Last Wednesday, over 400 delegates from the sell-side, buy-side, IRPs, alternative data providers, and regulators attended UK research firm Substantive Research’s second annual New York conference called Unbundling Uncovered USA. By all accounts the conference was a resounding success.
2019 Unbundling Uncovered USA
430 financial market professionals, including 100 buy-side attendees from 80 firms located in Europe and the US met last week at the Metropolitan Club in NYC for a full day of presentations and robust panel discussions.
The 2019 Unbundling Uncovered USA conference addressed a wide range of topics surrounding the global adoption of research unbundling in the wake of the EU’s MiFID II unbundling mandate. Over 35 experienced speakers, moderators, and panelists from Europe and the US discussed the following:
- A Regulatory Update from the FCA on MiFID II
- What has happened in Europe and what will happen in North America?
- How to protect performance whilst ensuring transparency
- The Research Product – How will it change and what are the consequences?
- Valuation and Budgeting
- Covering Corporates – Access and Coverage
- Defining Operational Best Practice
While the large turnout last week indicated the continued interest in research unbundling, most sell-side and buy-side attendees were less panicked this year that MiFID II would be imported on a wholesale basis to the US after being implemented in the EU in 2018.
Adam Wreglesworth of the FCA revealed one concern the UK regulator discovered in conducting supervisory meetings with asset managers in the months following MiFID II’s implementation. He mentioned the FCA felt the focus some asset managers had on quantitative models to value research were too rigid, and they were not really focused on research quality. He noted that these asset managers needed to involve the front office more in valuing research rather than relying solely on the number of research interactions consumed.
Most conference participants acknowledged that some form of research unbundling was likely to be adopted in the US by asset managers as it was slowly becoming a “best practice”. However, many were confident that regulators were unlikely to mandate unbundling in the US like the FCA and ESMA did in the EU.
Transparency was another topic that came up a number of times during the conference. Most admitted that managers providing clients transparency about their research spending was a good outcome. However, there was disagreement about the exact form of this transparency and whether it should be required by regulators or it should be made available to customers upon request.
How asset managers should fund their research payments was also discussed by most of the panels. While a few large global asset managers admitted that they decided to globally pay for research from their P&Ls, most acknowledged that this resulted from fiduciary concerns which arose after they decided to ring fence and absorb their European payments. However, very few US domiciled mid-sized and smaller asset managers showed any interest in paying for research from their P&Ls, as their clients were not terribly interested in it. A number of panelists pointed out the potential costs of moving to a P&L payment model, including the possible drag on performance such a model could produce.
Most panelists from the sell-side and independent research firms complained that the buy-side was not providing them with much transparency on what aspects of the research product they valued and what they didn’t. One panelist commented that he felt this was the case due to a lack of trust between the buy-side and their research counterparties. The upshot of this development is that many research providers feel they do not have enough customer input about what they should invest or disinvest in.
A new panel at this year’s conference addressed the impact that MiFID II and research unbundling could have on corporate access. As one panelist pointed out, many corporates were in denial about the consequences MiFID II would have on their IR efforts. However, a few large asset managers shared how they had developed their own internal corporate access efforts to coordinate with the sell-side and to source their own meetings. Another panelist explained that many corporates were increasing their IR budgets to fill the gap caused by ESMA’s new corporate access rules.
As mentioned earlier, this year’s Unbundling Uncovered USA conference was a resounding success as measured by the quality of the panelists and the number of attendees who participated in the 2019 event. Of course, one big question that remains on everyone’s mind is when and how will research unbundling be adopted in the US. Separately, US financial market participants remain concerned about how US asset managers will decide to fund their research payments and the impact this decision will have on the research ecosystem. The team here at Integrity Research will continue to watch related developments in the marketplace and inform our readers as they take place.