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Watchdog’s Mifid II ‘bombshell’ at industry conference alarms some in City

The UK financial watchdog has alarmed some City brokers by saying new rules on payment for investment research could extend to wider sales and trading roles.

From January — under European legislation known as Mifid II — asset managers will have to pay financial institutions directly for research instead of combining the cost with trading commissions.

To date, the debate has focused on price negotiations for research between banks and asset managers, with the former offering packages that include written reports and direct access to analysts.

But some brokers have been caught off guard after the Financial Conduct Authority said that content produced by sales traders who take orders on trades and typically advise clients by highlighting trends and “market colour” — would also count as research.

“Whilst this is logically consistent with everything the FCA has said on [research] unbundling, it will still come as a bombshell,” said Richard Balarkas, director of Quendon Consulting and former chief executive of Instinet, an agency broker.

“Most firms will have hoped to sidestep the question of how to charge for all those client-facing employees whose role is neither research nor pure trading.”

An FCA official told an industry conference this month that if a sales trader provided an idea with “substantive” analysis or insight, that would need to be paid for by an asset manager to avoid being classed as an inducement, according to multiple sources who attended the event.

“Research departments give a structured output that you can price, but this will be extremely hard to monitor and police,” said the chief executive of one City broking house, who did not wish to be named.

The rules could make it more difficult for a broker to interact with an institution with which it traded but had no research deal, he added.

Nevertheless, some larger banks and brokers said they had already interpreted the rules in this way and were taking precautions to ensure staff would not breach them. One said that in drawing up Mifid II agreements with asset managers, it was pricing “research and sales” as a combined package.

By contrast, another bulge bracket bank said that it was reviewing its sales communication policies and had given training to traders to ensure they would not write or say anything that could be deemed “substantive”.

Neil Robson, a regulatory law partner at Katten Muchin Rosenman in London, said the FCA had likely spoken out as a warning to any investment banks who planned to blanket label certain content as “non-substantive” or “not research material’ — where it might not always be the case.

“Simply because it’s coming out of the front office doesn’t mean it’s immediately out of scope,” he said. “Asset managers will have to look at everything in context, on a case-by-case basis, to determine if something is research covered by Mifid II rules or not.”

Others have raised concerns about what the changes might mean for the future of sales traders, whose numbers have already fallen with the move towards automated trading.

“It makes the job of the salesman ever more redundant because he’s not allowed to have a view on anything,” said a senior executive at a London stockbroker.

Mr Balarkas said: “Brokers will either have to cease supplying some services, or price them on a discrete basis — or ensure that the service has little or no value, which rather defeats the point of supplying it.”

The two industries square up in key battle over technology for autonomous vehicles

A fierce debate has gripped Europe’s automobile industry that will shape the future of all cars sold across the region: how to get internet-connected vehicles to “talk” to each other while travelling on the road.

It centres on two competing technologies that has broadly split the continent’s carmakers and telecoms providers into rival camps — and has even pitted two branches of the European Commission against each other.

“This could descend into trench warfare,” says one person familiar with the situation, which has become increasingly heated in recent months.

Carmakers largely favour a short range technology using a dedicated band of spectrum or radio frequencies for car-to-car communication. This vehicle-to-vehicle system, or V2V, will be ready for operation once network equipment is built, which could be carried out relatively quickly.

This layer of technology would allow cars to drive much closer together on the roads, synchronising braking to avoid accidents.

The telecoms companies, in contrast, are backing an open, long-range cellular system, which allows cars to share the airwaves with mobile phone signals. This will take longer to develop than V2V as it will have to wait for 5G, the next generation of mobile technology that is not expected to be rolled out globally until 2020.

“It is like the race between VHS and Betamax,” says another person involved in the negotiations, referring to the battle over video technologies in the 1980s, which was eventually won by VHS as it established itself as the standard system for recording and broadcasting films and television series.

The dangers of a protracted battle over the type of technology that should be used for connecting cars risks slowing the development of autonomous vehicles.

The European Commission is due to announce its formal decision on the type of technology it favours next year with some big groups in the car and telecoms industry, such as Vodafone and BMW, backing a “technology neutral” position that would allow the development of both systems.

However, this has not stopped the car and telecoms groups arguing over their favoured systems.

Tens of millions of euros, including public money, has already been spent developing the short-range WiFi based technology V2V, especially in the US where it has been widely tested.

Several carmakers, including Renault, Toyota, Hyundai and Volkswagen, as well as some component manufacturers are in favour of using V2V technology that also has the backing of various member states, including France, Sweden and the Netherlands, according to three people familiar with the situation.

Volkswagen, which last year made more cars globally than any other company, has announced it will push ahead with installing the technology in some of its cars from 2019.

Truckmakers are also backing the V2V WiFi option because of the role it plays in “platooning”. This is a partial autonomy system where a convoy of lorries synchronises their braking to travel much closer together, dramatically cutting fuel consumption by reducing air resistance.

Proponents of V2V point to the flaws of the cellular system, which must be connected to a telecoms network, making it unsuitable for actions that require an instant response from a vehicle.

“If you need to brake, you better know it in a millisecond,” says a person familiar with the technology. “You can’t have buffering on a braking system.”

The telecoms industry, however, say that a cellular system is potentially safer, calling it a 1,000m “safety bubble”, referring to its longer range. This, they insist, has big advantages over V2V. 

Proponents of the cellular system also point to the fact that while a shorter range system can detect a car has stopped suddenly in front of it, the longer range system would be able to determine an incident further up the road and react ahead of time. 

Some carmakers including BMW and Daimler-owned Mercedes-Benz stress the already tested V2V can be up and running more quickly than the cellular system.

