Article 13 Inducements of the MiFID II Delegated Directive has created a wide diversity of reactions from puzzled head-scratching to fearful wailing from the equity analyst community. Readers will be aware that research must now be classified as paid-for and justified Research or essentially advertising that may be received for free. The Research to Marketing spectrum contains a middle grey area- ideas and commentary that may be specific, that may have limited distribution and that may contain recommendations. It remains a question for the buyside receiver to judge whether the information is substantive or a minor, non-monetary benefit. While already complex in the equity sphere, the situation is compounded for macro-economic and FICC research. FICC trading desks profit from the bid-offer spread rather than explicit transaction commissions, making the unbundling of the research element all the more difficult. While FICC research has always been in scope for Article 13, in the rush to comply for equities and in the absence of any obvious compliance mechanism, it has largely been ignored. It should be noted that a handful of banks, Credit Suisse, Danske, Nat West et. al. have taken themselves out of the conversation altogether by publishing FICC research publically at zero cost.
ESMA have clarified the full extent of mud in this particular stretch of water by updating its MiFID II/MiFIR investor protection and intermediaries Q&A. In summary:
- Inducement restrictions in Arts. 24(7) and (8) contain no carve-outs for FICC analysis
- Depending on its nature, FICC research may be run the full gamut from substantive and has to be paid for to minor, non-monetary benefit
- Esma acknowledges that the lack of established market practices may hinder compliance. However, “in some cases FICC research could be capable of being priced and paid for through a subscription agreement”
- In this case, “firms would need to document how they arrive at their pricing structures and ensure there is no inducements risk”
The amendments to the Q&A shed little light; in short, there are a number of ways FICC Research can be paid for, if it isn’t free and freely-available, then the price must be justifiable and justified. The additions should however, serve to concentrate minds that FICC Research inducements remain on the regulatory radar. The relative facility of unbundling equity commissions accords them a low-hanging fruit compliance status, the sotto voce message from ESMA is it’s time for the ladders.