Money managers and other industry representatives are divided on the impact the incoming Markets in Financial Instruments Directive II will have on bond research and liquidity.
The rules, known as MiFID II, come into play Jan. 3 and, among other things, will require all financial firms doing business in the European Union to disclose research costs as a distinct line item, unbundling them from execution payments. Another part of the rules will enhance pre- and post-trade reporting requirements.
While much has been said of the impact of MiFID II on the equities market, some executives working at money management firms and industry associations feel less has been covered regarding the impact on fixed-income markets — but that there could be far-reaching consequences in terms of the level of research available and, potentially, liquidity.
Speaking at Pensions & Investments' WorldPensionSummit in The Hague, Netherlands, last month, Jack Inglis, CEO at the Alternative Investment Managers Association, London, voiced his concerns over MiFID II. "The impact on the market is there's going to be less research. I think we're most likely to see the impact in fixed-income research," he said, citing surveys showing about a 66% reduction in the production of fixed-income research going forward. "So all this means there's less rigorous original thought in the marketplace for the investment process, and I would suggest that may be a problem."
Sources at other organizations and money managers agreed there might be far-reaching effects on certain areas of fixed-income research.
"Where asset managers will need research in fixed income might be in areas that could see a shortfall after this change because of unbundling and broker-dealers not providing" research, said Patrik Karlsson, director, market practice and regulatory policy at the International Capital Market Association and secretary of its Asset Management and Investors' Council in London. "If you are running an actively managed fund, you will want to provide alpha and want to pay for the inputs to your fund that create alpha. Where that is more valuable (may be) high yield, (collateralized loan obligations, residential mortgage-backed securities), covered bonds, emerging markets — not necessarily your vanilla corporate bonds from large issuers."