Under the revised Markets in Financial Instruments Directive, payments for investment research can no longer be bundled together with execution fees, and the implications for both the buy side and the sell side are not to be underestimated. John Brazier examines what this change means for the industry as a new breed of research providers comes to the fore, and the role technology will play in the emergence of this new market model.
The driving force behind the revised Markets in Financial Instruments Directive (Mifid II), which comes into force in a little under three months’ time, has always focused on increasing market transparency and investor protection. However, the reality of implementing and maintaining compliance with such a broad directive has left many market participants on both sides of the Street scrambling to get their houses in order.
Arguably the most complex element of the new trading rules are those separating payments for investment research from execution fees, which were historically bundled together and acted as an inducement for asset managers to trade with specific sell-side providers. Mifid II means that the buy side must now be far more selective of the research it consumes, while the sell side must rethink its traditional waterfront research coverage model.
The ability to provide consistent, transparent feedback to research providers was a key consideration for Principal Global Investors (PGI), an Iowa-based group of asset management firms that has implemented a dual solution to the investment research problem, comprising ITG’s RPA system and the One Access platform for research valuation from Visible Alpha.
Jennifer Sadiq, director of equities at PGI, says the firm made a strategic decision to evaluate how technologies related to investment research evolved over the previous three years before opting for a solution that would provide Mifid II compliance coverage and improve the firm’s research evaluation capabilities. “We realized that not only did we want to have a better handle on the broker evaluation process, but we also wanted to account for the research we consumed at a much more granular level and be able to recognize the value of that consumption point, as well as entering it into the administration piece of actually directing credits and accounting for them,” she explains.
The combination of the ITG and Visible Alpha solutions will replace PGI’s existing broker evaluation system, which has been in place for the best part of a decade and was developed in-house. Sadiq explains that research consumption was previously reviewed on a biannual basis, which in turn would help guide how PGI was allocating commission credits for research across those firms that provided research as a bundled service offering. “Where we needed improvement was being able to provide that level of transparency to our research partners,” she says. “To some of them it can be like a fire hose they just turn on and hope that pieces stick. Sifting through it all can be very challenging.”
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