We have published our report into MiFID II and what we believe it will mean for investment research and corporate access.
The FULL REPORT, PRESS RELEASE and ACCOMPANYING BLOG can be found in the 'News' section of our website.
The Markets in Financial Instruments and Derivatives Directive (MiFID II) will be implemented on January 2018.
The Directive is designed to;
• Regulate Organised Trading Facilities (OTFs) such as dark pools and non-exchange trading platforms (OTC);
• Increase reporting of investment transaction prices at the point of purchase whereby funds are required to demonstrate that they traded at the best available price;
• Require funds to separately disclose payments for investment research and company access (company meetings) where these are made from client monies.
“Unbundling” payments for non-trading services is the most important component of the Directive for corporate issuers.
CAG believes that funds and brokers are likely to have systems in place by Q4 2017 in order that they are fully compliant by January 2018.
MiFID II states that non-deal Corporate Access has a “material” benefit to fund managers and cannot be exempted as a “non-material” benefit;
• Non-deal meetings with investors may have to be governed by a Concierge Payment Account (CPA) between the broker and the fund manager;
• Fund managers have to maintain records of who arranged a company meeting for client/FCA review;
• RPAs may be able to accommodate Corporate Access but only if the meeting has a “research” component (i.e. the analyst attends with the company);
• Corporate broking fees are unlikely to “cover” the requirement for a commercial relationship between broker and fund manager given exemption for IPO/secondary market activity;
• Feedback from fund managers to brokers may be limited given “unbundling” and a strict separation of equity sales and Corporate Access.
The question of who pays for Corporate Access is not answered by MiFID II. However, the requirement to establish a “clear line of sight” between funds and brokers is central to unbundling.
MiFID II establishes a definition of “substantive” research which has a material “value” to fund managers;
• Includes investment advice – recommendation and/or target price;
• Is aligned to the strategy and/or structure of the fund under management (i.e. tech, high growth, income, etc.);
“Non-substantive” research product is characterised as “market commentary”, does not contain recommendations/target price and is not specifically relevant to the underlying fund.
• “Substantive” research requires a payment structure between the fund manager and the broker (Research Payment Account or RPA);
• Fund managers must set a “Research Policy” at the fund level which outlines which forms of substantive research it will pay for with clients’ monies;
• These policies are likely to set KPIs for regular client/FCA review of expenditure (e.g. Quarterly);
• Investment research teams (brokers) must create systems to report on their provision of product under RPAs to FCA;
CAG believes that this distinction will reduce the impact of analyst research as a communications channel for corporate issuers.
Corporate issuers should consider the following points when reviewing IR and corporate broking activities for 2018 and beyond;
• Has the broker/analyst been signed up by the company’s main shareholders to provide research coverage through an RPA?
• What proportion of the company’s current shareholder list has a commercial relationship with the broker (e.g. RPA or CPA)?
• Can the company distribute the analyst’s research to the media and other stakeholders?
• Will the analyst(s) be able to speak to the funds without an RPA in place?
• Will analyst(s) write research on the back of company’s financial calendar and, if so, to whom will this be available?
• Will the broker be able to market this research via a company road show without having RPAs in place with the relevant fund managers?
• Can the broker arrange for Corporate Access with funds under an existing RPA?
• Will arranging a meeting with a fund manager without RPA/CPA coverage impact the broker’s ability to trade with that fund?
The full impact of MiFID II on research and Corporate Access provision is unclear. Compliance will be enforced on funds and their risk-averse approach may be to ensure transparency
• Financial calendar research coverage may require a commercial relationship between the Corporate and the broker outside of traditional corporate broking (“equity advisory”);
• Paid-for-research offers a possible alternative but fund management readership remains an issue;
• Corporates are likely to have fewer covering analysts and those who do may have more limited access to fund managers;
• Corporate Access is a key area of FCA focus for compliance, suggesting brokers may seek an outsourced solution and/or reduce provision;
• MiFID II exemption on deal road shows may prompt a focus on new/secondary issues for brokers;
• Direct communications between Corporate and Fund Manager is likely to increase, raising profile/workload of Investor Relations;
• Independent Corporate Access provision may offer a MiFID II compliant alternative which guarantees contact with fund management universe.