As Voiced at the Equities Leaders’ Summit 2017: The Buy-side Struggles with MiFID II Research Unbundling

As Voiced at the Equities Leaders’ Summit 2017: The Buy-side Struggles with MiFID II Research Unbundling

by Shanna McEachern, Manager, Field Marketing, Americas, IPC

Hello everyone,

If you saw my last post, you’ll know that I just came from the Equities Leaders’ Summit in Miami – the largest annual gathering of Equities buy-side heads in the US. In this video, I wanted to focus on one particular topic of interest at that event: MiFID II and the impact of research unbundling. Here’s what I heard.

What was said about MiFID II and research unbundling @ the Equities Leaders Summit?

Under MiFID II regulation, research consumed by asset managers must be paid for with a separately defined price tag, as opposed to being bundled into the traditional broker commission as a holistic service. This shift in regulation is to demonstrate asset managers are not being induced to trade.

As such, the buy-side firms at the Equities Leaders’ Summit had some significant concerns and uncertainty about how they were going to manage research going forward. The first concern sounds a simple question, though nobody seemed to have the answer:

1. How do you define research?

How do you define research? What constitutes paid research, and what doesn’t? If someone tells me the current ask or bid, is that research?

The audience just didn’t know. When years-old relationships become chummy between asset managers and their brokers, it may become harder to delineate formalized research services from everyday conversation. If the answers are stated in the MiFID II fine print somewhere, this information has evidently not made it out to the buy-side firms who most need to understand it and take action upon it.

2. How do you control for unsolicited research?

The second concern was around addressing what research actually makes it to your inbox. After all, as of January 3rd, it is explicitly the buy-side’s responsibility to ensure that they do not accept unsolicited research. If you open an email that contains research, you’re now obliged to pay for that research regardless of whether or not you intend to use it. Because of this, firms will need to implement some sort of controls to ensure that investment teams are only receiving the research they expect and desire.

The need to manage this type of information exposure has led to formation of several new vendors offering techy management systems. Unfortunately, as you’d expect, research management solutions don’t come for free either.

3. How will unbundled costs and shrinking budgets impact relationships?

The third concern was the impact of research costs on the actual relationship between the buy side and the brokers providing that research. According to market research presented at the Leaders’ Summit, we expect to see a 10-30% reduction in research spend in 2018 across European buy-side firms. Now, what does that mean for the research provider? Will they deliver the same quality of service to a given asset manager if spend drops by 30%? Will brokers expect that 30% to be compensated for somewhere else – such as in execution?

Interestingly, a separate but complimentary study showed that while overall budget did decrease, so did the number of brokers any given buy-side intended to deal with. If that’s true, then the research spend per broker may remain roughly unchanged. The issue then lies with staying on that broker list, and research providers will need to ensure that their services are made more valuable than ever.

What’s more, as every interaction becomes scrutinized in the new MiFID II world, firms will be pressured to justify lines of communication they’d previously taken for granted. When spend is being increasingly tracked and managed, we will likely see a simultaneous uptake in recording, line management and TCA.

To sum it up, the buy-side firms present at the Equities Leaders’ Summit had three main concerns around research unbundling:

How to define research – which there may not be a clear answer at the moment

How to control incoming research – which we may require new technology a third party solutions; and

How to approach sensitive buy-side / broker relationships when brokers risk being cut

Thanks for listening. IPC are continuing to think about the challenges faced by our customer base, and ensuring firms can continue to connect to their counterparties and research providers in the changing landscape. Feel free to reach out with comments, questions, or to speak with IPC about how our solutions can help connect you to your counterparties in a way that’s secure, compliant, and facilitates both internal and external communications management.

© 2017 IPC Systems, Inc. All Rights Reserved. The contents of this publication are intended for general information purposes only and should not be construed as legal or regulatory advice.