In its latest Q&A relating to research inducements released Friday, the European Securities and Market Authority (ESMA) warned banks providing FICC research that they will need to substantiate their pricing or potentially run afoul of MiFID II’s inducements prohibitions. The latest Q&A also tightened requirements on free research exempted from the new rules. It’s doubtful that either measure will provide much relief to independents undercut by bank research.
Unbundling FICC research has been an ongoing struggle for European regulators because research costs are baked into bid/offer spreads which are apparently unchanged by the new regulation. Thus any explicit pricing dealers assign to their research is purely incremental to the funding already provided in the spreads.
For this reason, FICC research has been priced low – as one example Crédit Agricole Corporate and Investment Bank slashed its FICC subscription fees nearly 90% last fall from its original €170,000 ($210,000) fees to €20,000 ($25,000) [subscription required for link]. One month later, Crédit Agricole CIB lowered fees further to €5,000 ($6,000) for access to its FICC research plus another €5,000 for limited access to analysts. Independent research firms have labeled low sell-side subscription fees for written research as predatory pricing [subscription required for link].
In response, ESMA added language on March 23rd 2018 to its Q&A on FICC research [page 57 of the document] indicating that it expects FICC dealers to be able to document how they arrived at the their pricing for FICC research:
“In some cases written FICC research could be capable of being priced and paid for through a subscription agreement. However, firms would need to document how they arrive at their pricing structures and ensure there is no inducements risk…”
ResearchWatch subscribers can reference our previous analysis of ESMA’s Q&A here.
We question how effective this new stipulation will be in regulating pricing levels for FICC research. Banks will be able to justify their pricing schemes to regulators so long as they charge premium prices for high-touch services. Crédit Agricole CIB, for example, notes that its low prices represent a floor and additional fees are required for priority access to analysts: “If you want to guarantee priority access to our analysts, please liaise with us to discuss service level needed.” Banks can also argue that research is utilized by other units such as wealth management, justifying internal allocations of wealth management revenues to subsidize research costs. Regulating prices is inherently difficult because of the complexity involved.
MiFID II compounds the problem of low-priced bank research by allowing research to be given away for free if it is broadly disseminated. We have counted eight banks giving their research away for free [subscription required for link].
The latest Q&A confirms that research which is openly available to investment firms or the general public is classified as a ‘minor non-monetary benefit’ and thus exempted from MiFID II’s research inducements rules. However, ESMA slightly narrowed the exemption on Friday by requiring that the research have no log-in or sign-in requirements:
“ESMA considers that ‘openly available’ in the context of written material should mean that there are no conditions or barriers to accessing it, for example a necessary log-in or sign-up, or the submission of user information by a firm or a member of the public, in order to access material.”
This will require modifications for a few of the banks giving away their research. For example, the website offered by RBS requires registration and registrants are screened by RBS staff before approving access. Nevertheless, such adjustments are relatively easily implemented.
We have catalogued a litany of flaws in MiFID II’s research unbundling regulations, including the reality that FICC research remains essentially bundled, with dealers benefiting from any incremental fees charged for FICC research services. As subsidized subscription fees to bank research have become ridiculously low, regulators succeeded in actually making the playing field more uneven between banks and independent research firms, not less as originally promised.
In our view, ESMA’s tepid tweaks to its Q&A will have limited impact on the situation. Banks will be able to justify their low-ball research fees to regulators by pointing to higher negotiated fees for services such as analyst access and multiple sources of revenues across the bank. ESMA’s requirement that free research have no restrictions on its broad dissemination is minor at best. A more meaningful action by ESMA would have been closing the free research loophole altogether, but perhaps substantive changes to MiFID II must await the advent of MiFID III.