Although some industry experts are projecting that new Mifid II rules will reduce buy-side spending on equity research by as much as 40 percent, a new study from Greenwich Associates predicts the immediate impact to be much less dramatic, with European institutional investors planning to cut research budgets by only 1 percent in the next 12 months.
That’s a smaller cut than investors projected last year, when participants in the same study predicted reductions of 6 percent to 7 percent.
Central to Mifid II, regulators are attempting to bring transparency and accountability to the market for investment research. Under the new framework, asset managers and other institutional investors will have to make discrete payments for research, either from their own balance sheets or through new research payment accounts (RPAs). In essence, regulators are trying to ‘unbundle’ research costs from trade allocations to the greatest possible extent.
‘Our research shows the seismic disruptions that many expected probably won’t materialize in the early months of 2018,’ says William Llamas, Greenwich Associates’ relationship manager and author of the new report, ‘As Mifid II looms, European fears subside’.
‘Immediate, substantial decreases will indicate to regulators and clients alike that these managers were wasteful in their research spending in prior years.’
As of mid-year, about one in 10 buy-side institutions plan to shift all research payments to ‘hard dollars’ from their own P&Ls in the next year – a move regulators will undoubtedly applaud.
‘While other institutions have already decided to fund research payments with RPA-based payments, about two thirds of study participants have not yet decided how they will pay for research under the new Mifid guidelines,’ says Llamas.
Greenwich Associates interviewed 164 buy-side equity traders and 198 portfolio managers in Europe about their plans for equity research budgeting and payments for the year ahead.