MiFID II research rules have been in implementation since January 2018. It's one of the most discussed issues within the financial industry. However not all companies are affected by it or have to implement it. Here we discuss what companies adhering to MiFID can expect and what companies not adhering to MiFID can enjoy.
What is MIFID II?
In very broad terms, MiFID II aims to protect investors and make sure that financial markets operate in the fairest and most transparent way possible.
One of the new rules mandate investment firms to no longer accept research as a non-monetary benefit, unless a firm can prove that the research passes the quality enhancement test and that the research is classified as a non-monetary benefit. This has caused much debate about how much firms will charge for research within the industry; some firms have decided to provide research as part of their services whilst others have announced they will swallow up the costs.
Obligations of sell-side and buy-side subjected to MiFID II
Under the new rules, buy-side and sell-side firms have several obligations to follow which they did not have prior to MiFID II new research rules.
Sell -side firms providing investment research are required to:
Buy-side firms receiving investment research are required to:
The purpose of these obligations is to mitigate conflicts of interest and ensure that research is not being offered as an inducement.
Why is it causing so much contention?
These changes have caused much contention because, under the existing rules, when an investment firm trades more products, its overall fees will increase despite it receiving the same amount of research. These costs will then be passed on to its clients. Under the new rules, this will no longer be possible. investment firms must not link the amount paid for research to the volume or value of transactions. Instead, they must agree a budget for research to be paid for upfront and this must correlate to the quality and value that the research would add to the end investor. This gives the investment firm two choices. They can either pay for research directly from their own account, or pay using client commissions and a research payment account which is supported by a Commission Sharing Agreement. This codifies how costs are split into execution costs and research costs, and how commissions are to be shared amongst research providers.
To support this, sell-side (research) firms are required to separate the costs of research from the cost of execution. In this way, investment firms must make explicit payments for research they receive. The impact of the new rules is that, for the first-time, asset managers are taking a hard look at the quality of research they receive to determine what is worth paying for which, as a result, means that firms will have to closely assess how much their research is worth – difficult to do in practice as the value of research is inevitably subjective and depends vastly on many factors.
So what happens if your company is not subjected to MiFID II?
There is no such problem if your company is not subjected to MiFID II. At least for the research firm and the investment firm (including you, the energy and mining company).
The Energy and Mining company can link the amount paid for research, which in this case, consist mainly of content in the form of initiation reports, online content, new media, blog and social media posts etc. The Energy and Mining company doesn't need to agree on a budget for research to be paid upfront. Better still, the fees that the Energy and Mining company paid can be correlated to the quality and value that the research would add to the end investor, which in this case, are investors of the Energy and Mining company.
So this gives the Energy and Mining company two avenues to exploit;
This puts the purchasing power right in the hands of the Energy and Mining company, because they only pay when they receive value from research providers like us.
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