Research unbundling, a prerequisite for the Capital Markets Union?

Unbundling is a cog in the CMU machine
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As ResearchPool anticipated, the release of the MiFID II delegated acts has been delayed yet again. The general consensus is that we won’t hear much about the delegated acts until mid-November.  

The continued delay is understandably frustrating for stakeholders:

  • The deadline for full MiFID II implementation is 3 January, 2017. The chances of this deadline being moved are extremely unlikely.
  • No financial firm can begin implementing MiFID II until they have implementation details from the European Commission, which are handed down through delegated acts.
  • The delay of their release is cutting into the implementation timeframe. Financial firms will have much less time to adapt their people, policies, processes, and software to meet the new regulations.

Given the inconvenience, why the delay? Most likely, it’s due to the Capital Markets Union (CMU) taking centre stage and occupying the European Commission’s attention. With the CMU becoming the supreme priority, the delegated acts have simply taken a back seat to the CMU.

Does this spell disaster for MiFID II?

Inconvenient…or a Stroke of Genius?

Drastically shortening implementation time for something so important is at best inconvenient and at worst catastrophic.

Or, it could be seen as a smart move by Lord Jonathan Hill and his team for the following reasons:

  1. The delay gives the European Commission, Council and Parliament extra time to finalise the closed-doors political negotiations.
  2. It also allowed the Commission to introduce the CMU framework that conveys a cohesive and long term vision for European capital markets.

It should now be possible to move ahead trusting that MiFID II rules and principles will not only better protect end-investors by limiting conflicts of interest but also help achieve CMU goals:

  1. Create a single market for capital by removing barriers to cross-border investments
  2. Improve access to financing for all businesses around Europe
  3. Diversify the funding of the economy and reduce the cost of raising capital
  4. Maximise the benefits of capital markets so they can support economic growth and job creation
  5. Help SMEs raise finance more easily
  6. Help the EU to attract investments from all over the world and become more competitive

Catalysing Financial Research

In fact, Research unbundling should be a catalyst for a broader and deeper coverage of European SMEs by analysts, without which many, if not all, the goals above cannot be attained. The current structure of the research business whereby production is subsidized by trading commission can’t cope with such ambitions and great plans. The reality is that year after year the number of SMEs covered by the sell side analysts gets reduced, as a result of the low trading commissions generated on one side and the high costs of selling coverage on the other. And even so, it’s not certain that all sell side firms are running at profit.

While concerns that research unbundling will result in further reductions of coverage should be listened to, policy makers and regulators should see them as, at best, resistance to change, and, at worst, short-term consequences while the market readjusts to a far better model. They should now set their sights on supporting and promoting solutions that establish marketplaces for research, as a fully standalone business, where supply can efficiently meet demand with transparent pricing and open access.

European Capital Markets industry insiders have long known that reform is urgently needed. The deep fragmentation in laws / regulations, market practices and infrastructure is hurting the European competitiveness every single day in the globalised the marketplace where companies of all sizes operate. It’s crucial that we all make CMU a reality and pursue the greater objective over specific industry or country interests. Surely, not all dots can be connected now, but hesitate now and we might rue another opportunity missed in hindsight.

One Response to “Research unbundling, a prerequisite for the Capital Markets Union?”

October 23, 2015 at 3:42 am, Robert Morie said:

What are these marketplaces for research on a standalone business? Tell me how to do it? The buy side continues to shoot itself in the feet. I’ll pay you a penny less without the research. If you think SME’s will get more coverage you are in need of therapy.

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