Guy Sears, Director Risk, Compliance and Legal, IMA
"We are walking into a world in which it is more likely that we are going to end up with a ban on dealing commissions."
MiFID II and MiFIR were supposed to be about promoting competition among trading venues and scrutinising the business of dark pools. But some of the language in ESMA's consultation is dragging buy side activities into the mix.
Large asset management firms have expressed concern in particular over potenially needing to make changes to internal crossing systems. That's because activities associated with systematic internalisers are about to get thresholds and tighter regulation. Consequently, buy side internal matching systems might be required to register as MTFs.
Guy Sears, director of Risk, Compliance and Legal at the IMA, said: "(The regulation) has quite possibly got wider impact in terms of some of the activities and systems that both buy and sell side have."
From a client point of view, it could indicate rising costs if trades that could be crossed get pushed to brokers. However, Sears pointed out that are various exemptions built into MiFID II and this situation could well be considered deserving because the regulations are intended to target venues.
"The legislative language does not always draw the distinction terribly well between focusing on a business and what might be ancillary activities to being an asset manager," Sears said. "But I don't think one has to rush to say there is a problem. The question we have to ask ourselves is: what do some of these matching systems do and are they really what MiFID II and MiFIR are discussing?"
Another major area of concern has been the debate over banning the use of dealing commissions to pay for qualifying research. Sears said that such a move would surely cause disruption, and a £1.5 billion industry would need to figure out how to restructure in a few short years.
A report from the IMA outlines some of the hurdles, as well as principles it believes regulators should bear in mind before changing the rules. Members of the trade association, which represents the UK investment management industry, manage some £5 trillion of assets on behalf of UK and overseas clients.
Whether or not regulators listen, action is expected. "We are walking into a world in which it is more likely that we are going to end up with a ban on dealing commissions," said Sears.
Observers of the potential impacts have said that small asset managers would be hit hardest, with greater barriers to entry for start-ups. Though this needs to be assessed, Sears also pointed out that he knows more than a few smart and nimble smaller firms that stand to benefit.
"Firms are having to spend more time and effort to determine whether market feeds, data, stochastic models are allowed under (UK financial regulators') rules," he said. "If we can't pay for research from dealing commissions, you no longer have to make a distinction."
In other words, suppliers can break free from conformist research formats that qualify for soft commission as opposed to meeting client needs. So a firm deciding how best to apply capital -- whether to hire talent in-house or outsource from investment banks, or which services to buy -- will consider quality versus cost.
"The source of the money when you buy your own talent is your own P&L, and renting from investment banks is through dealing commissions. If that stopped then you are comparing apples and apples at last and that may also cause there to be changes for good or ill," he said. "At the moment, there is great opacity around that."