Regulation: The price of research in the wake of Mifid II

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Mifid II forbids the free provision by banks of any benefit to asset managers that induces business, and that will have a big impact on bond research.

Canary Wharf 2013-R-600


As the January 2017 deadline approaches for banks in Europe to comply with Mifid II, one little-covered issue that is going to rise to greater prominence concerns the provision of fixed income research. Banks will no longer be able to provide this for free to investors, who must either pay for it or stop receiving it.

Because banks’ entire businesses are built on interest rate and credit risk, they have always devoted considerable effort to researching these markets. That research has always been an obvious resource to repackage and pass on to banks’ bond investing customers in an effort for banks to portray their expertise in debt markets and win customer volume and revenue from bid-offer spreads. But often this has been provided ostensibly as free to investors.

That will no longer be possible from 2017, when any benefit passed to an investor that might comprise an inducement to trade – as research clearly does – must be paid for by the client. 

Vague wording

It all carries obvious echoes of past efforts from regulators to make sure that asset managers do not benefit as businesses from free provision of equity research by disguising payment for it and passing the charge on to their own clients investing in their funds. If they are going to do that, equity asset managers at least have to be transparent about it. The equity market regulation of that practice had an obvious starting point in that investors payment through order flow at least recognized an attributable value to the provision of equity research.

It will be a challenge for asset managers and banks to agree attributable value and charging for fixed income and credit research. Of course both sides will try to find ways round the regulations, but wording is so deliberately vague that it will be a brave bank or fund manager that tries to proclaim a desk note, traders’ insight or anything else not formatted as a traditional research document as anything other than an inducement to trade. Customers will be banned from receiving such inducements or benefits that they do not pay for.

Curtailing communication between banks and investors may have untold consequences in bond markets that are already showing signs of episodic high volatility amid low volumes and shallow liquidity. It’s not a topic that has generated much coverage yet. But regulators could be setting up a very unlevel playing field.