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Apr 17, 2018

Mifid II seen as internalizing IRO and investor work

Regulation starting to have real-world impact, expert says

Mifid II is starting to change behavior among investors and IR professionals as organizations internalize aspects of their workflow, according to Michael Hufton, managing director of corporate access at IR software firm ingage.

‘People are now seeing change on the ground. That is almost universal,’ Hufton tells IR Magazine. ‘For corporate IROs, this means seeing more direct requests coming in.’ This has strong implications for brokers, but also – crucially – for the workload of IROs.

Hufton recounts a story about the head of IR at a big Australian corporate, who told him that one of the firm’s largest shareholders had said to the company CFO at a broker-organized event: ‘This is the last time you will see me here because next year I will have to pay, so I will come and see you directly.’

‘The reason that story is so important is that it triggered the CFO to say to the head of IR, You clearly need more budget,’ Hufton observes. Many IROs will hope Mifid II, in creating more work for them as they become ‘in-house brokers’, will be followed by their organization giving them more resources.

A shift in approach is also coming among investors. ‘It’s in the public domain that Fidelity, BlackRock, Lazard, T Rowe Price and Wellington have all appointed internal corporate access teams,’ Hufton says. ‘So the whole story that there would be an internalizing of the process – we now see evidence of that happening to some of the biggest global investors. We can now point to that on the ground. That is significant. It doesn’t mean those firms are going to refuse meetings from brokers. But it tells you something about the intent of investors.’

In the same way, corporates are changing. ‘I met with a FTSE client of ours that said it now organizes 50 percent of its investor meetings itself,’ Hufton continues. ‘That is exactly the trend we are seeing: more and more companies are internalizing more of this activity. So the corporates are internalizing and the big investors are internalizing. And the element that is done direct will continue to grow.’

As a result, the broker offering is changing – as it has to. IR Magazine recently highlighted the changing nature of the broker market with the implementation of Mifid II.

‘In the past, if a corporate went to a broker to arrange its roadshows, that broker could credibly cover the whole market, because even if it was not getting paid by that institution, it could still offer a meeting,’ Hufton comments. ‘Now, that blanket ability has changed because a lot of institutions don’t have a form of contractual arrangement with that broker – and they will not accept meetings from it [as a result of Mifid II]. So from a corporate point of view it makes things more complicated because you cannot now cover the whole market with one broker.’

He adds that there is evidence of Mifid II having an effect outside Europe: ‘We had a great example of a US investment house with an analyst in New York refusing to accept a meeting from an Australian company organized by an Australian broker. It was a Mifid II-related refusal because the investor didn’t have a corporate access arrangement in place for that broker – but didn’t touch Europe at all. I thought that was a great example of the globalization that is taking place under Mifid II.’

BlackRock is a good example of the globalization approach: it has stated publicly that it is looking to roll out a global solution to Mifid II. ‘It is simply too complicated for a big house to run two systems across its operations,’ observes Hufton, who says the main surprise he has seen connected to Mifid II has been the slow pace of getting to this stage. ‘I thought people would get on top of all of this before the January implementation date, but they didn’t. In fact, January came and then they started looking at it. And now we have started to see some change.’