MIFID II – Huge uncertainty despite looming deadline
Dublin, 5th December 2017
With MIFID II due to be implemented on 3rd January 2018, fund managers are scrambling to make key decisions which will impact fund costs as a result of the new regulations. Centaur Fund Services recently surveyed its clients to learn about fund managers’ MIFID II preparations together with any associated challenges with retaining access to investment research. Key findings from the survey include:
1. FUNDS WILL CONTINUE TO TAKE THE HIT FOR RESEARCH COSTS
Under the new MIFID II requirements, investment banks will be required to charge their clients for access to research, rather than bundling research services in with the commissions paid for trading. There is a clear divide developing between fund managers who intend to cover the costs of this research themselves and those that are going to continue to pass on research costs to their investors through the funds that they manage.
In Centaur’s survey almost three quarters of fund managers responded that research costs will continue to be borne by the funds that they manage with only a quarter saying that the fund manager will absorb the costs themselves.
It is notable that managers who run hedge funds will typically arrange for the funds to continue to pay for research while managers who run long only funds are typically paying for research themselves. The only reason for this distinction appears to be investor expectation.
2. MOST MANAGERS EXPECT RESEARCH COSTS TO REMAIN CONSTANT OR TO DECREASE OVER TIME
One welcome result of MIFID II is that the industry will need to be far more transparent about the cost of research supplied to managers. Our survey results suggest that most managers expect research costs to either remain steady or to reduce over time. 67% of the managers surveyed responded that they expect fees to either reduce or remain steady after the implementation of MIFID II.
Of the managers expecting research costs to increase, it is notable that they are typically managing niche strategies focusing on individual sectors or geographies, rather than broad based large cap strategies.
One thing that is certain is that fund managers are thinking far more carefully about the value and relevance of the research they subscribe to. The survey reflects the belief that as fund managers assess how much research they really need, they may utilise less research from investment banks and become more proficient buyers going forward.
3. MOST MANAGERS BELIEVE THAT MIFID II MAY DAMAGE THEIR ABILITY TO ACCESS RESEARCH
Cost is not the only factor to impact fund managers in the New Year. There also remains considerable concern that MIFID II will negatively impact the ability of managers to access high quality research. In Centaur’s survey, the vast majority (85%) of fund managers believe that MIFID II may damage their firm’s ability to access research which is critical to their investment process and their ability to analyse risk, with only 15% saying that it won’t impact.
4. TECHNOLOGY UPGRADES ARE VITAL FOR MIFID II
Compliance with MIFID II will present managers with a host of reporting and compliance challenges. It is clear that managers are taking these challenges seriously.
90% of Centaur’s clients surveyed stated that MIFID II has directly caused them to implement new technology solutions, while 73% have increased the amount their firm spends on compliance.
Independent administrators such as Centaur have the flexibility to respond quickly to regulatory changes. Karen Malone, Founding Partner of Centaur Fund Services said, “As MIFID II looms on the horizon, there is still much uncertainty in the market. The new regulation will demand significant changes to our clients’ trade analysis and reporting structures. Many are turning towards Centaur to support them in a wide range of functions, including regulatory services and reporting.”