- UBS, Instinet and Convergex among companies discussing changes
- Pioneer may use a smaller number of research providers
Pioneer Investment Management thinks Europe’s looming ban on bundling together payments for equity research and trading is a great idea. But uncertainty over what will be allowed in the final rules has forced it to stop its efforts to separate the two.
“It is long overdue,” said Gianluca Minieri, Dublin-based global head of trading at Pioneer, which manages $244 billion. “We had to stop because of a lack of clarity.”
At the moment, fund managers pay their brokers for research and trading through one fee, the trading commission. Critics say it’s difficult to tell how much the customer pays for each service. The European Commission, the executive arm of the 28-nation European Union, wants to make those costs more transparent, but it has yet to say whether it will permit existing methods of separating payments, such as those used by Pioneer, to continue.
The proposed ban on bundling payments to brokers is one of the most contentious proposals in an EU-wide overhaul of financial regulations called MiFID II. The rule change, which comes into force in 2017, would disrupt the business model that investment banks use to profit from equity markets. Indeed, greater transparency may make some bank operations less lucrative.
MiFID II will hit asset managers too. Their clients pay the research and trading fees. The EU proposals require that analysts’ notes be paid for from an account owned by the fund manager or from a client-funded account dedicated to paying for research.
Under the current system, a money manager that doubles its trading volume could also increase how much its pays for research, regardless of whether it uses more research. Another criticism is that a fund might opt for inferior trade execution because it wants that broker’s research.
“The problem perceived by regulators is that you could be executing with someone just because you get their research,” said Anish Puaar, European market structure analyst at Rosenblatt Securities Inc. “Because of this bundled system, you’re compelled to trade with them perhaps even if they’re giving you poor execution quality.”
Pioneer pays for research through a commission-sharing agreement. Such arrangements allow money managers to direct their brokers to transfer money to a third firm to pay for research. The company, which is owned by Italian bank UniCredit SpA, started a project last year to set up CSAs for all its European businesses. After learning in December, however, that the arrangements may be banned entirely, it put its plans on hold.
The asset manager is also developing new ways to value and budget for research. That will probably mean reducing, or at least re-allocating, spending to a smaller number of research providers.
The European Securities and Markets Authority, the EU’s markets regulator, is expected later this month to rule whether CSAs do enough to separate payments. The commission, meanwhile, may publish the final rules for MiFID II this autumn.
‘Conflict of Interest’
Earlier this month, the German, French and British finance ministries wrote a letter to the commission, calling on it to water down the proposals on trading payments. Some national regulators are taking a different stance. The U.K.’s Financial Conduct Authority has said the current system contains an “inherent conflict of interest” because fund managers’ clients bear the cost of research that is difficult to value.
Pioneer reckons that greater separation between research and trading payments will make asset managers more selective when they choose research. The downside is that smaller asset managers may not be able to afford the best analysis, and smaller companies may get less attention from analysts, making it harder for them to raise capital from equity markets.
UniCredit’s fund-management business isn’t the only one trying to prepare for the new rules, though few firms have been public about their plans.
Nomura’s agency broker Instinet Europe has won approval from the FCA to run separate client accounts for trade payments and research payments, while Swiss bank UBS Group AG is developing a new pricing model for its research. Brokerage-services provider Convergex Group LLC is looking to adapt its offerings to the new regulations. Like Pioneer, the firm is awaiting further details from Brussels.
“Different asset managers are making decisions right now depending on their circumstances,’’ said Adam Toms, chief executive officer at Instinet Europe in London. “Our view is that existing CSA structures can be augmented to deal with the residual concerns of regulators and that’s what we would like to see happen.’’