been authorised as a payment institution with the Financial Conduct Authority, the UK regulator, after applying for approval in March. The firm is now allowed to receive cash payments and distribute funds to research providers from clients who have chosen to operate a hard dollar research payment account.
Under MiFID II, the European Securities and Markets Authority has proposed that fund managers buy research using either direct payments out of their own revenues or from a separate research payment account, which can be funded by a specific charge to a client, in order to avoid conflicts of interest. The FCA has created controversy by saying it believes that Esma’s proposals are incompatible with the continued use of commission sharing arrangements.
Adam Toms, chief executive of Instinet Europe, told Markets Media: “There are still mixed opinions on how to pay for research and one size does not fit all. We would like CSAs to continue to be used as they only need slight enhancement to meet the goals of the regulators.”
Toms said clients are in one of three phases - using basic commission sharing arrangements, using a third party to aggregate their CSA payments or transitioning to research payment accounts.
“Clients have moved one step up from where they started the process,” Toms added. “We have seen a significant increase in CSA aggregation and a handful of transitions to a research payment account.“
At Instinet Europe balances for aggregating commission sharing arrangements are 50% higher than at this point last year according to Toms.
Even if Esma prohibits CSAs, Instinet clients will be able to continue using the CSA technology for their hard dollar payments.
Sanford Bragg, chief executive of consultancy Integrity Research, told Markets Media: “If commissions continue to be allowed to pay for research, hard dollars will only be used by a minority of fund managers.”
Bragg said large global asset managers are in processing of reviewing their commission sharing arrangements but waiting to see Esma’s final rules, due out next month. “For fund managers who spend a significant amount on research it is not an easy decision. Research spending gives them an advantage against smaller rivals but they may want to reconsider if it comes out of their own pay,” he added.
Instinet said in a statement that the first clients are expected to go live this month through Plazma, the firm's integrated cash management and broker review platform. Plazma allows clients to track research budgets, instruct research payments, generate management reporting and vote for brokers.
Featured image via Dollar Photo Club