RSRCHXchange has launched an online marketplace to make it easier for buy-side firms to purchase research ahead of new regulations on unbundling coming into force in Europe in 2017.
Markets in Financial Instruments Directive II, covering financial markets in Europe, will require all research to be unbundled, transparently valued and fully auditable from January 2017.
Under the new regulations the European Securities and Markets Authority has proposed that fund managers pay for research either from their own revenues or from a research payment account funded by a specific charge to a client in order to avoid conflicts of interest. Esma did not clarify whether commission sharing arrangements will still be allowed to pay for research when the regulator released its final MiFID II technical standards this week.
Vicky Sanders, co-founder of RSRCHXchange, told Markets Media: “The big picture is that unbundling will happen under MiFID II regardless of whether CSAs are permitted. Some pension funds have already moved to hard dollars and are beginning to track consumption because it makes perfect business sense."
Before launching RSRCHXchange Sanders was at Marex Spectron where she was in charge of the commodity broker’s sales effort for a new research product. She also previously worked in equity sales at Merrill Lynch in London and Goldman Sachs. The other co-founder of RSRCHXchange, Jeremy Davies, had spent seven years at asset manager CQS running the event-driven and special situations portfolio.
Davies told Markets Media: “When I was in special situations I had to become an expert very quickly but it was hard to find the right research providers and it could then take months to set up a new counterparty. RSRCHXchange conducts compliance and due diligence checks on research providers and passes them through to the buyside to shorten the compliance process.”
He added that when they began developing RSRCHXchange last October they involved a number of buyside firms in order to meet their needs. On RSRCHXchange fund managers can search for specific terms within all the reports on the platform and buy the research they need in real-time using either cash, CSAs or the new research payment accounts set up for MiFID II.
European portfolio managers are expecting to buy more research using hard currency according to the latest annual European Equity Investors Study by Greenwich Associates which was published this month. The consultancy interviewed 200 European equity portfolio managers and 185 European equity traders between March and May this year and said the use of CSAs is nearly ubiquitous among larger institutions and UK accounts - and this has not changed despite the regulatory uncertainties.
Davies said: “RSRCHXchange offers an end-to-end solution and integrated back office management process makes the research procurement process auditable and defensible.”
The platform launched this month with more than 20 clients. Sanders added that RSRCHXchange allows firms to meet their record keeping requirements under MiFID II, as well as rank providers and measure and monitor consumption.
“Our content is stored in the cloud so the buyside can access reports in one centralised repository and track usage,” she said. “In the future we will be launching an app so that research can be accessed even more easily.”
Greenwich Associates estimated that European investors generated €3.4bn in cash equity commissions for the 12 months ended June 2015, with €1.7bn directed to pay brokers and third-party research providers.
John Colon, managing director of the market structure and technology practice at Greenwich Associates, said in the report: “While €1.7bn is a considerable sum, it is nonetheless far below peak levels and is currently where few brokers view cash equity research on its own as a profitable endeavor. If regulatory changes reduce drive down institutions’ overall expenditures for research, even a modest reduction likely will have a substantial impact on the availability of research.”
If the implementation of MiFID II leads to less research being produced by large banks, there is potential for independent providers to fill the gap. Sanders said: “The independent research universe is very fragmented and makes up just 5% of market share of a $20bn market and we believe that segment can grow.”
Peter Wright, founder of custom research platform Dodilio, told Markets Media last month that the MiFID II regulations will be a catalyst for transforming global research consumption. He said that large buyside firms such as Fidelity and Wellington have said that if MiFID II changes are approved in Europe, they will make changes globally.
Davies said: “We will be primarily focusing on the UK and Europe until January 2017. We will then look to shift to other geographies as firms look to comply with the research rules globally.”
Feature image by A/Dollar Photo Club