Global Asset Managers & Broker Dealers
More Questions Than Answers About MiFID II – Following
Industry Conference In NY
* More MiFID II Uncertainty — Following our recent regulatory work (see also, 5/5,
Assessing The Regulatory Landscape; Changes Are Brewing), we attended an
Equity market structure conference in NY which focused on MiFID II – we were
surprised to see the crowd largely unaware of potential repercussions and timing of
the drafts. We believe industry members (and European member states) are far
from ring-fencing MiFID II implications, potentially weighing on sector valuations. In
this note we address key takeaways.
* Will MiFID II Be A Regulation Or Directive? Perhaps the biggest takeaway was
conference panelists were leaning towards MiFID taking a directive form.
Additionally, the recent Expert Group meeting yielded eight European member
states arguing for a partial directive at least – causing great uncertainty over
regulation/directive as a leaked draft of the act indicated regulation was more likely
(see also our 5/18, European Asset Managers - MiFID II – “Leaked” Draft Delegated
Acts = Small Positive). A directive would be a weaker result, we believe, and
heightens risks of unintended consequences. While a directive may be less
stringent, it would add layers of complexity and likely increase compliance costs as
managers navigate multiple interpretations.
* Are Larger Managers Incentivized To Support MiFID II? Per the panelists, larger
managers will likely have greater pricing power versus smaller peers during Sell
Side/Buy Side negotiations to determine hard dollar costs for research. Additionally,
the Sell Side will likely see greater consolidation of market players with the Buy Side
focusing on the most effective research – as quantifying “return on research”
becomes increasingly important. The panel sees a potential unintended
consequence being a greater focus from the Sell Side on Large Cap research,
limiting time spent on Small/Mid Cap and reducing coverage universes; ultimately
weighing on the capital formation process.
* Does MiFID II Cross The Pond? Simple answer – most likely. Nuanced answer –
to a degree. Some global managers have already indicated they will apply the
strictest interpretation across all jurisdictions, indicating some separation between
research/execution payments in the U.S. is likely. The conference panel expected
pricing conversations to be driven by the Buy Side, although most conversations are
yet to take place in the U.S., we believe.
* What Are The Implications For Our Joint Coverage? We continue to favor large
global Asset Managers with U.K.-based SDR and U.S.-based IVZ best positioned.
We also see net beneficiaries among Alternative Asset Managers and ETF
manufacturers.