Countdown to Mifid II (version 2)

As stated in my paper seven days ago, Mifid II is an overhauled of the Markets in Financial Instruments Directive, which was designed and constructed in a manner whose intention is to offer enhanced protection for investors as well as promote greater transparency into the way financial markets operate, across all asset classes; be it equities, bonds, foreign exchange as well as exchange traded products.

From an Asset Management perspective, one of the largest changes is the way research is conducted and/or used.

As from 03 January 2018, asset managers will need to start paying for external research which to date has been distributed, more often than not, free of charge. These types of reports included written reports, financial models, and calls with analysts. Asset managers will now need to cater for research costs in their budgets as a separate cost from trading costs. At this juncture, asset management companies will need to devise a detailed cost-benefit analysis as to whether to finance research and analysis through third party service providers or whether to increase their head count (recruit analysts) to carry out the job for them. Either way, they will need to foot the bill from this point forth.

Also, this could very well mean that the larger asset managers, who already have a robust research set up in place, stand to gain from the new European rules concerning research at the expense of smaller rivals, who would need to fork out additional funds to keep themselves afloat. The larger firms should not find it difficult to capitalise on the fact that they can easily pay out of profits and retained earnings, whereas the smaller outfits might not be in a position to increase additional costs of this magnitude. I am not saying that Mifid II will drive them out of business, but they could well struggle at the expense of the larger investment banks.

According to the Financial Times, a recent survey of 330 asset (equity) managers in Europe found that the average cost for equity-based research is expected to equate to ca. 0.10% of total Assets under Management. But it stands to reason that the larger outfits stand to benefit more from economies of scale and such costs can be distributed amongst different regional research divisions/teams, a luxury which the small outfits cannot take advantage of.

Mifid II is targeted towards safeguarding the interests of the investor, be it from a trading perspective (best execution), compliance perspective (trade reporting and transparency), asset manage (research), which undoubtedly puts additional financial strain on bank, large institutional investors, brokers, asset managers and exchanges alike.