Regulators Provide Welcome Relief on MiFID 2 Research Requirements

With the MiFID 2 deadline quickly approaching, the Securities and Exchange Commission (SEC) and the European Commission both issued statements regarding MiFID 2 research requirements. 

On Thursday market participants preparing for the Markets in Financial Directive (MiFID 2) implementation on 3 January 2018 welcomed some much-anticipated news.

What Has the SEC Done?

The SEC granted temporary relief from the MiFID 2 research unbundling and inducements regulation through the issuance of three distinct “No Action Letters.” This includes a 30-month relief period ahead of implementation.

US broker-dealers will not be required to register as investment advisers to comply with the sweeping European rules that come into force at the start of January. US brokers are permitted to receive payments for research in hard dollars or through MiFID 2 Research Payment Accounts (RPA) from MiFID 2 firms without being considered an investment advisor. It also means that US asset managers may continue to aggregate orders consistently for all their trading activity. US asset managers may also continue to rely on the existing safe harbor for paying broker-dealers for their research and brokerage. It is now likely the SEC will use the 30-month relief period to engage with the industry to form a more permanent solution to this regulatory disconnect with Europe.

“Today’s no-action relief was designed with input from a range of market participants to reduce confusion and operational difficulties that might arise in the transition to MiFID II’s research provisions,” said Jay Clayton, SEC Chairman.

What Has the European Commission Done?

In a coordinated communication approach with the SEC, the European Commission also released guidance for MiFID firms obtaining brokerage and research services from non-EU brokers in the form of an update to the Frequently Asked Questions section on its website Thursday. The European Commission’s guidance aims to ensure that research budgets are wholly separated from brokerage activities in accordance with MiFID 2 rules.

The additional guidance provides EU-based firms with more clarity on how they can continue to trade with US brokers that also provide them with research.

“With the issued guidance EU firms will have greater clarity on how to deal with non-EU brokers that provide research. In this context, we welcome the decision of the staff of the US Securities and Exchange Commission to simultaneously agree to relief for US brokers supplying research to EU firms. Our coordinated action again shows the excellent EU-US cooperation in international financial regulatory matters,” said Valdis Dombrovskis, Vice President of the European Commission.

What Does This Mean?

Research unbundling rules have been the main concern surrounding MiFID 2 implementation for global assets managers. The relief and clarification brought by the SEC and European Commission will be welcomed by investment bank, brokerage, and asset management communities alike.

The 30-month relief period granted by the regulators now means existing global trading models in Europe and the US will not change on 3 January. Many asset managers were concerned they would need to split their trading books into MiFID trades and all other trades, which was seen as an operational inefficiency.

US managers were concerned that without having an option to operate RPAs, they would need to take on the cost of research themselves. The SEC now leaves that option open.

The coordination between European and US regulatory authorities to come to a pragmatic solution to this regulatory fragmentation is an interesting sub-plot to this story. The drafting and communication was carefully orchestrated after months of discussion and gives the market a two-month adjustment period. This trans-Atlantic cooperation comes soon after the European Commission and the US Commodity and Futures Trading Commission (CFTC) also agreed to align on the rules relating to OTC derivatives. Asset managers, operating in a highly globalized and interconnected industry, hope this harmonization of policy continues to be the direction of travel for the foreseeable future.