Lee Bray, Head of Trading APAC, J.P. Morgan Asset Management, looks at the ongoing trends in unbundling and its impact on the buy-side and sell-side.
There is a definite advantage to the underlying client as there’s a lot more certainty around commission spend under the new European regulatory regime. This is not to say that there was anything wrong with how commissions were being managed before, the mechanism just changes when you disaggregate research and execution completely. However, there is a discussion over the unintended consequences of the new rules and how is that going to affect the overall client experience? The problem is that the impact is yet to be determined because even at this late stage in the legislative process, it’s not exactly clear how it’s all going to settle down. Will the costs be absorbed by the client or the fund management industry?
On top of the uncertainty that we all face regarding what final shape the rules will take, it is becoming increasing obvious that some of the smaller asset management firms will be less able to absorb the extra bottom line costs that this new legislation might impose. It may be difficult for them to remain as a significant client to the brokerage community, and therefore you might see them lose out.
After much back and forth, and some optimism that there would be a softening of the stance of the regulators, we are reaching the conclusion that the rules are likely going ahead in their current form. This obviously raises some questions about whether that would be good or bad for the industry, from a European and global perspective. Many global asset management firms over the last two or three years have been working towards a position where they will be well-positioned to meet that new legislation on day 1 if it goes in as intended.
From my perspective, the key question is how we work with the brokerage community to get a price for the research that the buy-side firms are consuming. It could be argued that there is a slight reticence from the brokers to put a value on items while there is not an obligation to currently do so, this conversation needs driving forwards. As a result of the uncertainty, exaggerated partly by the legislative uncertainty, the sell-side will hold off on providing us with menu pricing, as they will want absolute clarity before taking this step. Will they be prepared? Of course, but I think that they will leave an option open until the very last moment.
I think that these conversations around the proper pricing of research and execution will be a big focus for the sell-side in the next year or so, and there will need to be a lot of dialogue between the buy -side and the sell-side.
Although I would say the equity world seems to be more prepared given the focus that has been on commissions recently. One difficulty is that the equity world has explicit commissions, whereas in fixed income there is the added complexity of not having the same structure of commissions to break down.
It would require a steep change in the structure of the market to implement some solutions similar to those that we see in equities.
To some extent the process has already begun. There has been a lot of effort to implement TCA and general cost transparency in fixed income, with larger firms now using systems to give quote comparisons. Many of these things happened in the equity world seven or eight years ago, and you can see that evolution happening at the very early stages in fixed income.
Asia and global regulation
In APAC we have a ‘wait and see’ attitude towards how European regulators are approaching this new environment. Clearly in this region, we have several regulators that don’t explicitly recognise something as simple as a CSA payment. If a firm wanted to implement a global model it may be an even bigger leap to operate the system which MiFID II is proposing.For example, in Taiwan and Japan there will be ongoing difficulties in breaking down commissions as a firm may wish to.
There is a lot of money that is global and it may be difficult to reconcile the Asian regulation with the European situation, and then wider global regulation. For example, in Taiwan and Japan there will be ongoing difficulties in breaking down commissions as a firm may wish to. The precise mapping of funds and trading within and between the vast range of global firms that have to be involved is a very difficult topic to deal with.
We are heading towards the separation of execution and research, and the environment will evolve. We will reach the situation where both the regulators and the asset management firms are comfortable, but there are still question marks on a number of areas and we just need to get that clarity. Global firms are well prepared and we are operating unbundled where we can with CSA programs etc.
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