With just six months to go before the Markets in Financial Instruments Directive II (MiFID II) compliance deadline, many financial firms are struggling to pin down the research unbundling requirements of the regulation. Key challenges to implementation include measuring the value of research, establishing a pricing system and building a compliant solution.
MiFID II research requirements and the industry response were discussed during a recent A-Team Group webinar. The webinar was moderated by A-Team editor Sarah Underwood and joined by Richard Balarkas, non-executive director at Bats Trading and Saxo Capital Markets; Mahesh Narayan, head of research, financial and risk division, at Thomson Reuters; and Bharat Malesha, executive vice president, fees and expense management, at SmartStream.
An early audience poll showed 38% of respondents in the planning stage of meeting MiFID II research requirements, 25% working on the requirements, 24% somewhat compliant, 7% yet to start on this area of MiFID II, and 5% being fully compliant.
While these results suggest readiness by the compliance deadline is questionable at some firms, Narayan noted that the European Securities and Markets Authority (ESMA) is unlikely to delay MiFID II research rules, leaving buy-side firms with work to do on how they measure usage, value and pay for research, and establish a consistent payment process.
Balarkas described the changes set out in MiFID II as reversing the buy-side process of acquiring research. He explained: “The requirement looks much like any other procurement process. The buy-side must decide and agree what it wants and what it will pay before it gets any research so that it can pre-allocate research costs to clients. This is a huge amount of work, including contracts, negotiations, payments and policy.”
Considering the challenges of compliance, Malesha said pricing is a key issue, with firms needing to add data points to front, middle and back office systems to track research budgets. Narayan noted the need to integrate research readership, access and sources to provide transparency and justify research acquisition before and after setting a research budget.
While many buy-side firms have yet to decide how to pay for research, some are expected to use client funds and a smaller proportion their own P&L account. Commenting on this, Balarkas said: “If buy-side firms choose to pay for research out of P&L, they are likely to come under less regulatory scrutiny, so this could be the easiest approach.”
On the sell-side, Narayan said: “This is a fundamental change to business and the business model. Research is no longer a cost centre, but a P&L business. The transition is not easy, sell-side firms must negotiate one-on-one contracts with large clients before the compliance deadline.”
The speakers discussed solutions to these problems, noting the need to track usage, value research, provide access services and maybe block unwanted research. With a good process in place, Malesha suggested better transparency and matching of the value add of research with its use could provide significant business benefits. Balarkas agreed with an audience poll showing that little benefit is expected from initial compliance with MiFID II research rules, but said the longer-term provision of two independent markets for execution and research services should provide greater ability to value and price services.
Final advice for data practitioners working on MiFID II research unbundling included starting early, making sure all required information is captured and complete, and focussing on data aggregation.
Listen to the webinar to find out about:
- The MiFID II research regime
- Challenges of change
- Buy-side approaches
- Sell-side approaches
- Expert guidance