The revised Markets in Financial Instruments Directive, MiFID II will come into effect in Europe from January 2018. The new legislative proposal is expected to have a global impact on the ecosystem of how buy-side consumes sell-side research. MiFID II provides several guidelines pertaining to transparency, market integration and investor protection. Governed by The European Securities and Market Authority (ESMA), some of the guidelines will include big changes to existing bundled payment structures. How will the new rules affect investment firms / sell-side firms, asset managers / buy-side firms, and research partners? Will there be more pain than gain for the industry?
A brief outline of the proposed changes relating to inducements and research payments to and from a third party can be found below:
One of the main aims under the new rules will be to improve the way financial markets function by making them more efficient, resilient, and transparent. When it comes to sell-side research, there are two current models – bundled research payment model, where the broker holds all commissions and provides trade execution and other services, and commission sharing agreement research payment model which is a type of soft dollar arrangement between a fund manager and an execution broker.
Sell-side research is funded through commissions paid by clients each time they buy or sell shares. Research houses distribute large volumes of research to asset managers in the hope of winning future execution business from them. However, legacy systems of using dealing commissions, bundled with execution commissions paid out of clients’ funds presents some challenges. They do not guarantee whether a fund manager is paying for the right level of research, or receiving the best execution, if they automatically give business to a favoured research provider.
Seeking to address such conflicts of interest, MiFID II will affect the following stakeholders:
How will your business be affected by MiFID II? Our latest white paper looks at traditional payment structures and existing conflicts of interest, as well as the implications of the new market rules, both on payment models and on all market players across the financial industry.