Research unbundling rules came into effect just over a year ago as part of MiFID II requirements. The goal of these rules was to enhance transparency and investor protection and eliminate conflict-of-interest risks associated with research between the buy side and sell side. The industry is split as to whether this is a positive or negative outcome for the industry. In reality, this is just the start of necessary change in the production, distribution and consumption of research.
A recent global survey of market participants conducted to understand how research provisioning has changed since the introduction of the new Markets in Financial Instruments Directive revealed that as price transparency becomes clearer, firms are becoming more discerning regarding the type of research they consume as well as their method of access. Some critics claim that this risks negatively impacting research provision, particularly on small- and mid-cap companies, threatening listings and secondary trading volumes as a result.
On the flip side, proponents believe MiFID II has offered an opportunity to open up the research market and challenge the status quo regarding the implementation and execution of investment ideas.
It is clear from the responses that research unbundling is now starting to take off across the industry. More than half (53%) of all buy-side respondents indicated that they have already implemented a global policy, and a further 20% plan to do so within the next five years. While research unbundling in Europe is likely driven by regulation, the rest of the world is being led by perceived end investor demand and the practicalities of implementing regulatory policy across different jurisdictions.
For U.S. respondents, those firms that have been able to ring-fence Europe also have chosen to do so with an acknowledgement and fiduciary duty to treat all clients fairly, but a growing number of global firms are opting to align themselves to MIFID II.
Value-Add Research Matters
With that said, today’s dominant research providers remain the bulge brackets for now, with 69% of respondents indicating they chose global investment banks over regional specialists — but this may yet change. While firms initially intended to use Research Payment Accounts (RPAs) funded by a research charge to the client, the last quarter of 2017 saw an increasing number reversing their decision and opting to pay for research via their own P&L. When firms implemented the move to P&L, the primary concern was to make sure research agreements were in place in time for Jan. 3, 2019. Bulge bracket banks benefited from this due to their coverage and multiple touch points across organizations.