The impact of Mifid II on asset management in Asia | Magazine content
The European asset management industry has just undergone its largest set of rule changes in a decade, with the introduction of the Markets in Financial Instruments Directive II (Mifid II) on Wednesday (January 3rd). But the ramifications of this new set of rules will affect many Asian fund houses and investors as well.
Mifid II is an update to the original regulation launched by the European Securities and Markets Authority (ESMA) in 2007. The initial version focused on markets and the trading of financial instruments, while Mifid II requires companies operating in the European Union that they comply with the new regulation on markets in financial instruments (MiFIR) and for them to hold a legal entity identifier (LEI).
The new rules aim to make financial markets more open and secure, including the cost of research and the pooling of fees. But the implications are far-reaching and will include fund managers and brokers in Asia. The impact of the rules was discussed at a recent event in Hong Kong, hosted by AsianInvestor and sponsored by BNP Paribas.
Mifid II will require asset and wealth managers trading any asset class with their European counterparts, including legal entities and structures, companies, charities and trusts, to have an LEI registration. In addition, buying companies will have to pay for broker searches that they have received for free. And product manufacturers must designate “target markets” for their products when selling them through European distributors.
This affects Asian brokers or asset managers serving clients based in the EU and UK; they will have to comply with the new rules when negotiating in these two jurisdictions. The new regulations will also affect Asian funds investing entirely in Asian equities but with underlying European investors.
Natalie Shaw, head of liquidity distribution for Asia-Pacific at BNP Paribas, said many Asian investors are ready for Mifid ll, but the impact this will have is uncertain, especially on how whose unbundling of brokerage costs affects the production and distribution of research.
Shaw noted that an asset owner currently pays a fund manager a management fee for their expertise. If the fund were then traded with a broker at a bundled rate of 20 basis points, it could effectively pay 13 basis points for advice (such as research) and seven for execution services. Whenever the fund trades, it pays the broker for advice.
“Mifid II … tries to remove the incentive [for fund managers] pay brokers by trading more, because the end customer pays.
Shaw said BNP Paribas’ Mifid II customers pay for research through a structured mechanism, to remove any incentive to trade. Many Asian fund managers are not affected, but “fund managers who operate in Europe or manage money for European clients will have to follow a kind of unbundling”.
Count the cost of research
Haitong International Securities is also largely isolated from Mifid II due to its Chinese client base, but head of institutional equities Mark Burges Watson also sees unintended consequences.
“The Japanese clientele is largely affected because many clients in Japan are large global institutions. What I understand is that Mifid II is an economic threat as much as a regulatory threat. Many US clients are not in the scope of Mifid II, but they like the idea of not having to pay for research and pressure their investors to absorb research costs, ”he said. said Burges Watson.
He sees companies react by investing in smart execution platforms, reducing costs and reassessing customer relationships.
A recent CFA Institute EU survey of Mifid II found that fund houses preferred to pay for access to analysts rather than written research, and most were willing to absorb research costs rather than bill their clients. .
“Negotiations are underway between fund managers and providers over the price of research,” said Mary Leung, advocacy manager for CFA in Asia-Pacific. ” I have [also] I heard that some fund managers here were almost ready with RPAs (research payment accounts), client agreements, and policies, but as the industry moved to payment they were under … pressure not to. not do RPA. “
As Janine Canham, COO of Sanford C. Bernstein, put it: “It’s pretty tough [for a fund manager] to justify [the need for] find out if someone else is paying for it, but you are not prepared to pay yourself ”.
“Mifid II does not talk about research [in isolation]; it’s just that research unbundling is caught in the whole incentive argument. Trailer commissions … will also be caught up [as part of Mifid II’s ban on EU firms receiving monetary and non-monetary benefits]Added Mark Shipman, Global Head of Funds and Investment Management at Clifford Chance.
Assess the risks
Shipman says companies are responding to unbundling in several ways. Brokers subject to the new regulations will likely take a one-size-fits-all approach and apply EU rules around the world. Global asset managers with a strong European footprint may take a different approach and absorb research costs or use RPAs in Asia Pacific as well. Local managers with Asian-focused businesses can choose not to participate in unbundling, unless they are forced to do so by an EU partner.
This is because Mifid II is likely to create levels of research payments, potentially increasing risk.
“I see a risk for regulators when there is de facto consolidation, which of course is quite the opposite of what they wanted, especially with small and medium-sized asset managers who are under pressure, ”Shipman said.
Keith Pogson, head of financial services for Asia-Pacific at Ernst & Young, was also concerned about the repercussions in Asia. “Are we going to see a separation of paths because of this regulatory impact? What is happening in some of the less liquid markets in this region? There are a lot of consequences that people don’t really think about yet, ”he said.
As the LEI deadline approaches, Asian investors want to know if the regulators’ ‘No LEI, no trade’ warning is enforced from day one, or if the FCA and ESMA allow a delay. of grace for operations. Shipman said his colleagues in London believed the FCA would not immediately begin enforcement action.
Stéphane Loiseau of Societe Generale, global head of execution for Asia-Pacific, estimates that well under 10% of Asian companies are LEI compliant. But he noted that HKEX had already based China’s new investor identification regime on the LEI.
Why Mifid II is important
While the full impact of Mifid II is yet to be felt, Loiseau said it offers an opportunity to adapt business models.
“We need to embrace these positive changes and we need to adapt our business models,” he said. “The cost of running an investment banking business has changed over the past five to ten years. “
The need to reduce research costs is also helping to develop innovative fintech solutions such as Credit Suisse’s use of quantitative analysis and narrative science to generate its market reports. And Shaw said BNP Paribas is one of several investing in this area by building an AI center.
“Research is blocked [the same] been taking place for decades. Things change. We’re… finding better ways to get value by using technology to improve our game, ”Shaw said.
Mifid II can make markets more transparent, but it could accelerate the disruption of traditional information flows in favor of technology, big data and AI research solutions.
The rules will also force a review of the traditional relations between brokers and buyers, in Europe, but also, increasingly, in Asia.