In contrast, backers of the cellular system say it will provide a much cheaper and more effective way of connecting cars in the future, even if it less developed right now. 

The strongest argument for the cellular system, according to Analysys Mason analyst Tom Rebbeck, is that it can improve the overall transport system using its longer range by managing traffic lights and reducing congestion across a city rather than just be used for individual vehicles. 

In essence, with the cellular system, chips can be installed in road networks and traffic lights, so that cars can communicate with the world around them at much greater distances. This allows them to “see” conditions not visible with traditional cameras or sensors.

The GSMA, the telecoms trade body, said that the chips being developed for driverless cars represent “the gateway for the 5G era” that will move technology forwards from the 4G era that currently connects 23m cars on the road in Europe. 

The GSMA said that a proposal to back V2V would “seriously hinder” the deployment of the more advanced technology and “may lead to a lock-in of an ageing technology that is not future proof and is put in question by major automotive manufacturers”. 

However, some in both camps of the car and telecoms sectors see benefits in a “technology neutral” approach from regulators.

Consequently, telecoms companies including Vodafone and Telefónica have teamed up with car groups including Audi, BMW, Daimler, Ford and Jaguar Land Rover to push for this “technology neutral” approach to connectivity under the 5G Automotive Association chaired by Audi. 

A likely outcome is that all communications systems for connected cars will be interoperable, which would require companies developing 5G-based systems, such as the cellular long range version, to be able to interact with the older V2V technology.

However, this could pile on the costs as the two systems may need to be included in the same car to comply with the law and, according to engineers working on newer systems, slow down projects.

A drawn-out debate in Europe over the issue could also risk pushing the EU behind the US, where money has been pumped into developing V2V, in the setting of a regulation blueprint for connected and autonomous vehicles.

Philip Pfeffer, a partner at law firm Herbert Smith Freehills: “If the US sets the standard, there is a danger that Europe will be stuck with it.”

WisdomTree to buy ETF Securities’ European commodities platform for $611m

WisdomTree, the US-listed asset manager, has agreed to pay around $611m in cash and shares to acquire a $17.6bn European unit of ETF Securities, a London-based provider of exchange traded funds and products.

The deal, which covers ETF Securities’ exchange-traded commodity, currency and short-and-leveraged business, will increase WisdomTree’s assets under management to around $66bn. It will rank as the ninth largest exchange traded products provider globally.

“The acquisition will immediately add scale, profitability and diversification to our business in Europe,” said Jonathan Steinberg, WisdomTree chief executive and president.

Growth across the ETF industry is accelerating with a fourth consecutive year of record-breaking growth expected in 2017. Competition is also intensifying as asset managers strive to win a share of this market.

Invesco, the US asset manager, has made two acquisitions this year in a drive to strengthen its position. It paid $1.2bn to buy the ETF arm of Guggenheim in addition to acquiring the London-based ETF provider Source. JPMorgan plans to offer ETFs in Europe while Franklin Templeton has launched ETF operations in the US, Canada and Europe.

The deal with ETF Securities marks WisdomTree’s second strategic deal in Europe following the acquisition in 2014 of a majority stake in Boost, a small London-based ETF manager.

WisdomTree will pay $253m in cash and 30 million shares, valuing the total consideration at $611m based on Friday’s closing price, WisdomTree said. The cash element will be funded by $200m of newly issued debt plus $53m of cash on hand.

The stock portion will be made up of 15,250,000 shares of common stock and 14,750 shares of a new class of Series A non-voting preferred stock that can convert into 14,750,000 shares of common stock, but with a voting cap of 9.99 per cent. The shares will give ETF Securities an 18 per cent stake in the group assuming all shares are converted.

WisdomTree will adjust its quarterly dividend to $0.04 per share, it said, starting with the dividend scheduled for payment in the first quarter of 2018. The deal is expected to close late in that quarter.

Asian Market - Following the declines seen in US equity markets on Friday’s session, Asian bourses have opened mixed. Steelmakers in Japan are also trading lower, with shares of Nippon Steel down by over 2%. In Australia, the ASX 200 Resources Index has risen by over 0.5%, after declining by 1.6% on Friday’s session. At the same time, the Hang Seng Materials index has declined by more than 0.7%. Shares of Aluminum Corp of China have declined by more than 1.4%, while Rusal has moved lower by over 1% following the release of its earnings report . Property developer, Country Garden, has gained over 7% in Hong Kong, as the company is due to be added to the Hang Seng index. Sunny Optical Technology, which is also due to be added to the index, has traded higher by more than 4%. Meanwhile, shares of Cathay Pacific and Kunlun Energy are trading lower by over 1% and 2.5% respectively, as both firms are due to be removed from the Hang Sang index. At the same time, the Hang Seng Information Technology index has rallied by more than 1%. Shares of PC gaming firm Razer have moved higher by over 40% in their trading debut. Japanese online gaming firm Nexon has gained over 7%, following the release of its earnings report and guidance. Amid today’s decline being seen in Japanese equity markets, the Topix Securities broker index has lost over 1%. Mega banks are also trading slightly lower, ahead of Mizuho Financial’s earnings release, which is expected later today.

Nikkei -1.32% Hang Seng +0.34% CSI +0.42% Shanghai +0.44% Shenzen +0.29%

Eur$ 1.1652 CNH 6.6524 CNY 6.6441 JPY 113.47 GBP 1.3099 CHF 0.9965 RUB 59.1539 WTI$ 56.80 +0.07%

S&P +0.05% EuroStoxx +0.20% FTSE +0.38% DAX +0.18% SMI +0.19%

- VOW3 GY :

ACS accelerates the search for a partner with 2 billion to improve the Abertis bid

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