Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Crossing the Atlantic is like going through the looking glass for bankers. 

New European rules aimed at cutting the ties between investment research and trading will force fund managers to pay separately for stock tips rather than allowing an all-in price. The U.S. holds the opposite view and actually prohibits broker-dealers from selling standalone analysis.

It looks like a fudge has been found, but it's hard to shake the feeling that Wall Street stands to win jobs and capital as post-crisis rules diverge.

Essentially, the American response to Europe's looming MiFID II rules seems to be: We'll accommodate you, but we won't copy you. Bloomberg News reports that the U.S. Securities and Exchange Commission will simply turn a blind eye to financial firms that sell research to European clients directly instead of bundling it up with other services.

That's a relief for firms that feared being whacked with fines or requests to become regulated investment advisers. It's less welcome for those fund managers who were hoping for a single pan-Atlantic approach to buying research. The EU and the U.S. are sticking with their opposite views.

This doesn't in itself mean that New York offers a cheap workaround or safe haven from MiFID II, which has sown confusion over everything from the right research price to the right way to pay.

That so many asset managers have decided simply to absorb research payments themselves, rather than go through new regulatory hoops to keep passing the cost to clients, threatens unintended effects. Belt-tightening asset managers will almost inevitably start shopping around more, creating a price war for research. It's hard to imagine that this won't ensnare U.S. banks, which want to keep the market share in areas like equities brokerage that they've snatched from European rivals.

Belt-Tightening
Survey shows almost 40 percent of top fund managers plan to cut research budgets
Source: Greenwich Associates survey of largest commission-paying accounts, published Aug. 23, 2017. Tracking "Expected change in overall budget for external research/advisory services in next 12 months"

But the Atlantic divide is getting wider, and Europe has a difficult task making sure it doesn't lead to regulatory arbitrage. MiFID II's 1,500 pages of rules try to do much more than put a price on research: They aim to cap trading on opaque dark pools, drag more flow onto regulated exchanges, and improve scrutiny of derivatives.

This direction of travel made sense in the wake of the financial crisis, when everyone was pulling together. But Donald Trump's election endorsed a deregulation drive in the U.S. Britain's Brexit vote gives succor too to those who want to free the City of London from red tape. These are pretty profound philosophical differences with the MiFID II crowd.

One can imagine banks working hard on potential ways to book trades in the U.S. rather than Europe, where as much as 74 percent of equities would be affected by the dark-pool trading cap, according to Octavio Marenzi, of consultancy Opimas.

The expected U.S. non-enforcement approach may offer some unplanned opportunities if it gives greater flexibility to American sub-advisers managing research accounts for European investors.

And in Europe, there's the risk that not every country will interpret MiFID II the same way. Linklaters's Rachel Knipe reckons true harmonization of rules across the EU has never been realistic.

Big multinational banks will find it easiest to navigate the divergent paths. They may be tempted to reshuffle businesses and jobs to exploit regulatory arbitrage. With Switzerland's Credit Suisse Group AG being urged to move its investment bank to the U.S., these rule splits might lead to some interesting places.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net