Compliance Update – March 20188th March 2018
Welcome to our regular newsletter. In this issue, we share:
- Trade Ideas starts strongly post MiFID II
- Impacts from MiFID II that are starting to surface
- Sell-side uptake on TIM Restricted List enhancements
- How we help clients be fully MAR compliant
2018 starts with a bang for Trade Ideas
The MIFID II research unbundling process has matured fast. While much uncertainty remains, a bright spot is unprecedented demand for, and activity in, trade ideas. 2018 started with record highs in the TIM network, with more ideas from more authors at more firms. Monthly idea volumes for January are up 21% on the previous year. The number of contributing sell-side firms was up 16% and the average ideas-per-author up a massive 20%. With other broker services challenged, we are proud to be offering a channel where our clients can be recognised and rewarded for their alpha generating contributions.
MiFID II impacts starting to be felt
Looking more broadly, the pricing race to the bottom for research documents means that even specialists are struggling to replace trading revenue. Our clients tell us that execution commission generally has seen cuts from around 15 bps to 5 bps per trade to meet best execution requirements. Payments for research documents are not even close to compensating for these cuts, while payments for other research services such as analyst time are unlikely to plug the gap. Fired or retiring analysts may resurface at corporates, or on the buy-side. As expected, specialists are attracting greater interest than generalists by many on the buy-side, with a greater focus on real insight and quality.
Our hedge fund clients are doing well, pulling $14 billion from investors in January – already half the amount the industry raised during all of 2017 – according to data by eVestment. However, much of the fundamental buy-side community has opted to pay for research from P&L, with Fidelity the most recent to throw in the towel. Absorbing research costs will be an unwelcome challenge at a time when fees are already under pressure. Buy-sides are negotiating hard: we hear tales of large buy-sides offering to pay 10 or 20 times less than what broker’s say they would expect to charge for research. Many of the deals have been done, much closer to the buy-side research valuation than the sell-side. At hedge funds there is a more even split of funds paying for research from client funds versus P&L, but generally funds are paying for research from their own pocket – and paying less.
It is unsurprising then that many brokers are adding further contributors to TIM both within sales, and also sometimes with an analyst research flavour. Many TIM buy-side recipients are interested in research analysts’ most favoured and least favoured stocks. They are also interested in the investment recommendations sales people must disclose under Market Abuse Regulations. TIM provides brokers a channel for distributing this data in addition to trade ideas. In the post-MiFID II world such non-traditional data is a promising source of new revenue.
TIM Restricted List enhancements: Block idea entry and Auto-close idea
We have seen a number of sell-sides using two new features recently added to the TIM Restricted List feature:
- Block idea entry – prevents an author from sending an idea if the stock is on your restriction list
- Auto-close idea – auto-closes an existing idea if the stock becomes restricted.
Both features provide additional protection for both idea contributors and buy-side recipients because it minimises the risk of inadvertently giving insider information. If you are not familiar with the Restricted List feature, TIM can either provide a warning when a salesperson enters an idea on a stock on your restricted list, or block it altogether. When an existing idea is on a stock that is later added to the restricted list, salespeople can either be notified enabling them to take the appropriate action, or the TIM can close the idea automatically, preventing any further communication on that idea. For more information, contact us at TIMfirstname.lastname@example.org.
MAR investment recommendation feature – Conditional Disclaimers
Brokers can use TIM to ensure they are fully compliant with MAR when making investment recommendations. This includes capturing and distributing the recommendation with it’s required disclosures, making these disclosures available to your clients, including full recommendation history and quarterly aggregated disclosure reports. In addition, a compliance portal provides oversight for monitoring and adherence.
To make full use of our MAR system and be fully compliant with the Article 6 disclosure requirements, we provide the ability to make ‘conditional’ disclosures – these are specific-conflicts your firm may have for a given issuer. For example, if your firm is a market maker in a security, or if your firm is engaging in IB activities with the issuer. Once the conflict data is uploaded, TIM automatically makes the appropriate disclosure for a given recommendation.
If you would like to learn more about our MAR solution, please contact us at TIMemail@example.com.