While nearly two of three US investment managers do not fall under the remit of MiFID II, a growing number are considering following the requirements to unbundle research payments in the new European Union regulations covering financial markets.
Greenwich Associates said in a report, MiFID II is Here: How Investment Managers Have Prepared, that the majority of US investment managers, and 64% of the US respondents in the study, are not covered by the regulations which came into force last week. Only US fund managers who manage money for European clients must comply.
William Llamas, who helps lead Greenwich Associates relationship management and marketing initiatives with the buy side, said in the report: “However, a growing number are considering following the same guidelines as their European counterparts. While only 9% of US respondents are electing to be MiFID II-compliant, that percentage could grow in the coming year.”
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MiFID II requires asset managers to either pay for research themselves from their P&L or to use a research payment account funded by clients, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but still have to track their consumption of research and assess its quality.
Nearly half of the US-based respondents who have to comply with MiFID II intend to pay for research themselves, with the rest either undecided or charging clients separately according to Greenwich. The consultancy surveyed 39 European and 21 US MiFID II-compliant institutions and 49 US firms that will not/do not need to be compliant with MiFID II in November last year.
“During the first half of 2018, whether this momentum of P&L-based research funding models and MiFID II compliance will continue to spread among US firms should become clear,” added Greenwich.
One US-based head trader said pressure from clients to maintain the same reporting standards as European rivals had forced him to act. He said in the report: “I believe it’s inevitable that eventually every global manager will pay for research out of their own P&L … I just didn’t expect the wheels to be turning this quickly.”
However Greenwich also noted that further action from the US Securities and Exchange Commission is required for widespread US adoption. In October last year the SEC issued a no-action relief letter, giving US brokers the ability to comply with the MiFID II research requirements without breaking US securities law for 30 months following the implementation of new regulation.
A majority, 61%, of firms in a survey last year from the International Capital Market Association’s asset management and investors council said they plan to unbundle their research consumption globally. The ICMA survey also said the majority of asset managers intend to pay for research in fixed income, currency and commodities themselves.
“Interestingly, US brokers have also been concerned about MiFID II’s influence as it relates to possible hard dollar payments for their US equity research,” added Greenwich. “Specifically, brokers and providers offering research advice are uncertain about the legality of accepting hard dollar payments for research without registering as an investment advisor—a widely utilized practice at present.”
In Europe, the majority of fund managers have chosen to pay for research themselves, rather than having to administer research payment accounts. For MiFID II-compliant institutions the median annual full-service budget is just over $200,000 for each bulge-bracket broker according to the Greenwich survey.
“For these institutions, the good publicity and client satisfaction outweigh the potential drag on their portfolios,” said Llamas. “While institutions figure out the optimal structure for their respective firms, our research suggests that European institutions—and perhaps many global, multi-asset class asset managers—are moving toward a P&L-based funding model.”
European-based respondents have cut their research/advisory budgets for this year by a fifth from 2017 so the total pool will fall to $1.35bn. However the survey said that, despite the smaller budget this year, a significant percentage of managers’ equity research budgets will remain unchanged from 2017.
Nick Burchett, UK equities manager at Cavendish Asset Management, said in a statement on the launch of MiFID II: “Paying for research remains an ambiguous area, and we’ve already seen a huge reduction in the costs that were expected to hit investment managers. Brokers seem to be taking the view that it’s better to charge low research rates than have no clients at all – but it remains to be seen how sustainable this approach is.”
Jack Pollina, managing director at ITG, said in a statement that MiFID II comes with administrative challenges such as paying for research through an RPA that needs to controlled by the asset manager with strict oversight or funding requirements from the UK’s Financial Conduct Authority, such as the 30 calendar day sweep of research credits which will come with reconciliation time constraints.
“Over the next few months we will see what is and is working and what may need to be tweaked because of the operational challenges imposed which can cause inefficiencies such as the 30 day requirement of RPA funds sweep,” added Pollina. “ We expect the industry to push the FCA to allow 30 days from month end in order to allow more accuracy with less stress on the process.”