Cross-Subsidizing Research: Major MiFID II Headache


The following is a guest article on cross-subsidization of research by Mike Carrodus, founder of Substantive Research, a curator of daily macroeconomic research from sell-side brokers and independents.

In Substantive Research’s consultations with over 50 buy-side firms since May this year it is clear that the stigma associated with continuing to charge end investors for research is dissipating. Both the AMF and the FCA consultation papers legitimised the use of CSAs. Whilst the FCA have added new controls and procedures it is clear that this is a viable funding route, at least theoretically. So what will make more firms join those already paying for research out of their P&L instead?

The areas of greatest concern vary depending on the size and business model of the asset manager you are speaking to. The largest firms talk about managing multiple research budgets, and the dynamic process of moving some of the CSAs funding those budgets to execution-only whilst others continue to allocate to research. Many small and medium size firms cite comprehensive consumption tracking as the largest potential headache.

However if there is one dealbreaker for the RPA/CSA route it is this: a lack of clarity in how much sharing of research is acceptable. Where should buy-side firms draw the line and how can they implement the necessary controls?

It may sound sensible to implement a straightforward delineation between published research and any bespoke interaction with a provider. So if a PM takes a bank’s thematic publication into an investment committee meeting the other participants do not have to make the choice between shielding their eyes or passing him a tenner.

However if a PM from a desk which doesn’t contribute to a particular research provider’s bill attends an external analyst’s visit, the research budget his fund is housed within will need to contribute and the interaction will need to be valued.

That may sound terrible in practice, but even this may not work if the end investor doesn’t explicitly agree to this delineation. The legal departments of asset management firms will need absolute confidence that they are not laying themselves open to lawsuits from pension funds that feel they have paid for research that others have benefited from for free.

At Substantive Research we are embarking on a two-month consultation process with pension funds to see if a consensus can be reached on this issue. Once we’ve completed the consultations we will publish our findings as an Appendix to our existing draft RPA Code of Conduct, which will be housed on from November 10th and free to view.

If you have any comments, questions or suggestions please email us on


About Author

Mike Carrodus founded Substantive Research, a research curation, comparison and valuation service in early 2015 with two goals in mind: to match research providers and PMs using a bespoke, data-driven process, and to help asset management firms ensure that they were consuming the highest quality research at the cheapest price. Substantive has a bi-weekly readership of over 1,000 buy-side professionals who use their newsletter as a key identifier of the best thematic work. Prior to starting Substantive Research in April 2015, he was Global Head of Institutional Sales at Ned Davis Research, one of the leading independent investment strategy research providers.

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