Request Demo
he hidden problems Europe uncovered during unbundling

The hidden problems Europe uncovered during unbundling

March 7, 2019 Thought-leadership

This is the second in a three-part series of articles to help US asset and hedge fund managers answer their clients’ questions about the unbundling of payments for research and trading and understand what a best in class research management system looks like.

Unbundling of payments for research and trading may come to the US markets; how it will play out is an open question currently being debated by the Securities and Exchange Commission (SEC). There is growing pressure on the regulator from several large asset managers to harmonise the rules with Europe, which has separated the payments for the two functions under the revised Markets in Financial Instruments Directive (MiFID II).

As EU firms have been through this process already, it is worth considering where investment firms tripped up and how to avoid that in the US market.

First mover advantage

Firstly, with the whole market going through the same process, it may be tempting to hang back and engage in the process late. The argument for doing this, is that one has to wait for the final rules before complying. However, asset managers will find that institutional investors want to know how big of an issue this might be – even before there is certainty.

Asset managers that have not started assessing the impact – through analysis of research consumption, expenditure and other sell-side services – will struggle to answer the most basic questions. The key takeaway is to start early, and answer questions with confidence.

Don’t be side-tracked

The big discussion point during the unbundling process was how to manage research in a commercial model, but this often put the issue of corporate access in the shade and some asset managers pushed this down the track. To assess both, firms need to build a single picture of use, cost and value. While banks are very willing to provide data for clients regarding corporate access and research consumption, there are practical challenges to using it which increases the buy-side workload. As sell-side firms do not provide data in a standardised format, each data set has to be manually gathered by the front office and then normalised to create a single set of data. It is possible to automate this process, however the data will still need to be standardised and aggregated prior to analysis.

A more efficient approach is for buy-side firms to collect their own data, reducing the interference in front office activity and enabling standardised data from the offset to combine corporate access and research consumption.

The cost of everything

The third issue was the process of setting a price for research and corporate access. Where asset managers are informed on cost and value, they can work in advance and be a price maker. This helps the sell-side work out market value for their services and makes the price formation process more efficient. It is also valuable to look at the market prices in Europe, to consider the relative value of services.

One size fits nobody

The fourth issue was the inappropriateness of setting trial periods in paying for research, over a fixed length of time, for a whole asset management firm. As this created an artificial limit around the testing process, it meant buy-side firms struggled to assess value for all funds equally. 

Missing bits

The fifth and final issue was the risk of unintended consequences. If sell-side sales staff were no longer being remunerated in the same way, the impact on service levels, for example in curating research content, could be affected. It is worth mapping out the process and working out where action could be taken to minimize any possible impact to service levels. 

UPCOMING IN THE SERIES:

In the next article we consider what a best-in class research management system looks like, taking into account regulatory, technological and drivers from within your own business. 

You can find part one of this three part series here:  Is the SEC about to unbundle your business

Recent Insights

February 27, 2019 Research Management

Is the SEC about to unbundle your business?

February 27, 2019 Press Release

Red Deer’s MiFID II Research Management Solution Selected by Engadine Partners LLP

February 13, 2019 Thought-leadership

Webinar: Increase your firm’s confidence in its ability to protect against market abuse and misconduct.

September 14, 2018 Announcement

Red Deer continues winning streak at the HFM European Technology Awards

July 25, 2018 News

Red Deer shortlisted in two categories at the European Hedge Fund Technology Awards 2018

May 29, 2018 Press Release

Red Deer selected by Close Brothers Asset Management to support MiFID II processes

May 4, 2018 Announcement

Red Deer wins ‘Best Research Subscription Management Solution for MiFID II” at A-Team Group’s RegTech Awards 2018

April 27, 2018 Announcement

Red Deer named “Best MiFID II solution – Research Management” at HFM European Hedge Fund Services Awards 2018

March 22, 2018 Press Release

Red Deer Appoints Henry Price as CEO

January 16, 2018 Press Release

Raymond James Investment Services selects Red Deer for MiFID II Research Compliance

November 9, 2017 Press Release

Hermes Selects Red Deer’s MiFID II Solution to Prevent Inducement and Streamline Research Compliance

October 26, 2017 Announcement

Red Deer Wins ‘FinTech Ones to Watch’ Award at The Trade’s Leaders in Trading Awards 2017

October 24, 2017 Press Release

GAM Selects Red Deer’s MiFID II Solution to Ensure Compliance

October 19, 2017 Press Release

Red Deer announces integration with Instinet’s RQ Connect

October 12, 2017 Thought-leadership

Data Assets Strategy and Int-Data – Objectifying the entire investment decision-making process

October 10, 2017 Press Release

Cheyne Capital Management Selects Red Deer for MiFID II Research Compliance

July 13, 2017 Videos

The Challenges of Unbundling

June 14, 2017 Press Release

Red Deer and TheySay Empower Active Investment Managers through Deep Text Analytics

May 31, 2017 Press Release

Red Deer and Westminster RPA Partner to Provide end-to-end MiFID II Solution

Try Red Deer

See Red Deer in Action

Request Demo