On October 12, 2017, NIRI Boston held an event with an expert panel to discuss the impact of the upcoming MiFID II regulations, which are slated to go into effect on January 3, 2018. The panel was moderated by Jeremy Javidi, Portfolio Manager at Columbia Threadneedle. The panelists were Rupert Della-Porta, COO of Atlantic Equities; Kevin Kruszenski, Head of Equity Sales, Trading and Corporate Access, Keybanc Capital Markets; and Matt Waldner, Head of Americas Trading at Columbia Threadneedle.
The Markets in Financial Instruments Directive (MiFID) is a European regulation, the goal of which is to increase market transparency and lower costs in the financial system. MiFID II looks at research costs and says to asset managers that they must either pay themselves or get the fund owners to explicitly pay for it, meaning asset managers may need to pay for it out of their own P&L. While this regulatory structure is being implemented in Europe, asset managers with clients in Europe will also be exposed, and many US asset managers are choosing to move to this research structure in 2018, despite no requirement to do so. Columbia recently announced they would move to pay for research out of their own P&L.
Rupert, and many others, expect that this will result in downward pressure on equity research pricing in Europe, which will likely result in fewer sell-side analysts across the industry. However, European asset managers will still want to meet with US companies. As far as pricing for research, the panelists believe it will be dictated by the number of users, the number of analysts they will consume, and whether they will just read research or need to speak with analysts. For conferences, pricing would likely go up substantially. Ranges have been quoted based on current usage and creating price bands around that.
As this model moves to the US, a market that was described as “over-brokered”, the panelists expect that the US sell side will also reduce research coverage, and Columbia will look to “pick winners and losers” from a sell-side research perspective. One concern is that small caps will see the greatest reduction in coverage. The sell side will need to focus on thematic research and not just quarterly reports, which can also be enabled by IROs. As Kevin said, “the evolving quality of research needs to get better if we expect to get paid for it.”
Despite these changes, corporate access will remain a priority, and conferences will remain one of the most efficient ways for the buy side to discover and conduct diligence on small caps. IROs should anticipate that the top 20 asset managers will have someone on staff to deal directly with IR for corporate access, instead of relying on the sell side.
Special thanks to Stephanie von der Luft, Managing Director, Institutional Equity Sales at KeyBanc, for writing this event summary.