MiFID II – Regulatory Burden or Opportunity for the Buy-Side to Optimize Research Spend

The impact of MiFID II on both buy- and sell-side firms will be profound and far-reaching, including how investment research is consumed, paid for and valued. What are the chief implications of the research unbundling section of MiFID II, how will buy-side firms deal with these implications, and how can research providers capitalize on the changes?

In a recent Thomson Reuters survey of asset management firms globally with assets under management of less than $25bn, more than 80% of respondents expected consumption from independent research providers either to remain flat or increase in the future. The survey also found that smaller buy-side firms are looking for new sources of research. How will MiFiD II impact the industry?

MiFID II has far-reaching implications for both buy- and sell-side firms, including how investment research is consumed, paid for and valued.

Mahesh Narayan, head of research at Thomson Reuters, recently spoke to FinExtra about the implications of MiFID II for the Investment Research industry. (Watch full video, below.)

Here are the highlights of what Mahesh had to say:

What are the chief implications of the research unbundling section of MiFID II?

One thing is certain: The implications are profound and far-reaching.

MiFID II will affect both the buy-side, which consumes research, and the sell-side that produces it. Although some of the regulations are still evolving and could change further, the regulator has been clear about three aspects:

  1. Research products and services can no longer be consumed for free.
  2. It is not just the research itself that is affected by the changes, but rather the whole package, including, for example, investor trips, analyst calls and meetings.
  3. There is no prescription relating to how firms must pay for research. Rather, they are obliged to implement a systematic process relating to their dealings with the sell side, including which brokers and independent researchers they use, what they consume and how they value it.

[Related: “Alpha Capture Offers Better Trade Idea Mousetrap”]

How will buy-side firms deal with these implications?

We expect the buy side to react to the changes in two ways:

  • First, buy-side firms are likely to view this as an opportunity to optimize their research spend. They will ask questions about which brokers add the most research-related value, which is likely to lead to the big asset management firms streamlining and reducing the number of brokers they use. For example, a big asset manager currently using 50 brokers or independent researchers could shrink these resources to perhaps 10 in total.
  • Second, we expect the buy-side to pay increased attention to how it tracks research consumption. We expect an increase in internal controls to track specific usage – for example, exactly which analysts are consuming which research and from which firms.

What is your advice to those that produce research — both sell-side and independent research firms?

The sell-side must think about its role and the value that it adds. Specifically:

  • Big firms should emphasize the total value of what they offer, including analyst meetings and corporate access.
  • Mid-sized firms should look for ways to differentiate their offering. For example, there could be a specific region or sector where they are the research leaders.
  • Small independent research firms should view these regulatory changes as an opportunity. Whilst these firms don’t cover the entire market, they usually focus on a few sectors or companies very effectively and this provides them with an opportunity to showcase their expertise.

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