Mifid II, the result of the ongoing overhaul of the EU’s flagship markets regulation which will come into force on 3 January 2018, bans fund managers from paying banks for research directly out of clients’ funds, as this is seen as an inducement to trade with that bank.
Instead, they must either make the payments out of their own resources, or set up special “research payment accounts” funded by explicit research charges to the client.
One problem – particularly for fund managers who operate in both Europe and the US – is that this conflicts with US rules preventing broker-dealer banks from taking specific payments for research, as this could lead to them being regarded as “investment advisers” under Securities and Exchange Commission rules. That status restricts their ability to trade on a principal basis, which is particularly important in fixed-income markets.
In an October 19 letter to Valdis Dombrovskis, the EU’s Commissioner for financial services, seen by FN, Ferber warned that “other jurisdictions, most notably the US, have a system that is quite different from the European one” and “this makes operating research payment accounts difficult in those jurisdictions”.
“For market participants that operate on a global level, this constitutes a considerable compliance problem…I would much appreciate if your services could flag this issue in the regular exchange of views the Commission has with third country authorities in order to come up with some guidance for those situations”.
Ferber’s letter also flagged up the issue of applying Mifid II’s research rules to fixed-income markets, where perceived conflicts are not as apparent and requiring separate research payments would be entirely new.
He wrote to Dombrovskis: “I know that a lot of market participants are struggling to devise systems that work for fixed-income research on the one hand, and satisfy the overall requirements in Mifid II on the other hand. Many national supervisory authorities have not found a way to deal with these points either. Guidance by your services or [the European Securities and Markets Authority] on fixed-income research regimes that fulfil the Mifid II requirements would be very useful.”
Andrew Bowley, head of regulatory response and market structure at Nomura, which has long called for fixed-income research to be exempt from the rules, said he was “surprised and encouraged” by the letter.
He said: “It is late in the day, but recognition of a problem that we’ve highlighted for a very long time. Fixed-income markets work on a competitive pricing structure using [request for quote] models and research is not perceived as having the same influence on trading as it does in equity markets.”
In September, both the UK’s Financial Conduct Authority and France’s Autorité des Marchés Financiers published updates on how they intend to implement Mifid II, and among other things they asked the industry for views on how to apply the research rules.
The papers indicated the FCA was taking a harder stance on the research rules compared to the French, and made clear they will apply to fixed income research. The AMF, in contrast, said it was unsure how the rules applied to the asset class and invited “views and opinions” on the matter.
In an emailed statement to FN on October 27, Ferber said these were points “frequently brought up by market participants trying to implement Mifid II. Unfortunately, even national competent authorities [national regulators, for example the FCA] have not been able to give clear guidance”.