Just when money managers across the globe thought they had dealt with European trading rules, new suggestions to alleviate a perceived decline in smaller company research and investment are threatening to cause further upheaval.
On Feb. 17, the European Commission published a public consultation on the review of the Markets in Financial Instruments Directive II. The rules, which came into effect Jan. 3, 2018, brought in a set of requirements to improve transparency in trading.
For money managers, perhaps the most discussed and burdensome of the requirements was the mandatory separation of payments for investment research and the execution of trades. Managers largely decided to absorb the costs of research on companies themselves, rather than passing them onto clients.
Now, the commission is suggesting that these MiFID rules be amended to effectively rebundle payments for certain companies.
Sources in the money management industry had already expressed concern that MiFID II and the so-called unbundling would have a detrimental effect on the quality, quantity and focus of investment research.
And now, it seems the European Commission shares that concern when it comes to small and medium-size enterprises, which it said over the recent years has suffered in terms of research coverage.
"One alleged reason for this decline is the introduction of the unbundling rules," the commission wrote. "Less coverage of SMEs may lead to less SME investments, less secondary trading liquidity and less (initial public offerings) on (the European) Union's financial markets."
The commission added: "There is a need to consider what can be done to increase (SME research) production, facilitate its dissemination and improve its quality." The commission wants responses to its consultation and suggestions from all parts of the financial services industry by April 4.And while money managers were never particularly pleased to see MiFID II's unbundling rules come in, they said the rules were not solely to blame for the demise of SME research.