The French markets watchdog is calling for a rethink of the European markets rules that split share trading from analyst research earlier this year.
Robert Ophèle, chairman of the Autorité des Marchés Financiers, told the Financial Times it was “absolutely clear” that some rules introduced in the EU’s recent investor protection law would have to be reviewed to account for Brexit.
“Even without Brexit we would have had to look at it again because there are very detrimental effects on research, especially for mid-caps, that’s absolutely clear,” he said.
He said Europe was engaged in a “dangerous game” as research capacity was being pared back for many smaller companies — especially after the rise of passive investment strategies that track market indices.
The EU’s so-called Mifid II rules mean fund managers now have to pay for analyst research separately to trading fees, prompting many of them to reassess and usually cut back what they consume.
Several smaller brokers and independent research houses, especially in London, are struggling to adapt to the drop in revenue caused by the new regime — prompting some brokers to consider merging or selling out to larger rivals.
France has long led opposition to the strict unbundling of research costs from trading fees imposed by the new regime — putting it at odds with the UK’s Financial Conduct Authority, which was a driving force behind the changes.
“It’s clear that from the beginning we here at the AMF, we thought that this was not a very good idea to develop this complete unbundling,” said Mr Ophèle.
He acknowledged that Brexit created extra uncertainty, particularly on the question of how new market rules introduced by the UK or the rest of the EU will be implemented across the region. “How do we apply these similar rules? Do we apply them coherently between each of us, or not?” He said a Brexit transition period could help.
Among the other Brexit-related adjustments to Mifid he is seeking include changes related to the thresholds for trading bonds and swaps on electronic exchanges. Current standards assume London markets are part of the calculations.
He said that EU financial markets rulemaking would change more broadly after Brexit. As more trading activity shifted from London to the rest of the EU, it would dilute the “unique advantage” the UK has from the data it receives from concentrated markets in the City, he predicted.
“It means that there will be some form of rebalancing of financial activities, meaning that we will gain also in expertise. We will gain in-depth knowledge of these consequences of a possible regulatory move,” he said.
France’s call for Mifid II rules to be reassessed comes as the research market is starting to consolidate in response to a squeeze on revenues under the new regime.
AllianceBernstein — the US asset manager and brokerage — said this month it was buying UK-based research boutique Autonomous. More recently, Australia’s Macquarie held early stage talks about buying Liberum, a UK broker that provides research and advisory services to small and mid-cap companies.