New EU Market Rules Could Kill Brokers’ Morning NotesBy
Notes intended as marketing may have to be paid for from 2018
Rules put onus on buyside to block receipt of free research
Each weekday morning, shortly after 8 a.m. London time, City workers get a cheery “GOOD MORNING” in their inboxes as Anthony Peters’s daily note arrives.
In it, the Sol Capital Advisory strategist discusses the previous day’s events, economic numbers published or due, and pours scorn on hobby horses including the European Union, central banks and politicians. A similar recipe is used by Bill Blain of Mint Partners, who opens “Blain’s Morning Porridge” with a song lyric or quotation, and Deutsche Bank AG’s Jim Reid, whose “Early Morning Reid” recounts some part of his home life before turning to the economy, rates, bonds and currencies.
These are just a few examples of the morning-note genre, which is one of the ways investment banks and brokers market their services to potential clients. The problem is, under the EU’s upcoming MiFID II rules, firms must soon start charging for research -- and that may include the morning musings of analysts and strategists. The authors risk having to either charge for the notes, restrict their circulation or render them anodyne.
“MiFID II does allow for what are called minor non-monetary benefits, but this only includes a few, very basic types of informational research,” said Hannah Meakin, a financial-services partner in London at law firm Norton Rose Fulbright. “Certainly, anything that can be described as a recommendation of an investment strategy, or a substantiated opinion or substantial analysis, I think you’d assume is in the investment-research category.”
The updated Markets in Financial Instruments Directive II is an overhaul of the way markets are overseen that runs to more than 1,000 pages and is huge in scope. When it comes into force in January, it will impact trading in everything from stocks and bonds to derivatives and commodities as it seeks to increase investor protection and transparency.
Morning notes will have to account for MiFID II’s requirement that anything “substantive” -- that is, well thought-out and potentially useful to readers -- should be paid for to avoid being considered an inducement.
“Charging under MiFID is a real, real problem,” said Sol Capital’s Peters. “Isn’t the point of reading research to collect the most diverse range of views on a chosen subject and, hopefully, a few views on some un-chosen subjects too?”
In terms of how much banks might charge, a two-tier pricing model is taking shape, according to Neil Shah of Edison Investment Research Ltd.
This might offer the full research services of a major bank -- including meetings with analysts and conference invitations -- for some very high sum, but allow access to the research portal alone for $10,000-$20,000 a year, Shah said. Would non-subscribers get to see morning notes for free?
“Not if it’s a note with anything worth saying,” said Shah. “Anything substantive and you’ll have to pay. Substantive is anything that gives you an indication of an investment strategy.”
While notes are useful, whether they’d be worth paying for in isolation is a different matter, said David Tawil, co-founder of hedge fund Maglan Capital LP in New York.
“Those morning notes save me some time and sometimes I catch something that I would otherwise have missed,” Tawil said. “Since we’re a cost-conscious firm, we would need to carefully evaluate any cost, because there isn’t any alpha in those notes.”
The question of whether firms will have to charge arises because of the blurred line between marketing and research.
A Q&A published by the EU’s European Securities and Markets Authority says that “short market updates with limited commentary or opinion may be capable of being considered as information that is a minor non-monetary benefit.”
This will affect people such as Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York, whose team sends out a lengthy overview of the previous day’s market action each morning. The note covers everything from equities, rates and commodities to emerging markets, economics and currencies and might strain the definition of “short market update.”
A disclaimer in red at the top of the note saying that it’s “Sales and Trading Commentary -- Not a Product of Cantor Research” doesn’t change anything for MiFID purposes. ESMA is clear that, in assessing whether something is substantive, what counts is the content, not “the qualification given/alleged by the provider.”
Posting everything on a website for free means you can probably sidestep the rules, said Edison’s Shah. Yet that might not be acceptable to every author because they use the notes to attract new clients.
“The problem is that putting everything up on a website diminishes its value, because if everyone has it, then you don’t have an edge,” said Bob Penn, a partner at law firm Cleary Gottlieb Steen & Hamilton in London. “It reduces the ability of the sellside to target a particular client with a tailored message.”
Mint Partners’s Blain, whose day job involves matching buyers and sellers of bonds, attached in-depth reports on non-performing loans at Europe’s smaller banks and on aircraft financing to his musings in recent months.
“On MiFID, we are taking a very simple stance,” he said. “Everything we do is commentary and we don’t make recommendations.”
Deutsche Bank’s Reid insists he remains optimistic. “I would argue it makes the best morning notes more valuable,” he said on Twitter. “I actually feel the opposite of threatened.”
A spokeswoman at Reid’s firm, Deutsche Bank, declined to comment on the lender’s plans, as did a spokeswoman at Cecchini’s firm, Cantor Fitzgerald.
“Firms are now required to impose research-style compliance requirements on a large amount of sales material which was previously outside the scope of this kind of regulation,” said Peter Bevan, global head of financial regulation at Linklaters LLP in London. Brokers will have to take a close look at their material to “ensure they do not inadvertently find themselves having to apply a charge to what is essentially a marketing function.”
— With assistance by Gabriella Lovas, and Nishant Kumar