MiFID II requires that sell-side research and corporate access services for fixed income securities, where research costs are generally included in the spread, be treated more like equities and priced for the first time.
While the revenue mechanisms are unlikely to change, with payment based on trading spread, the measurement and value of different forms of client interaction will become increasingly important. With little commercial transparency around the value of fixed income research to-date, firms are having to embrace new revenue models, including subscription based content, and adopt tools that are already being exploited by the equities firms.
Inducement to trade
The logic of how ‘inducement to trade’ applies to the equity market is well understood but as fixed income is a principal-based market, where best price can vary at any point in time, the potential for inducement is not so clear. Nevertheless MiFID II does treat unstructured FI research provision as an inducement, so sales calls and ‘colour of the market’ communications may only be legal in a defined relationship under which they are paid.
As commissions are not usually charged in fixed income brokerage, paying for research based via commission sharing is unlikely to be viable, so RPAs (Research Payment Accounts) will need to be set up and separately disclosed. This means that asset managers will have to manage multiple, segregated research budgets, while taking great care not to share research across them.
They will need to invest in systems and processes to prove that they are not paying for research with dealing commission, while fixed income brokers will need to prove that they are not providing it without payment. The brokers will have to revise their business model to focus on added value and to develop services which qualify for RPA payments. And their salespeople will have to actively market the products of their research departments, which is a big change for most fixed income firms.
The new regulations also apply to sales coverage and any value-added service provided by sell side sales teams. The equities market employs sales traders and research sales, and the same approach could be adopted in Fixed Income, where value-added sales people become part of the research team, and hence part of the research budget.
Some industry commentators anticipate that budgets may be significantly lower for fixed income than for equities, and the key question for the buy-side remains: Should they continue to charge end-investors for the research, or put the cost onto their P&L?
Learning from the Equities experience
While the buy-side has grown used to a waterfront ‘unlimited access to everything’ model, many equities firms have already moved in anticipation of the need to control and monitor use of research and corporate access services. This calls for a very fine-grained preference and entitlement methodology, which enables buy-side clients to be set up with subscriptions having entitlements appropriate for their tier of service, and also aligned with their preferences as individual portfolio managers or buy side analysts. So whatever the asset class, or type of research product, the taxonomy will match the firm’s output and entitlements and preferences are set accordingly.
Also, to ensure that entitlement and preference settings are visible, fully representative and up to date, access management is put directly into the hands of (authorised) account managers, salespeople and analysts, rather than being hidden away in a system.
Banks, brokers and IRPs can position themselves to protect research revenues, and enable asset managers to justify research spending, by recording and reporting research and service consumption at a very granular level. It’s possible to capture and provide the necessary data if all aspects of relevant buy-side interaction and service provision are facilitated and managed by one integrated solution covering email or phone communications, meetings, roadshows, research distribution, and consumption monitoring across multiple channels.
This makes it easier to execute and measure all workflows and consumption, while providing the metrics required to justify compensation and meet clients’ reporting requirements. And for maximum transparency records of all client interactions should be consolidated in one place in a readily searchable format, with the facilities to track, quantify, analyse and report on the services provided.
Buy or build?
The need for a fast and trouble free implementation appears to be shifting the balance away from in-house development for MiFID, even within the largest banks and brokers. Sell-side research is rapidly becoming an evolving, multi-dimensional marketplace and so the focus is on minimising risk, reducing costs and accelerating return on investment. For many firms the option to harness established software platforms and exploit proven industry best practice is looking like a safer bet.
There’s much discussion of the threat to revenues, to coverage and liquidity, which may impact some firms, but there is another dimension to MiFID compliance. The nature and volume of the data - covering all aspects of client interaction and service consumption - that must be routinely captured, stored and reported under MiFID can be leveraged to provide highly valuable business intelligence. With the right tools, firms can use this data to capitalise upon their own competitive strengths and build more profitable client relationships.
For example, greater visibility of how an individual piece of research content performs can provide a guide to pricing, client preferences, product life cycles and the most effective authoring styles. It also provides the opportunity to show clients additional content based on what they’re already subscribed to, or what other clients with similar profiles have consumed.
The maintenance of detailed records also provides the basis of client review reports and invoices to ensure that all activities can be fully compensated. The scope for giving individual, profit generating clients a more personalised, bespoke service using a platform that supports timely promotion of content that he, or she, is likely to be interested in is significant. Some Fixed Income research providers that have implemented MiFID II ready processes are reporting that clients have embraced the spirit of unbundling months before the deadline and are already valuing and paying providers for specific content and services.
Industry experience demonstrates that it is possible to take a powerful, evidence based approach to meeting the demands of MiFID, while maximising return on all aspects of research content provision and related services.
For information on proven MiFID II - ready research distribution and monetisation solutions, and their integration with sell-side CRM, visit www.singletrack.com