After months of deliberation over whether or not fund managers should get out their wallets to absorb research costs, it appears the majority of the buyside has finally decided it is decision time. After all, there is now less than 100 days until Mifid II comes into force.
From BlackRock to Franklin Templeton, a number of the bulge-bracket asset managers have recently decided to cough up research costs from their own profit and loss accounts. But while this clarity from the buyside is of course welcome, it by no means signals an end to the research billing and commissions saga. On the contrary, significant knock-on implications to a broker’s business are likely to be felt long beyond January 3.
As fund managers begin reallocating costs and assessing research value, brokers will still be left fielding the first wave of questions such as ‘when and how am I going to be charged?’ and ‘what exactly am I going to be paying?’ The second wave of questions such as ‘are all research providers invoicing in a standard way or format?’ and ‘is there a portal?’ have not yet arisen.
While those in equities may be used to these questions (albeit with invoices managed retrospectively and manually), fixed income, currency and commodity intermediaries are on less familiar ground. You can already hear the cries from the research sales desk of ‘I have never had to charge for this before, how do I go about recording and enforcing these agreements?’
Previously, FICC houses got thrown a little bit of money from the bank, and knew they were getting some revenue and trading from it. They now need to find a way to manage large numbers of global and regional research contracts and agreements, not to mention budgets and invoicing in regional currencies needing to be converted to the base currency for global client servicing. All this leads to a mountain of contractual paperwork and tracking of interactions.
And even if the sellside gets to grips with research, the problem starts to get even more thorny when you start trying to figure out how Commission Sharing Agreements work with eligible research pots. Can the interplay be seen as an inducement? The problem is, under Mifid II, the number of counterparty agreements is set to increase tenfold. It is, therefore, much harder to work out which CSA agreements can link to the right research buckets.
Banks are anticipating the number of both research and CSA agreements shooting up from the hundreds to the thousands over the next six months. Firms may need to provide clients with very intricate trading and research interaction details. In order to meet the requirement, they need to show when and what specific rate cards were agreed.
They also need a copy of the rate cards or fee structure and a signed agreement (although some houses are establishing if verbal agreements are sufficient). All of this means that the sellside needs to find a way to manage multiple agreements and rate cards globally across different markets, instrument types and services. Try doing this successfully with the old fashioned manual spreadsheet approach.
With so much to consider, is it really realistic to think that the big sellside houses will get their client contractual negotiations and agreements sorted in just four months? Whether it’s new audit trails for proving that the best client advice was provided, or the huge increase in processes that need to be automated, brokers and banks still have plenty to ponder.
So, while January 3 may well be the date everyone is currently working night and day towards, when it comes to Mifid II research and CSAs, one can’t help but feel that the real work is yet to begin.
Daniel Carpenter is head of regulation at Meritsoft