Briefing note. ESMA Q&A on MiFID II inducements rules (research) (Latest update by ESMA: 4 April 2017)

Transcription

1 Briefing nte ESMA Q&A n MiFID II inducements rules (research) (Latest update by ESMA: 4 April 2017) Intrductin The Eurpean Securities and Markets Authrity (ESMA) has issued Q&A fr research (as inducements) t help firms and Member States implement the Markets in Financial Instruments Directive II (MiFID II) rules. ESMA s Q&As have been issued n 10 Octber 2016, 16 December 2016 and 4 April They frm part f a brader release f Q&As n investr prtectin (the research questins are cvered n pages 41-52). The Q&A prvides guidance n hw firms shuld interpret the research prvisins in MiFID II and delegated legislatin. Questin 1 was part f the Octber release, Questins 2-6 were added in 16 December 2016 and Questins 7-11 were added in the latest update, n 4 April ESMA has indicated that further updates may be released befre the applicatin deadline f MiFID II which is 3 January Executive Summary The elements cvered in the 10 Octber 2016 and 16 December 2016 publicatins (Questins 1-6) are: Setting f research budgets: ESMA cnsiders that a budget can be set fr a grup f client prtflis r accunts where the firm has established a similar need fr third party research in respect f the investment services rendered t its clients. Legal status f mney held in a research payment accunt (RPA): ESMA pints ut that an RPA must be funded by a research charge t the client and that due t its nature as a charge, the funds belng t the firm. Dealing with unrequested research prvided free f charge: ESMA stresses that it is nt acceptable fr firms t receive research fr free where n assessment has been made under the inducements rules r there is n payment arrangement in place. ESMA prvides several examples f what it cnsiders reasnable steps which a firm shuld take t avid receiving free unrequested research. Accepting research frm third cuntry prviders nt subject t MiFID II: ESMA clarifies that firms subject t MiFID II inducement rules must cmply with these requirements irrespective f the status r gegraphical lcatin f the research prvider. Receiving research frm anther grup entity: ESMA clarifies that the MiFID inducements rules apply in the same manner irrespective f being part f the same grup r nt. When are materials cnsidered minr nn-mnetary benefits rather than research: ESMA pints t recital 29 f the MiFID II Delegated Directive (C(2016)2031) which says that nn-substantive material r services cnsisting f shrt term market cmmentary n the latest ecnmic statistics r cmpany results may be treated as minr nn-mnetary benefits.

2 The main elements f the 4 April 2017 publicatin (Questins 7-11) are: Crprate Access: ESMA des nt cnsider that arranging meetings is research because it des nt "explicitly r implicitly recmmend r suggest an investment strategy and prvide a substantiated pinin as t the present r future value r price f such instruments r assets. Macr-ecnmic analysis: if macr-ecnmic analysis explicitly r implicitly suggests an investment strategy, macr-ecnmic analysis is cnsidered research. Only macr-ecnmic analysis penly available and generic in nature culd be cnsidered a minr nn-mnetary benefit. FICC (Fixed-incme, currencies and cmmdities) research: Like equity research, FICC r ther asset analysis shuld be either cnsidered research r a minr nn-mnetary benefit in ther wrds there is n differential treatment fr FICC. Allcatin f research budgets: Investment firm research budgets need t be built n ex-ante estimates f research spending. There shuld als be: (1) a clear audit trail f the payments made t research prviders; (2) cntrls ver hw amunts paid are determined based n the quality criteria established by the firm; and (3) well dcumented decisins t minimise cnflicts f interest. Disclsure f research csts t end-clients: At least the budget amunt per strategy and the estimated research charge shuld be prvided by the asset manager t its end-clients, bth as a percentage and a cash amunt. Summary f Answers Setting research budgets fr multiple clients when using RPAs (Questin 1) ESMA cnsiders that a budget can be set fr a grup f client prtflis r accunts where the firm has established a similar need fr third party research in respect f the investment services rendered t its clients. ESMA pints ut that this wuld allw firms t set a research budget at a desk r investment strategy level if they can evidence that the these have sufficiently similar mandates and investment bjectives that investment decisins are infrmed by the same research inputs. ESMA expects firms t describe their apprach in a written research plicy prvided t clients and that their apprach is cnsistent with using the budget in the best interests f its clients. Hwever, firms are still required t identify a specific research charge fr individual clients t fund the RPA, even where the budget is set fr several prtflis. Firms will need t have a transparent methd fr making a fair allcatin f csts e.g. the firm pr-rating the cst f research acrss all client accunts based n the value f each client s prtfli. ESMA stresses that firms shuld nt set a budget fr a grup f client prtflis that d nt share sufficiently similar investment bjectives and research needs. Legal status f mney held in a RPA (Questin 2) ESMA refers t Article 13 f the MiFID II Delegated Directive in cncluding that an RPA must be funded by a research charge t the client.

