North American broker-dealers and asset managers domiciled in the U.S. are watching their European counterparts gear up for compliance with MiFID II.
But will MiFID II affect U.S. broker-dealers and asset managers based in the U.S.?
Could the massive regulation that requires asset managers to unbundle research payments from executions, and quantify the value of research for its clients, find its way onto U.S. shores?
That question was the focus of an open call held by the Security Traders Association (STA) on March 2 examining the impact of MiFID II on North American broker dealers and asset managers.
Under the MiFID II delegated acts, which go into effect on Jan. 3, 2018, asset managers will need to pay for research from their own P&Ls, or set up so-called research payment arrangements (RPAs), which are to be funded by a commission sharing account (CSA) or a direct payment by the client.
Although the ruleset impacts firms based in Europe, U.S.-based asset managers competing for mandates against European investment firms could face competitive pressure to adhere to MiFID II rules.
“MiFID II is most relevant for global asset managers that are based in the U.S., but have a physical location in Europe where they serve European clients,” said Tom Conigliaro, managing director at Markit Brokerage and Research Services.
“Technically the European operations of those firms are within the bullseye of the regulations,” explained Conigliaro.
“While global firms can continue to operate their U.S. divisions under existing U.S. rules, operating a global business under two starkly different regulatory regimes is very challenging,” says Conigliaro.
“Most global firms are going to opt into MiFID across the globe, and that’s how the massive regulation will ‘leak’ into the U.S.,” he said. “Global asset managers would prefer to adhere to the stringent regulatory standard, so they can operate synergistically across the globe,” he added.
Buy-side firms that fall under the MiFID II rules on unbundling research payments from executions will need to:
- Track interactions with research counterparties.
- Regularly assess the quality of research and its contribution to the investment process.
- Establish a research budget.
- Allocate the budget to the strategy level.
- Manage payments either directly or through an RPA Administrator.
“For a U.S. asset manager that doesn’t have a physical presence or any jurisdiction in Europe, these firms are not in the bullseye of the regulation,” he said. However, practically speaking, U.S. managers that are managing European mandates or competing for European clients’ assets will face competitive pressure as clients come to expect the level of transparency they are receiving from asset managers in Europe.
Most asset managers will view MiFID II as a positive, due to its transparency, disclosure of prices and better reporting.
For instance, a state pension fund or college endowment fund could be evaluating investment managers including a European firm that is following a MiFID unbundled research regime. That firm is providing more transparency and disclosure than a U.S. domiciled manager is providing
“In this scenario, a North American asset manager that is not in compliance with MiFID II could be seen as having a competitive disadvantage,” Conigliaro suggested.
Rather than sit tight and watch how developments unfold, U.S. asset managers can take steps to align with best practices.
“A lot of U.S. asset managers are doing this already, such as setting budgets for their research, having an evaluation program, paying attention to ratings and rankings of their research, and providing data to their clients “to tell a better story” about performance based on the research, which the client is ultimately funding,” said Conigliaro, noting that “You can do all of these things that are aligned with the spirit of MiFID to the letter of the law until either there is a seismic shift from the industry, or a client calls demanding more transparency that it gets from reports from its other managers in Europe.”
Rather than being caught flat-footed, this gives asset managers a head start when they have no choice but to comply with a MiFID II-oriented regime.