Bond research should be exempted from Europe's trading rules, which have caused unintended problems, trade associations said.
The recommendations and warnings were made in responses by European trade bodies to the European Commission's review of the Markets in Financial Instruments Directive II, which closed to comment May 18.
MiFID II came into force in January 2018 to promote investor protection, best execution and transparency in Europe's trading markets. One move was to unbundle payments for trade execution and investment research.
Germany's BVI, which represents the country's money management industry and whose members run more than €3 trillion ($3.2 trillion) in assets, called for bond research to be made exempt from unbundling rules and said small and medium enterprise research coverage should be improved — something already acknowledged by the commission itself.
The rules have been implemented by the European money management industry "with considerable cost and efforts," the BVI said in its response. "As a result, the research budgets of asset management companies have been cut, the scope of research has been narrowed and the sell-side has adjusted its research offering. One aspect is that rules for passing on research costs to the client are unduly complicated."
Regarding bond research, "the application of the unbundling rules has only led to additional costs for asset managers. Asset managers now have to make additional payment beyond the spread, without the latter having been reduced by the research cost share," the response said.
BVI said growing market consensus is that equity research is focusing on liquid stocks while banks and brokers are reducing small-cap equity research. This will lead to deteriorating financing conditions in capital markets for small and medium enterprises.
The EU should review the unbundling rules, including "how research costs are allocated and ensure appropriate research coverage on SME as well as exempting bond research," BVI said.
France's Association Francaise de la Gestion Financiere, which represents money managers running more than €4 trillion in assets, warned that unbundling has caused an unlevel playing field between countries that have had to implement the rules and those that have not, "particularly with regard to U.S. players."
The AFG said U.S. research providers "amortize their costs with American and international customers. This allows them to dump prices for the benefit of their European customers."
It said a large U.S. bank may sell research as a "read only" service to European investors at a cost of €10,000 per year, whereas French brokers may charge between €30,000 and €50,000.
There is also a problem when it comes to money managers. "Indeed, when European asset managers make offers to both European and non-European clients, they have to price them the cost of research. The consequence is that the costs of European asset managers appear higher to clients compared to the costs of an American asset manager," the response said.
European money managers also have to agree on a research budget, with "many French clients (refusing) to pay the research fee."
The AFG said institutional clients "have all refused to pay for the research" and "one asset management company even had to give up two institutional mandates. To sum up, either the asset manager bears the cost of the research or he loses (his) clients," the response said.
Small and medium-size money managers cannot afford to cover the cost of research and "are therefore the first to be penalized," the response said.