3 ESMA pints ut that by nature f this deductin as a charge, means that the funds belng t the firm, hwever, these funds shuld be managed in an RPA cntrlled by the investment firm and it shuld be used specifically fr purchasing external research. ESMA encurages firms t align as much as pssible the timing f the charges paid by the client t the firm and the expenditure paid t the research prvider. ESMA clarifies that the bligatin n investment firms t rebate surplus funds if they underspend the riginal research budget des nt alter the status f the RPA mney. The investment firm must be satisfied that thrugh any utsurced agreements it cntinues t retain full discretin and cntrl ver the use f the accunt. The mney shuld be ring-fenced and clearly separated frm ther funds f the RPA Administratr, such that they remain legally wed t the investment firm. The third-party prvider shuld have n right f set-ff ver the mney r be entitled t use it as cllateral r therwise fr their wn benefit. Dealing with unrequested research prvided free f charge (Questin 3) ESMA stresses that it is nt acceptable fr firms t receive research fr free where n assessment has been made under the inducements rules r there is n payment arrangement in place that cmplies with Article 13 f the MiFID II Delegated Directive. Where a firm des nt want t accept research material, they shuld take reasnable steps t cease receiving it r avid benefitting frm its cntent. ESMA prvided the fllwing examples: Autmatically blcking r filtering certain senders/materials; Requesting a prvider t stp prviding research; Using the cmpliance functin f the firm t mnitr, asses and determine whether the material can be accepted befre it reaches thse parts f the firm that will make use f it; Prvide adequate training t staff t ensure they understand the inducements bligatins and the firm s apprach t receiving research; Having prcedures whereby staff reprt t cmpliance r senir management any cases f unslicited research being prvided by a third party where n payment agreement is in place. Where the prvider f research is a firm which als prvides executin services under MiFID II, the prvisin f unslicited r free research wuld nt meet the bligatins n them t price services separately. These firms shuld have systems and cntrls t enable them t cease prviding unslicited research. Accepting research frm third cuntry prviders nt subject t MiFID II (Questin 4) ESMA pints ut that EU/EEA firms subject t MiFID II inducement rules must cmply with these requirements (Article 24, paragraphs (7), (8) and (9), and the relevant level tw prvisins) irrespective f the status r gegraphical lcatin f the research prvider. Firms shuld therefre treat research frm a third cuntry prvider in the same way as any ther third party benefits.

