1 00118601 Emerging themes 2019 A4 AW v31 combined - Page 67



EMERGING THEMES 2019
For example, the provision of research by a corporate
finance firm that does not provide execution services
presumably poses far less of an inducement risk to a
buy-side firm than research provided by a firm that also
provides execution. Further, if the FCA seeks to use the
cost base for research production as the key baseline
metric by which to assess whether research is priced too
low, any proposals risk becoming too invasive on the
business models of sell-side firms, overly prescriptive,
and disproportionate to the problem it is seeking to
resolve. There is also the problem that the rules seem
to have impacted parts of the market for research
differently, with disproportionately reduced volumes
of research being produced for small- to mid-cap
issuers, compared to research for FTSE 100 issuers,
for example.
In addition, there is a desperate need for an expansion
and clarification of the category of minor non-monetary
benefits relating to “issuer sponsored” items, whether
they be research or corporate access. Such items were
historically usually provided to the buy-side for free by
corporate finance firms, who themselves often did not
provide execution services. As a result of the confusion
caused by the MiFID II rules, many buy-side firms feel
they cannot receive these unless they pay for them, but
are unwilling to pay because the issuer is not well known.
They also struggle to accept that this type of research
or corporate access constitutes a minor non-monetary
benefit. The result being that a part of the market that
needs exposure to the buy-side is not receiving it.
DANIEL CSEFALVAY
Partner, London
In summary
What is clear is that the resolution of these issues
is far from straightforward. By seeking to address one
perceived problem in the market, the MiFID II rules in
this area have created another one entirely, along with
unintended consequences and widespread uncertainty
in the market. This was perhaps to be expected when
such a long-entrenched industry practise was washed
away. It remains to be seen how regulators will attempt
to resolve this.
By seeking to resolve one
perceived problem in the market,
the MiFID II rules in this area have
created another entirely.
JOSEPH NINAN
Associate, London
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