Instinet Europe announced its application as a Payment Institution with the Financial Conduct Authority (FCA), reflecting regulatory efforts to change the way asset managers pay for research. The application positions Instinet to benefit if the final MiFID II rules prohibit research payments using client dealing commissions.
Instinet is seeking regulatory authorization to be an outsourced provider of “research payment accounts” (RPAs) which under proposed MiFID II guidelines would be a mechanism for charging asset owners for research services without using client dealing commissions. Since it is not clear yet whether the final MiFID II rules will allow research payments through existing commission sharing agreements (CSAs), Instinet’s action is a hedge for its own commission management business.
Separately, Instinet said its CSA balances have doubled over the past year and hit a record high in February 2015.
Instinet’s designation as a Payment Institution would enable it to offer a new segregated cash management and payment service solution to clients who choose to operate a hard dollar ‘research payment account.’ Instinet views RPAs as complementary to its existing Commission Management business, presumably sharing some of the capabilities such monitoring pool balances and payments to research providers.
Our Take
The entry of players such as Instinet helps to address concerns about the feasibility of implementing a new research payment process in prior to the January 2017 deadline when MiFID II will go into effect.
At the same time, the FCA has expressed reservations about using investment banks for the administration of research payments. Although Instinet operates as an agency broker, it is a subsidiary of the Nomura Group.
Instinet’s move is savvy. It steals a march on investment bank competitors, many of which are actively lobbying the European Commission to forestall a ban on research payments using client dealing commissions. Even if the final MiFID II language permits the use of CSAs to pay for research, the FCA may choose to implement a more stringent hard dollar regime in the UK, which would put Instinet in the catbird seat.