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MiFID II to Prompt Global Unbundling

Traders Magazine Online News, April 20, 2017

Shanny Basar

The incoming rules separating payments for trading and research in the European Union will expand beyond the region and are likely to boost full unbundling of client commissions around the world.

MiFID II, the regulations covering financial markets in the EU, come into effect at the beginning of next year. One of the requirements of MiFID II is to separate payments for research from trading commissions to increase transparency and reduce conflicts of interest. Asset managers will have to either pay for research out of their own P&L or from research payment accounts, where they have agreed a budget with their clients. The requirements cover fixed income, currency and commodity markets for the first and the buyside will also have to track their consumption of research and evaluate its quality.

Rebecca Healey, head of market structure and strategy at institutional trading network Liquidnet, said in a note that a post-MiFID II world requires fund managers to deliver the best possible outcome for end-investors in both research and execution, so only the best providers of either service will survive.

“European firms subject to MiFID II inducements rules must comply with these requirements irrespective of the status or geographical location of the research provider,” Healy added. “We are now one step further in witnessing full unbundling of client commissions across the globe.”

The European Securities and Markets Authority last month published its latest guidance on how fund managers should ensure that the purchase and receipt of research or services do not constitute an inducement to trade. MiFID II requires firms to put a research policy in place which should include the criteria against which the quality of the research they purchase is assessed; how the research contributes to better investment decisions; and how costs can be allocated in a manner that is fair to all client portfolios.

Research providers should also be able to explain how they price their services, especially where they also provide execution services, to enable them to evidence that they are not influenced by payments for execution services. Under MiFID II firms cannot accept research for free. Healey said: “‘Waterfront’ subscription arrangements, Esma considers could be compatible with MiFID II rules, provided that the fee charged can be justified by the expected benefit to the client.”

Simon Gilbert, sales director based in Liquidnet’s London office, told Markets Media: “Large managers who implement MiFID II in London may be expected to be consistent across their global platforms. It seems the trend toward unbundling and best execution will cross the pond into the US.”

Gilbert was hired from Sterne Agee to be responsible for helping Liquidnet’s European members source institutional liquidity in US equities. “Liquidnet is investing in technology and ensuring that members are aware of the whole suite of products, such as algos, which are a powerful tool,” he added.

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