This was penned by CAPIS Staff
Last week, CAPIS was fortunate to have the chance to participate in STA’s 87th Annual Market
Structure Conference. CAPIS’ own Chris Halverson is STA’s current chairman (and helped
emcee the event) while our COO Dave Choate moderated the panel, “The International Impact
of MiFID II,” which featured Thompson, Siegel & Walmsley’s Director of Trading, Chip Coleman,
and Integrity Research Associates’ Principal, Sandy Bragg.
Given MiFID II’s tentacles have crept far beyond the confines of the European Union, and that
there are changes afoot, we wanted to shed some light on the discussion if you were unable to
The key piece of collateral damage discussed is borne out by the data: research unbundling,
one of the key provisions in MiFID II, is significantly hampering asset managers’ ability to
achieve the same performance as they did prior to MiFID II’s implementation in 2018.
Smaller managers are at a disadvantage compared to their larger counterparts as they are less
likely to have internal analysts and economists to generate their own research to make up for
the shortfall. And EU firms are falling short of their U.S. peers as research from Evercore ISI
and Frost Consulting has shown that American funds, via a variety of metrics, are significantly
outperforming their European peers since the research rule went into place.
But it doesn’t stop there given the global footprint of many U.S. asset managers. These firms
are left with the undesirable decision of either adding complexity by ringfencing their European
operations or adjusting their firmwide model so that research is paid for out of the
firm’s/strategy’s P&L. As the panelists pointed out, what manager wants to explain to their
clients that some have to pay for research directly and some do not?
It is a hapless situation for U.S. managers with European operations who, prior to MiFID II,
could operate under the comparative simplicity of the SEC’s “safe harbor” provisions of Section
28(e) implemented in 1975 and updated in 2006. Via 28(e), Commission Sharing Agreements
(CSA), or Client Commission Arrangements (CCAs), provide a framework for separating the
costs of research and execution i n a bundled commission.
The irony is that while the proverbial genie can’t go back in the bottle, regulators in Europe are
trying. British regulators at the Financial Conduct Authority were the aggressive drivers behind
the unbundling provision but with Brexit, their seat at the decision-making table has been
removed. Now French and German regulators, always against the idea, are at the steering
wheel and trying to smooth out the bumpy ride that has been MiFID II.
EU regulators are looking to remove the unbundling provision for small cap equity and fixed
income research. How? BY CSA-esque agreements of course! So here European markets understand attempting to implement exemptions that, in a way, put their regulations back at the
perfectly functional framework developed by the SEC in 1975.
We laud the overarching goal of MiFID II which is to increase transparency. But, we at CAPIS
have been providing transparency into how commission dollars are spent for the duration of our
existence. Why add counterproductive onerous responsibilities when transparency already
exists for clients?
As Chris Halverson has written before, 28(e) works. And as the saying goes, if it isn’t broken,
there’s no need to fix it.
Luckily, American regulators have shown little appetite to pursue research regulations akin to
MiFID, but its impacts are still painful for global market participants. Hopefully, this recent tide of
enthusiasm by regulators to tamp down MiFID’s unintended consequences portends continued
rethinking of its true impact on capital markets.