Still Waiting for MIFID II

The investment industry in Europe and indeed, around the world, is still waiting to find out what the final MiFID II rules will contain.

Of particular interest is whether they will ban asset managers from using dealing commissions to pay for research or allow them to still use commissions via an ‘enhanced CSA’ mechanism. In either case investment firms could charge their clients for research under a research payment account (RPA) mechanism, using either hard dollar in the former or commissions in the latter.

There are also questions about whether the research payment rules would be applied to the fixed income universe, and how useful that would be, given the differences between how the research market operates in fixed income versus equity.

The final MiFID II ‘delegated acts’ from the European Commission are already late – most industry participants expected them to have been released earlier this year. The current timeline states that these final rules will be enacted by the EU member states in 2016 with implementation in January 2017.

A few months ago it was reported that the delegated acts would not be released until this month (November 2015) and now recent press reports are stating that whole timetable could be pushed back to 2018.

But aside from the timing, what will the final rules actually say?

I recently attended a large conference on the topic called ‘Unbundling Uncovered’, with participants across the buy side, sell side, independent research, academia and also a representative from the FCA. After listening to the presenters and having discussions with some of the panellists and attendees, it seems as though there might be some softening in the position of the regulators.

The change in the head of the FCA, the appointment of a Conservative government in the UK, and continued opposition by some European regulators (such as the German and French ones) all seem to have come together, in the opinion of some industry watchers, to make an outright ban on the use of commissions to pay for research less likely. Instead a strictly regulated system of enhanced CSAs, in which asset managers will have to set targets for their research spending and carefully consider and audit them, seems more likely.

However, this is all still very uncertain and we continue to wait with bated breath for the final MiFID II delegated acts from the European Commission, to find out how this crucial area of the market will be regulated.