MiFID II Research

Part of the MiFID II investor protection framework requires investment firms to make precise payments for equity and fixed-income research. More than five months on from the implementation of MiFID II, the market is still grappling with specifically what constitutes a fair price for research.

The MiFID II definition of which services should be categorised as research no longer applies only to independent investment research but also to advisory services provided by trading and front-office sales personnel.

This regulation poses significant challenges as firms are required to disclose the sell-side costs and charges associated with these activities to buy-side firms in order to demonstrate that they have not been induced to trade and are acting in the best interests of investors.

The extended MiFID II Research definition includes:

– Services or materials that could influence an investment strategy, either implicitly or explicitly adding value to an investment decision.
– Comprises one or several issuers of financial instruments, financial instruments, and assets.
– Offers substantiated opinion regarding the present or future value of a given asset, issuer, or instrument.

Buy and sell side firms will have to create frameworks in order to evaluate the multitude of services they provide and understand where they lie on the spectrum and whether they need to be paid for.

New MiFID II Research Requirements and what it Means for the Investment Industry.

The new requirements set out by MiFID II and MiFIR further enhances the requirements introduced in 2007 under MiFID I by continuing to reform the EU Securities and Derivatives markets. The legislation introduced substantial front-to-back changes for stock, bond, derivative, and commodity trading to ensure that markets operate in an orderly way.

In addition, it seeks to enhance transparency and investor protection. The new requirements are also intended to mitigate risks of conflict of interest associated with research and to prevent research from being used to induce trade.

The onus falls on both buy- and sell-side investment firms to fulfill the requirements:

Sell Side Firms
– Must not induce trades by bundling their research within execution services;
– Identify and review services that can be considered as research requiring payment;
– Provide un-bundled costs for services, and identify and charge separately for research, execution, and other advisory services.

Buy-Side Firms
– Demonstrate that research provided contributes to improved investment decisions and therefore is not used as an inducement to trade;
– Make explicit payments for specific research provided.

Investment firms should provide better reporting in order to facilitate explicit payments for research and to demonstrate what value the research has provided.

The extent of impact on profit margins and operating models for investment firms will depend on how they approach the challenges presented by MiFID II.

Investment firms that are prepared to consider the long-term strategic view and to evaluate the consequences of MiFID II across their client base, their service and product offerings, and their entire front-to-back operations will be in a better position to use the new regulations to gain a competitive advantage in the market.