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MiFID II: Fixed income research ‘won’t change’ through unbundling

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The majority of investors think the quality of fixed income, currencies and commodities (FICC) research will not change in the wake of MiFID II rules on research cost unbundling, according to a survey carried out by the International Capital Market Association (ICMA).

However, roughly under a third (32%) said they believed it would get worse, and 14% that it would improve.

The survey was of members of the ICMA Asset Management and Investors’ Council (AMIC) and was carried out last month. It sought to discover firms’ intentions and progress regarding the implementation of MiFID II research unbundling requirements specifically in relation to FICC research.

Just under half (46%) of the investors said a significant majority (75% or more) of their existing FICC research providers had not yet approached them about potential pricing arrangements.

The majority of respondents, 83% and 58%, respectively, said they would use fewer research providers once the new rules come into effect, and that spending on FICC research would increase.

An overwhelming majority (86%) said a reduction in the number of research providers would not hurt their funds’ performance. This, AMIC said, pointed to a potential oversupply of research.

The vast majority of respondents said they expected to be compliant by the 3 January deadline for research cost unbundling, although more than 60% said they were not yet compliant.

Increasing in-house FICC research capacity is on the agenda for a third of respondents, while 68% indicated they did not plan to do so.

The world according to MiFID II cost unbundling

More than 60% of asset managers with global activities plan to pay separately for fixed income research, according to the survey. 

The remainder largely planned to pay for research in non-EU jurisdictions only for EU clients (31%), while 8% said they would segregate their EU and non-EU businesses.

Patrick Karlsson, secretary to the ICMA AMIC, said the figures showed MiFID II would have a global effect.

EU and US regulators recently said non-EU asset managers could continue to bundle trading costs and research costs as long as the two were distinguishable from each other. The US Securities and Exchange Commission (SEC) said it would grant this relief for 30 months.

Speaking at an ICMA AMIC event yesterday, Ross Barrett, capital markets specialist at the UK’s asset management trade body, the Investment Association, said the SEC’s announcement was very important, but guidance from the European Commission had solved the issue “for the rest of the world”.

“And that does matter,” he continued, “because MiFID II is a new bar, it’s a higher bar that doesn’t exist anywhere else in the world.”

Asking managers to comply with the rules in other jurisdictions that in many case had rules to the opposite – such as the US – was not acceptable, he said.

Chris Devain, chairman of the European Association of Independent Research Providers, said asset owners were key to changing practices in non-MiFID II jurisdictions.

Once asset owners both in Europe and the US “get a flavour and taste for some of the reports that will come out of Europe and that increased transparency” they could put more pressure on US firms that deal internationally to comply with MiFID II research unbundling.

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