The following is a guest article from Robin Hodgkins, President of Castine LLC, a provider of commission management software and research procurement solutions.
With MiFID II’s influence already beginning to reach well beyond the borders of Europe, what will this mean for U.S. asset managers? U.S. asset managers operating under MiFID II’s jurisdiction are already grappling with implementation. Purely domestic U.S. investment firms may ignore the new EU requirements but they run the risk of being disadvantaged when competing for assets versus their European competitors.
We believe that a competitive imbalance will exist for many asset managers given the demands that their global clients will place on them and the realities of having to deal with different regulatory regimes globally. Even asset managers with a purely U.S. centric operation need to pay attention to MiFID II. While this will prove frustrating for U.S. asset managers, they will only feel more and more pressure if they don’t.
In the U.S. the usage of commission sharing agreements (CSAs) to separate research payments from execution has steadily increased each year since 2007 and the practice has worked with great efficiency. This is a major reason U.S. asset managers are so frustrated with the new regulatory requirements under MiFID II. Nevertheless they must take their global client’s needs to heart.
MiFID II’s competitive headwinds are forcing challenging questions upon U.S. asset managers:
- Q) Will clients ask managers to become MiFID II compliant when there’s no U.S. regulatory requirement to do so? A) As MiFID II takes root more clients will choose to invest their assets with managers who operate using the highest global standards.
- Q) Should we change the way we currently assess research values? A) Under MiFID II it’s important to track all the research received to ensure it has investment value and to turn away any research which doesn’t.
- Q) How will brokers react when we assess/communicate their research budget in advance (and/or should we have two budget reporting mechanisms based on the EU or U.S. venues)? A) Brokers are already having discussions with their clients about pricing the services they are providing. They are also very aware that MiFID II requires asset managers to set their research budgets in advance.
- Q) Should we consider using separate regulatory approaches for the U.S. and UK? A) Most U.S. global asset managers will not attempt to operate multiple regulatory approaches because the regulatory and reputational risks are simply too high.
- Q) How can I evolve from managing CSAs to running RPAs without maintaining multiple systems or starting from scratch? A) Asset managers need to consider the costs and resources required to implement a MiFID II compliant RPA program.
- Q) How will unbundling impact our ability to demonstrate best execution when funding an RPA with commissions collected alongside a transaction? A) Once you break out the research as a distinctive product to be valued and paid for, the quality of execution comes more into focus when competing for assets.
Can we afford to wait any longer before deciding on an end-to-end MiFID II action plan?
With only nine months remaining until MiFID II becomes law, no one has the luxury of extra time to determine their MiFID II action plan. Deciding to adopt MiFID II is only the first step in the process. There are many additional decisions and action steps to take to successfully implement a compliant process so it is strongly advisable not to procrastinate while going through the decision process.
The new EU regulatory requirements are far from trivial, but the good news is that many U.S. managers currently have much of the basic framework in place for conducting research valuations, setting budgets and assessing research quality, so going the rest of the way will be a well worthwhile exercise to adopt MiFID II and to get in a better position to compete with European investment firms for assets.
U.S. asset managers who are not required to adopt MiFID II should either consider adopting the new EU requirements as a best practice or consider closely aligning their existing practices with MiFID II’s requirements as soon as possible.