Insight into research costs under MiFID II

From January 3rd 2018, transparency will become a cornerstone of the financial services sector with the implementation of the Markets in the Financial Instruments Directive (MiFID) II.

As a consequence of this new directive, your order execution workflow requires a rigorous re-organisation. MiFID II addresses this process in several areas, including the field of information provision, transaction reporting and research.

In the first draft of MiFID II, it was stated that bundled order execution fees would no longer be allowed. With the introduction of this directive, research gets a price tag. The cost of research may then no longer be undisclosed in the broker's commission. The regulator has partially softened this approach, but it is certainly not completely removed.

Under the MiFID II directive, there are two options to pay and administer research costs:

1. Use a Research Payment Account
2. Pay for research from the investment firm's P & L

Setting up a Research Payment Account 
The Research Payment Account (RPA) is an account held by a third-party (for example, by a broker or custodian), which is managed by them and which is held separately for research payments.

There are two ways in which the RPA can be set up – either by means of a direct debit from the client account or through a bundled execution fee. In both cases, a budget must be made available per client specifying what the research costs will be for a certain period. When the RPA is funded through bundled execution fees it must be reconciled between the fee towards the broker and the fee charged to the client.

With both options, there will be a lot of additional administration, such as setting up budgets. Option 2 also requires reconciliation. Both options therefore involve additional work that is currently not required. 

Pay for research from the P & L
The simplest option is paying for research from the investment firm's P & L. As clients in this variant are not directly charged for research (although they may possibly be charged indirectly through management fees) no additional administration is required. It may even be possible to continue to pay bundled fees to brokers because clients are not immediately charged.

Another, perhaps more economical, option is to connect to independent research providers (there are many eager to provide this facility). In this set up you only pay an Execution Only fee to the broker. Many asset managers have already chosen this option. 

KAS BANK's Execution Only solution
The MiFID II directive will have a significant impact on the financial services sector. It is highly possible that research will largely disappear from being provided by major investment banks and move to independent research providers. In addition, we see that investment firms themselves are considering setting-up proprietary research desks.

With the use of independent research providers, KAS BANK, as an independent execution only broker, is excellently positioned to provide order execution under the MiFID II directive. This enables us to support your business in becoming MiFID II compliant. Independency is in our genes and, as such, we provide full transparency from A - Z.

More information
Would you like to know more about MiFID II and / or order execution? Our expert, Wouter Slijper, is happy to share our thoughts on this subject with you. Please contact:

Wouter Slijper

Wouter Slijper
T: +31 (0)20 557 2104