New York—The UK has been living with commission disclosure for over a year—how have investment managers adapted? Can we look to London for trends that will travel to the US? We were in London last week looking for the answers, when not cursing the feeble dollar. The FSA Exams
Even though the new commission disclosure regime was implemented in January 2006, the FSA only recently began to include commission disclosure in its examinations. Thus we found the topic to still be relatively top of mind.
Some of the asset managers on the receiving end of the exams have found the experience a bit rough, giving new life to the theory that the FSA's ultimate agenda is to do away with commission payments altogether. Some infer that the FSA is expecting for disclosure to lead to a client backlash, and if that doesn't happen the FSA will come back and regulate the practice away. This theory dates back to the Myner's Report in 2001, which recommended the abolishment of soft dollars. However, there does not seem to be any significant client backlash to date.
CSAs Widespread in UK
Commission sharing arrangements are well established in the UK. UBS reports that 80% of its top clients in the UK now have CSAs in place with them and 67% of their UK commissions are through CSAs.
From the asset manager perspective, investors have CSAs in place with their largest trading counterparties. UBS indicates that clients are typically signing 7 to 10 CSAs, but the asset managers we talked with have more than that. For the larger asset managers, the numbers of CSAs tend to range from 12 to 20.
Consolidation?
The larger investors indicate that 95+% of their commission trading—excluding execution only—is covered by CSAs. However, many investors haven't fully tackled the small and mid-sized brokers, especially those on the continent that may not set up yet to do CSAs. It appears that the investors are accepting some "leakage" of commissions that could be spent on research—at least for now.
CSAs have resulted in fewer trading counterparties, but the bigger investors still have relationships with large numbers of brokers. It is not uncommon for investors to deal with 60 to 100 brokers. One reason for this is there are hundreds of boutique brokers in Europe which are country or sector specialists. Although the boutiques are being set up participate in CSAs, it is a cumbersome process and not all are fully participating—yet.
As for the small and mid-tier brokers, they are rethinking their business. They are finding they must be more proactive in marketing their research. Some are looking to alternative research firms for inspiration, even though the sales and marketing track record for alternative firms is mixed. Nevertheless, they are finding that they need different types of salespeople and a more aggressive marketing strategy.
MiFID & CSAs
The action has now moved to the continent. All of Europe is furiously implementing the provisions of the Markets in Financial Instruments Directive (MiFID), which takes goes live in November. Best execution is one of the key provisions of MiFID, and this is supporting the adoption of CSAs. The pitch is similar to the one in the U.S.—CSAs help best execution by allowing trading to be consolidated with the best trading counterparties, delinking execution from the purchase of research.
UBS indicates that CSAs are growing quickly on the continent, with clients in France, Benelux, Italy, Switzerland and Scandinavia having CSAs in place and German clients coming on stream.
Coming up next we'll look at broker relations and research pricing trends in London.
Integrity Research Associates, investment research, equity research, research providers, alternative research, European investment research, European equity research, European research, unbundling commissions, unbundling equity commissions, soft dollars, commission sharing agreement, CSA
Posted at 08:52 am by Sanford (Sandy) Bragg
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