4 Receiving research frm anther grup entity (Questin 5) ESMA clarifies that the MiFID inducements rules apply in the same manner irrespective f being part f the same grup r nt. ESMA pints ut that in the case that firms accept t receive research frm ther firms in the same grup, they shuld pay particular attentin t the fllwing pints: Ptential cnflicts f interests and the bligatin t assess the quality f research and keep apprpriate cntrls and versight ver the amunts paid with reference t the quality; the requirement t ensure a research budget is used and managed in the best interests f their clients and that the csts f research are allcated fairly between client prtflis. The cmmercial preference f a firm t perate as part f a glbal business mdel des nt verride their bligatins under Article 13 if using an RPA. What is cnsidered minr nn-mnetary benefits as ppsed t research (Questin 6) ESMA refers t the definitin f minr nn-mnetary benefits which is prvided in Article 24 (8) f MIFID II Level 1 Directive and t specific items prvided fr in Article 12(3) and Recital 29 f the MiFID II Delegated Directive, which state that: nn-substantive material r services cnsisting f shrt term market cmmentary n the latest ecnmic statistics r cmpany results may be treated as minr nn-mnetary benefits. Firms need t assess whether the material is substantive r nt based n cntent and nt the qualificatin given by the prvider. Firms als need t assess whether they are reasnable and prprtinate and f such a scale that they are that they are unlikely t influence the firm s behaviur in any way that is detrimental t the interest f the relevant client. ESMA clarifies that a detailed research reprt r cnversatin with a research analyst, which in cntent meets the nature f research described in Recital 28, cannt be cnsidered as a minr nn-mnetary benefit due t it being labelled as such by a prvider r because such material is prvided thrugh a dealing desk rather than a research department. By cntrast, shrt market updates with limited cmmentary r pinin may be capable f being cnsidered as infrmatin that is a minr nn-mnetary. ESMA pints ut that the restrictin n inducements shuld als nt prevent cmmunicatins in the cntext f seeking market infrmatin t immediately execute an rder between traders, fr example n available liquidity r recently traded prices, which shuld be cnsidered as part f the executin service. ESMA ntes that material repeating r summarising public news stries r public statements frm crprate issuers culd als be cnsidered as infrmatin that cnstitutes a minr nn-mnetary benefit. Anther exemptin is fr pre-deal material directly relating t a new capital raising event by an issuer, which is prduced by a third party such as anther investment firm wh is placing/underwriting the issue prvided that the nature f the material is made clear and it is available at the same time t any prspective investr. ESMA clarifies, referring t Recital 30, that any nn-mnetary benefit that invlves a third party allcating valuable resurces t the investment firm shall nt be cnsidered as minr

5 and shall be judged t impair cmpliance with the investment firm's duty t act in their client s best interest. Crprate Access (Questin 7) ESMA refers t a definitin f research fr RPA purpses in Recital 28 f the MiFID II Delegated Directive in cncluding that crprate access visits d nt appear t be research and shuld be cnsidered a discrete service. ESMA pints ut that this des nt preclude crprate access visits being paid fr frm a Research Payments Accunt (RPA), but general research payments shuld nt subsidise such a service. ESMA expects investment firms t carefully assess whether crprate access services such as field trips, cnferences and individual meetings invlving a crprate issuer and facilitated by an investment firm are material benefits, r alternatively culd qualify as an acceptable minr nn-mnetary benefit. ESMA ntes that an investment firm can als treat crprate access as a cmmercial service and pay fr it apprpriately frm its wn resurces. In such cases, it is imprtant that the prvider prices services at cmmercial levels and access itself is nt linked t r dependent n payments fr research r executin services where the prvider ffers these ther MiFID services. ESMA als ntes that the investment firms wishing t meet with a crprate issuer individually has the ptin t apprach them directly and/r pay fr a third party crprate access service prvider t facilitate meetings that des nt prvide ther MiFID investment services. Macr-ecnmic research (Questin 8) ESMA draws ut tw criteria fr macr-ecnmic research t fulfil t be cnsidered research, drawn frm Recital 28 f the Delegated Directive. These tw criteria must bth be met: 1. The material r service must cncern ne r several financial instruments r ther assets, r current r ptential issuers f financial instruments, r be clsely related t a specific sectr r market such that it infrms views n financial instruments, assets r issuers within that sectr r market; and 2. The material r service explicitly r implicitly recmmends r suggests an investment strategy and prvide a substantiated pinin as t the present r future value r price f such instruments r assets, r cntains analysis and riginal insights and reaches cnclusins based n new r existing infrmatin that culd be used t infrm an investment strategy and be relevant and capable f adding value t the investment firm s decisins n behalf f clients being charged fr that research. ESMA thinks that mst macr-ecnmic research is likely t suggest an investment strategy, but accepts that sme macr-ecnmic research is sufficiently general t fall utside the definitin. Hwever, if macr-ecnmic analysis is nt cnsidered as research accrding t these criteria, recipients still cannt autmatically classify it as a minr nn-mnetary benefit, because it may be cnsidered substantive r t have material value.

