UK proposes to cancel MiFID II search rules for bonds and small businesses

The UK’s financial watchdog wants to exempt research on bonds and small businesses from EU trade rules.

The Financial Conduct Authority on Wednesday released proposals relating to its requirements under Markets in Financial Instruments Directive II, known as MiFID II. Among the European trade rules, which entered into force in January 2018, was the obligation to separate payments for investment research from execution costs.

FCA now wishes to revisit some of the changes implemented under MiFID II.

The proposed exemptions cover listed and unlisted small and medium-sized companies with a market capitalization of less than £ 200million ($ 277million) and research related to fixed income, currencies and commodities, the said. FCA in a consultation document.

In its oversight work, the FCA found that purchasing companies’ equity research budgets fell by around 20-30% following the application of MiFID II, with fund managers largely absorbing the costs of investing. research rather than passing it on to their customers. .

Although its analysis did not reveal that unbundling requirements significantly affected the coverage of UK small public companies, the level of coverage was already low, with an average of 1.6 analysts per company with a lower market capitalization. to £ 1 billion.

However, this figure masks another problem: that a significant proportion of companies at the lower end of the market capitalization spectrum have no coverage – 79% of public companies with market capitalization below £ 250million. do not have or have only one analyst coverage, the FCA said. This “may be insufficient to provide a fully informed view to investors,” he said.

In addition to suggesting an exemption for SME coverage, the FCA proposed a market-led initiative to create a research pool, with research on SMEs being commissioned using funds contributed to this pool. “Industry participants indicated some willingness for such an initiative but were unsure who would push forward such a proposal,” FCA said.

When it comes to fixed income, currencies and commodities – or FICC – the FCA wants to consolidate the research because FICC transactions “are usually not paid by an agency commission to the broker, but the broker gets their money’s worth. income “from the bid / ask spread. This means that bundling FICC research with fulfillment payments “does not create the same risks of opacity between transaction fees and research costs that arise for equity research,” the paper said. FCA consultation.

The proposals are part of potential capital market reforms by the FCA alongside Her Majesty’s Treasury. These reforms aim to ensure that the UK regulatory regime is suited to UK market structures and maintains the highest regulatory standards.

The proposals partly echo exemptions put in place by the European Union last year to reverse the unbundling of research and execution costs for companies with market capitalizations of less than € 1 billion (1, $ 2 billion).

The FCA wants industry to comment on its proposals by June 23. Any changes will be published during the second semester.

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