MiFID 2 review consultation process initiated - 'unbundling unwind' highly unlikely in our view
SUMMARY
With respect to research an 'unbundling unwind' seems highly unlikely: Focus of recently initiated MiFID 2 review consultation is 'market data' (consolidated tape) but research is covered as well, albeit with a focus on SME. Consultation document includes some common-sense ideas (that rather sound like enforcement of existing regulation) like 'pricing of research should be subject to the rules on reasonable commercial basis' but also more exotic ideas like excluding 'independent research providers' (no trading) from MiFID2, excluding SME research from unbundling rules and cross-subsidizing SME research via market operators or taxpayers' money. Generally, we believe there will be some minor watering down of MIFID 2 with respect to research (and corporate access), but a general unwind of unbundling seems highly unlikely, especially as we do not believe asset managers are ready to switch back to 'bundled model'. For more details on this argument see e.g here. For issuers this also means that most firms will have to earmark higher budgets and plan for a more active role for investor relations
DETAILS
EU initiates consultation process for MiFID 2 review: On February 17 the European Union has initiated the consultation process for the planned review of MiFID 2 (and MiFIR). The invitation to provide input can be found here. From there you can also directly kick-off the process to provide your input. The actual consultation respectively survey document can be found here.
Focus seems to be on 'consolidated tape': A key topic is a 'consolidated tape' as market participants have complained that costs to provide mandatory information ('market data') have massively increased. In our view this is the area where the urgency is highest, and there already seems to be a broad consensus that changes are necessary. Especially, as a 'consolidated tape' has been in use in the US for decades already. For background on this see e.g. Europe’s fragmented equity markets need a tape of record (Financial Times, 13 September 2019).
Research is part of the consultation as well, but do not expect 'unbundling unwind': Research (which in our view includes corporate/investor access, which is not separately mentioned) is covered in the survey, albeit with a clear focus, one might even call it a restriction - on SMEs. The section on research unbundling starts on page 54 of the consultation document/survey.
One idea is to exclude SME research from unbundling requirements: We see two problems with that. Firstly, this would require asset managers to switch back to the bundeled model. We have some doubts on that (see e.g. here). Secondly, for obvious reasons the population of SMEs varies. How can such an exemption be implemented?
Another idea is to exclude independent research provider (i.e. those without trading operations) from MiFID2: While we believe this is easier to implement, there still needs to be a increased willingness to pay for these services, which we currently do not see.
A third idea is to make pricing of research subject to the rules on reasonable commercial basis. The latter sounds more of an enforcement of the initial idea to us, as underpricing one service (research or corporate access) to better sell another service (trading, IPOs) is the very definition of an inducement under MiFID 2. It would also be easy to implement, as the the regulator just needs to slap the wrist of the most creative market participants. On the other hand, the regulator would have to go against the bigger players with their armies of lawyers, accountants and lobbyists which certainly will argue that global research coverage for USD 10k per year is a viable business for them.
A fourth idea is to foster issuer-sponsored research be making life easier for the providers of such services, or directly subsidizing SME research via exchanges or even the taxpayer. We believe that improving quality and efficiency in this sector is the most promising approach. However, being a liberal at heart we have our doubts if taxpayers money should be spent on that.
Overall, we still believe that there might be some minor watering down of unbundling rules, but a general 'unbundling unwind' - even if restricted to SME - seems unlikely in our view. We therefore believe brokers, asset managers and issuers have to adapt to the new environment. For the issuers this will require bigger budgets and a more active role for investors relations.
Appendix I: The survey questions/ideas on how SME research can be strengthened: This is the full list of questions/ideas from page 56 of consultation document:
- Introduce a specific definition of research in MiFID level 1
- Authorise bundling for SME research exclusively
- Amend Article 13 of delegated Directive 2017/593 to exclude independent research providers’ research from Article 13 of delegated Directive 2017 /593
- Prevent underpricing of research
- Amend rules on free trial periods of research
- Create a program to finance SME research set up by market operators
- Fund SME research partially with public money
- Promote research on SME produced by artificial intelligence
- Create an EU-wide database on SME research
- Amend rules on issuer sponsored research
Appendix II: Further reading: For a broader analysis of the MiFID 2 review consultation you might have a look here https://www.natlawreview.com/article/european-commission-consults-mifid-ii-and-mifir-review https://www.regulationtomorrow.com/eu/commission-launches-consultation-on-mifid-ii-mifir-review/
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