6 An imprtant exceptin is where a prvider makes macr-ecnmic-related material penly available at the same time t any investment firms wishing t receive it r t the public, fr example n a website. Material made available in this way culd be justified as a minr nnmnetary benefit representing infrmatin relating t a financial instrument r investment service that is generic in nature. Because macr-ecnmic research is ften generic it is usually relevant acrss a variety f strategies and asset allcatin decisins, and therefre ESMA thinks that firms may be able t mre easily justify paying fr it n a subscriptin basis and allcating csts mre bradly acrss many f its clients prtflis and accunts. FICC research (Questin 9) ESMA ntes that there is n carve-ut frm the research rules fr FICC markets. ESMA acknwledges that the lack f explicit executin cmmissin arrangements in FICC markets makes it difficult fr firms t pay fr FICC research separately frm executin csts. But ESMA thinks that firms may simply chse t pay fr such research ut f their wn resurces r by using a RPA funded by a direct charge t the client. Given cmmnalities between FICC and macr research, ESMA believes that firms can use a subscriptin mdel t pay fr FICC research (as per ESMA s answer t Questin 8). But firms must dcument hw they arrive at their pricing structure t avid the pssibility that the research acts as an inducement (i.e. the subscriptin shuld nt be extremely heavily discunted, fr instance). As per macr-ecnmic research, FICC research can be made available t the public by prviders, r firms may receive FICC research if it has been cmmissined and paid fr by a crprate issuer r a ptential issuer. In bth cases the utput wuld be classified as a minr nn-mnetary benefit. ESMA acknwledges that sme FICC research may lack enugh substantive analysis and instead represent infrmatin abut financial instruments r shrt-term market cmmentary that qualifies as a minr nn-mnetary benefit. Allcatin f research budgets (Questin 10) ESMA reminds readers that MiFID requires firms t set ut in their research plicy the criteria against which the quality f the research material they purchase shuld be assessed. The research plicy als needs t articulate hw the research inputs can cntribute t better investment decisins and explain hw the related csts can be allcated in a manner that is fair t the varius clients prtflis. ESMA particularly draws attentin t the imprtance f fair allcatin f csts t clients where firms purchase research centrally and make it widely available within the firm. Fair allcatin culd invlve apprtining csts accrding t the expected relevance f research t particular investment strategies r the level f use by individuals r teams that manage r advise n certain prtflis r accunts. ESMA stresses that the research budget shuld be an ex-ante estimate f frecast expenditure fr research csts that can be charged t prtflis with similar strategies under management. This, in turn, will require that a budget is sufficiently granular t be able t be pre-apprtined by prtfli r client.

7 ESMA expects prtfli managers t have rbust systems in place t ensure that decisins n the prcurement f research are clearly dcumented, and are taken separately and distinctly frm decisins n the chice f brkerage and executin services subject t relevant best-executin requirements. Prtfli managers shuld be particularly aware f cnflicts f interest risks when purchasing research alngside executin services In ESMA s view, a firm shuld have a clear methdlgy t establish what they expect t pay prviders fr research befre they receive and cnsume services. One way f ding it is fr a firm t set measurable ex ante criteria as t hw it will value the types, level and quality f service. In rder assess the value f research, ESMA says that firms may, fr example, have its wn internal rate cards r threshlds t adjust what it will pay individual prviders fr specified service levels. ESMA cnsiders that the regular ex-pst assessment cntributes t evaluate the quality f the research they have purchased and t infrm their future prcurement decisins and payment levels. ESMA acknwledges that firms have scpe t negtiate research prices with suppliers. Internal recrds f investment firms prcuring research shuld demnstrate hw they have reached their assessment f value and the actual price they secure fr specific research services. ESMA stresses that there shuld be n crrelatin between the transactin vlumes executed by a brker n behalf f a prtfli manager and any discunt applied t the research material ffered t the same prtfli manager. Disclsure f research csts t end-clients (Questin 11) Befre prviding an investment service, investment firms intending t use an RPA t pay fr investment research shuld prvide clients with tw separate pieces f infrmatin: (i) the amunt that the investment firm has budgeted fr research; and (ii) the estimated amunt that can be expected t be paid ut f the assets f the individual client. In relatin t the secnd aspect, ESMA states that the estimate shuld be cnsidered in light f the wider MiFID II csts and charges prvisins. Therefre, ESMA cnsiders that the estimated client research charge shuld be presented as a single estimate figure, and disclsed in bth a percentage (r basis pints) frmat and as a cash amunt. ESMA allws that if a firm wishes t d s t prvide a degree f certainty t investrs, it can present (ii) as a maximum figure where they guarantee t their clients they will nt pay mre than that predetermined amunt. Hwever, figures presented as a range are nt acceptable. ENDS 9 May 2017