Mifid II: Unbundling the bureaucratic burden

With the ink barely dry on the Mifid II Delegated Acts, Aoife Carey of equities broker ITG explains the administrative headache now facing fund managers when paying for research.

When it comes to the regulation of European financial markets, always expect the unexpected. A matter of weeks after the long awaited Mifid II implementation date was confirmed, market participants received the news of the Delegated Acts last Thursday – which outline how fund managers should pay for research.

After taking months to materialise, it’s fair to say that these Acts, on top of the 1,500 plus pages of other Mifid II rules, mean that fund managers across the City will have plenty to mull over in the coming weeks. While the Acts provide some clarity, some key questions regarding the use of commission sharing agreements (CSAs) remain open to local regulator interpretation. In simple terms, a CSA provides fund managers with the control to trade with a broker that provides best execution while remunerating either that broker or third party research providers for research. Brokers now have an obligation to provide transparent pricing for execution and research separately.

Importantly, although CSAs are not mentioned directly, it appears that they will not be allowed in their current form, although some adaptation of the structure should be possible. What is very clear is that if a firm wishes to use client funds to pay for research, separating out research payments from execution costs will be required. The challenge is that this process, more commonly known as unbundling, will increase the already high administrative burden on the sector. Fund managers will now have to report on providers paid from the account, the total amount they were paid and over which timeframe, the services received and the amount spent from the research budget.

Due to these heavy requirements, fund managers of all sizes need to carefully consider whether to use a separate account for research – known as research payment accounts (RPAs). This is a separate account that must be funded by a specific charge to the end investor and agreed yearly. City attentions will start turning towards balancing the most efficient way to pay for research, while continuing to deliver best execution to clients. Unbundling broker relationships to gain transparency between execution and research is a good place to start, as is reviewing and comparing past research budgets with future expectations. Fund managers that do this will be best positioned for this unfamiliar new world of research payments.

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