As had been anticipated, they do not ban asset managers from using commissions to pay for research. Rather, buy side firms can pay for research using a research payment account (RPA) which can be funded by commission sharing agreements (CSAs). However, there can be no link between trading volumes and research payments – asset managers’ research budgets must be set in dollars (or pounds, etc).
RPAs can also be funded by money obtained by asset managers from increasing the fees to their clients, though many believe that this is unlikely to be possible in today’s competitive environment.
The other major change included in the legislation is a requirement for asset managers to give detailed disclosure about their research costs to their clients (such as pension funds). This must be provided at a fund or strategy level in advance.
These rules are a massive departure from past practices for many in the industry, and they are likely to have very far-reaching consequences.
Most market observers seem to believe that the increased scrutiny and regulation of research budgets will lead to continued downward pressure on them.
Some other notable points are as follows:
As widely expected, the implementation date for MiFID II has been pushed back by 1 year to January 3, 2018.
Each country will now have to interpret the rules at a local level and give guidelines to the local industry.
MiFID II applies to many asset classes, not just equities. This presents quite a dilemma for users and providers of fixed income research.
Research cannot be provided for free by investment banks, as this would be considered an inducement.
Readers may find this article by Integrity Research on the final MiFID II rules interesting.