EU prepares tweak to MIFID rules: What it means for research and corporate access (spoiler: not much)
The impact of MiFID2 has proven frustrating for many issuers and investor relations professionals (IR magazine: IROs are miffed with MiFID, study says), but also bankers and asset managers. Lobbying efforts to water down the rules have started a long time ago and are intensifying (FT: EU prepares tweak to Mifid market rules after industry backlash). The latter has triggered hopes that the changes we have seen so far with respect to equity research and corporate access (investor access) could revert. We do not share that view.
Why a watered down MiFID 2 will not impact Research and Corporate Access.
1) Most changes that 'miff' market participants are triggered by a voluntary change in payment model not directly related to MiFID 2: As we have argued back in 2017 (Linked.in: MiFID 2 research payment model: the dust settles and ‘absorb’ wins) MIFID 2 did not require the asset managers to pay for research services out of their own p&l. However, this model quickly emerged as the new industry standard and is increasingly adopted even beyond Europe. This change in payment model, along with general margin pressure in the industry, has materially decreased the asset managers' willingness to pay for research and corporate access. In this new environment coverage of smaller firms and organizing broker-sponsored events are mostly not profitable for brokers without cross-subsidization from ECM activities. Assuming that a watered down MiFID2 will revert these changes seems utopic in our view.
2.) Changes will be rather technical, not fundamental.Research and Corporate Access not on the top of 'grievance list': A major new regulation comes with unintended consequences, some of them are more important (negative) than others. Current common understanding is that in a first step fundamentals will not be touched, but technicalities are to be clarified, modified and improved. The position paper on MIFID 2 shortcomings published by the German government (Necessary amendments and revisions to secondary market provisions in MiFID and MiFIR) is considered to be influential. It however mentions neither research nor corporate access.
3.) There has been no enforcement so far, so a potential watering down will not trigger any changes in behaviour. So far there has been virtually zero enforcement of MiFID 2 rules related to research or corporate access. Even the long awaited FCA report (Implementing MiFID II – multi-firm review of research unbundling reforms) failed to detect any obvious MiFID 2 violations. The FCA however confirmed that they still stick to their 2014 rule that corporate access cannot be paid out of trading fees. The FCA also stated that they consider the overall impact of MiFID 2 to be beneficial. Given the lack of enforcement and the FCA statements we see no reason why any firm should change their approach to MiFID 2 implementation now. The aggressive & creative ones will stay creative as they did not get a slap on the wrist, and the cautious ones will stay cautious until the rules actually change.
Conclusion 1: No acceleration, but the train has left the station: A tough FCA report might have accelerated changes, but the mere continued absence of enforcement and the prospect of potential technical changes to MiFID 2 will not revert the changes in the market we have witnessed over the past 18 months. In other words, this train might not be accelerating right now, but it has definitely left the station, it is not stopping and it is also not making a u-turn (technically difficult for both regulations and trains).
Conclusion 2: Prepare for the 'new normal': With the reduced availability of broker-sponsored events and investor-paid research ‘something has to give’. This does not necessarily mean that as a listed company you will have to increase your IR budget. Keeping your budget and IR activities unchanged will however most likely result in less investor interactions. If that is fine for your company, there is no need to change anything.
If you on the other hand seek to maintain or even increase your investor interactions you will need to adapt your IR operations, and most likely you will need a higher budget too. How that budget is spent is another matter: it will probably be a combination of higher headcount, software (i.e. processes and data) and third party services (sponsored research, investor interactions organized by third-parties). Your company specific mix of instruments will also depend on your IR strategy, your current manpower situation and workload.
How we fit in: Modular software & services focused on investor Interactions. We understand that corporates need flexibility and smart processes. Our IR workflow platform schedulR and tthe related services we offer give you exactly that.
schedulR offers a simple CRM, one that has been built with IR professionals of smaller and medium sized companies in mind. We call it an IRM. Investor contact data is updated by us – no need to spend time on an investigation every time a PM switches employers or roles. All your interactions are linked to your investor profiles so meeting preparation is easy. We also made it easy for you to download your data, be it for analysis & reporting of your interactions, or as you are working with a third party that organizes events for you. With the Interaction Request Workflow we pre-screen incoming meeting requests and make sure the respective investor profiles include enough relevant information for you to decide how to proceed with that request. Any investor interaction that has been initiated or arranged via schedulR will automatically be logged in the IRM.
In Q1 2020, we are adding an optional 'Event Module' to the IRM. This module will allow you to leverage the workflow for organizing roadshows we have developed and optimized over the last years. It includes electronic invites, dashboards for follow-ups, and fully mobile event schedules with Google maps integration. It also includes a feedback tool which you might use for roadshows or investor days. The Event Module is also convenient tool to co-organize a broker-sponsored roadshow, making it simple to invite target investors that have no business relationship with the broker. Additionally, corporate users can generate '1-click booking links' that can be integrated into most mailing tools and e.g. help you with investor days, or conference calls. Again of course fully integrated with the IRM.
Last but not least offer to organize Events (roadshows) for you. The use cases for the latter are diverse, just as your IR needs: Some clients wish to broaden their investor base and explicitly meet new investors (neglected by brokers, or in 2nd tier locations), other bigger, mostly non-Swiss companies work with us, as we are addressing a broader audience (all the equity buy-side, sell-side, fixed income) resulting in well filled schedules. And then there are smaller companies - that have to pay for events anyway - who choose us thanks to our excellent knowledge of the Swiss market. You don’t have to use our software for us to be able to organize events for you, but IRM clients have the benefit that all interactions of events we organize are automatically included in the IRM. All events in Switzerland and London are organized by ourselves, while for other locations we can count on our local partners – not the least as we believe in having 'boots on the ground' is crucial for this kind of services.