Will academics and regulators come to the same conclusions?

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Regulatory view

On French National Day, the Financial Times interviewed Robert Ophèle in the Financial Times about the recently launched initiative, and the way that regulation is being created in Europe, and how it could get amended.

The AMF has concerns that the emergence of research that is being sponsored by corporate issuers creates a potential conflict of interest.  It commissioned a study to find « concrete ways » to improve the situation, which should be available by the end of the year.

Financial Times, 14.07.2019

During the event we disclosed last week, the President of the AMF spoke about sponsored research, and acknowledged at the time that the principle of this was much akin to rating agencies financing model.  It did not feel at the time like he would dampen this green shoot of business for investment research.  What he mentioned though, is a degree of ruling on how sponsored research should be looked at. 

Additionally, in the FT article, there are a number of references to the process of MiFID 2 introduction where the AMF President looks at legislative and opt out possibilities to allow more flexibility in the future.

One area where France is looking to exert pressure is MiFID 2, where it has long led opposition to the strict unbundling of research from trading fees imposed by the new regime – putting it at odds with the FCA, a driving force behind the changes.

Financial Times, 14.07.2019

One may agree or disagree, although this may be a way to start reflecting on the required immediate actions: 

  • enlarge the size of the market for research (e.g. bringing MiFID 2 research rules to non EU countries, or across all types of investors, including hedge funds and mutual funds)
  • outlaw dumping or other forms of cross subsidy with ancillary businesses which are detrimental to independent researchers, and more generally, to free markets

If the FCA was a leading force in the regulatory environment, it’s because London was… connected with the real market, and listening to them and understanding how it works

Robert Ophele, extract from Financial Times 14.07.2017

We take this as a very positive note, and know that we, at ResearchPool, represent a good segment of the market that risks being left out from the information flow.

Academic study

Meanwhile, a study called “The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms” looks at Research, and came to our attention recently, thanks to Institutional Investor.

What is great about this analysis, is that it takes deep rooted information from the market, rather than a perception study of the participants, which could have an element of bias.

The paper, as II, relates that:

  • a substantial decrease in analyst coverage for European issuers, from analysts with lower track records
  • as a result, the dispersion or error in consensus is unchanged
  • the remaining analysis are more followed, harder (i.e. there are more sells and holds on stocks than before), and their recommendations are more profitable

The approach taken by the Canadian-British academic team is beyond our capabilities to criticise. We would like however to see if we could use a data sample that started in 2000 and observe whether the trend was not there before, with the following questions: did MiFID 2 create a change in the trend of the European issuers coverage, or did it provide an excuse for cutting coverage?

In any case, great news: better quality is what we should be aiming for!


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