The European Union's Markets in Financial Instruments Directive II (MiFID II) will take effect per 3 January 2018. Included in the 28 articles are new rules regarding payment for equities research from fund managers to Sell-side brokers.
From January 2018, no longer can trading commission be used to pay brokers for the research they provide. Research costs will need to be broken out as a separate cost item and fund managers will need to pay for research from their own P&L (the manager's), not the fund's P&L.
Quality of research will be much more scrutinised and we anticipate declining number of research analysts. Therefore, we expect Mid & Small Cap stocks will increasingly struggle to get research coverage.
MiFID II is coming to a market near you !!
Despite being a different jurisdiction than the EU, Australia is not immune to MiFID II. Many global fund managers with EU branches have already implemented best practices dealing with MiFID II in their branches globally, including Australia!
Implications for ASX-listed companies
Fewer research analysts available to cover ASX-listed companies, even for Mid to Large Cap stocks. Companies that currently have broker research coverage may find themselves without any coverage at all in a few years' time. Mid and Small Cap companies will find it increasingly difficult to get their message out to the investment community.
Enter the independent research providers
Listen to our interview with Boardroom Media about the implications of MiFID II on the equities research landscape in Australia.
The science behind independent research: Paid-for equities research pays off
"After the initiation of coverage, companies experience an increase in 1) institutional ownership, 2) sell-side analyst following and 3) liquidity.
In addition, the results are strongest for the fee-based research firm with ex ante policies that reduce potential conflicts of interest."
Prof. Dr. Marcus Kirk, University of Florida, 2010