A survey of 40 asset managers and 10 firms across the buy- and sell-side conducted earlier this year by the UK regulatory body found that so far under MiFID II, the manner in which UK financial firms have implemented the new rules around the separation of research payments and execution fees has resulted in “improved accountability and scrutiny over both research and execution costs.”

The most notable finding was the change had resulted in “around £70 million of savings for investors in UK-managed equity portfolios” during the first half of last year, compared with 2017.

A significant concern for asset managers prior to the introduction of MiFID II at the start of 2018 was the possibility that access to and quality of research would be diminished. However, the FCA stated that it found “no evidence of a material reduction in research coverage”, including for listed small and medium-sized enterprises.

Despite there being no restrictions on the access to required research, there was evidence that research budgets on the buy-side have shrunk since MiFID II came into force. The FCA’s survey found that research budgets had decreased between 20-30% for external research acquisition, with buy-side firms now paying less for research as a result of a tighter, more accurate focus on what they require, using acquired research in a more efficient manner and increased competition from providers.

The FCA also surveyed a number of independent research providers (IRPs), that had been tipped to prosper under the new regime as bulge-bracket banks and brokers would be forced to re-evaluate their pervious “waterfall” research provision strategies.

IRPs told the FCA that they have concerns over the competitive nature of the research market, highlighting low levels of pricing on the sell-side for research as “large multi-service banks are internally cross-subsidising their research” and “over-cautious approaches to the inducement rules by the buy-side and limited take up of trial periods have reduced their ability to access prospective clients.”

Overall, the FCA stated that the introduction of research unbundling in the UK had “steered the market towards the intended outcomes” but recognised that research pricing and valuation was still evolving.

“Firms are continuing to develop their arrangements and a market for separately priced research is still emerging. Therefore, we intend to undertake further work in 12 to 24 months’ time,” the FCA concluded.

While the changes to research unbundling are only formally regulated in Europe under MiFID II, recent research from TABB Group has found that the US asset management community is increasingly taking a similar approach, despite US regulators making no formal ruling on the matter as yet.

At the start of September, figures from TABB Group showed that 33% of large US asset management firms are still bundling research and execution payments. In comparison, 45% of mid-sized and 67% of smaller funds have retained a bundled approach, and 43% of those interviewed stated that research unbundling has had a positive impact on their business.

The post FCA finds research unbundling has saved equity investors £70 million under MiFID II appeared first on The TRADE.

Shortly thereafter, multilateral MOUs (memoranda of understanding) were formalised between the FCA and various EU national regulators allowing the funds’ industry to continue operating just as it has been – under a no deal scenario, putting to rest any fears managers had about the future of delegation. Other MOUs were signed covering centralised clearing and settlement in what should also help facilitate continuity and market stability.

So far, so good, but cracks are beginning to emerge between the UK and EU, evidenced by the recent dispute about share trading obligations, in what could be a worrying sign of things to come. While experts have spoken extensively about the immediate impact of Brexit, some banks and fund managers are beginning to look further down the line, analysing the potential implications of future divergences between UK and EU regulators.

At a de minimis, this could result in duplicative reporting manifesting, adding to firms’ costs and eating into their resources.  Other concerns are more serious though. If the UK were to deviate from EU rules completely, domestic financial institutions risk being excluded from the EU altogether. Limited access to EU markets is not the industry’s biggest fear though.

Systemic risks could also arise as a result of the UK’s departure. European regulators have made it no secret they want greater oversight of the risk management practices and policies at third country, systemically important CCPs. The UK – which clears most of the euro denominated trades in the market – is on guard, conscious about EU regulatory over-reach. Despite this oversight ostensibly being to protect markets, it could have the opposite effect.

For example, EU regulators could instruct UK CCPs on how they implement margin calls, something which has alarming implications. Italian banks – struggling under their huge exposures to non-performing loans – suffer a collective credit event, sending the economy into tailspin. If European regulators get their way, they could be within their rights to tell a UK CCP to lower its margin calls on Italian CDS (credit default swaps), in order to protect the Italian economy. By doing so, European regulators would potentially be sacrificing the financial stability and risk management integrity at a UK CCP.

It is clear institutions are prepared for the short-term Brexit risks, although many are now rightly concerned about what happens next. As one expert dryly put it, the Brexit negotiations were probably the easy part. If UK and EU regulators seriously diverge moving forward, the risks and costs to the financial services industry could be massive.

The post Clash on Brexit share trading rules could see further UK-EU regulatory divergence appeared first on The TRADE.

According to a poll of 250 asset managers carried out by State Street, 54% of buy-side firms said they are reshaping their distribution strategy and anticipate a surge in hiring in new locations within the next five years.

“Asset managers must stay nimble to thrive in this new market environment,” Liz Nolan, State Street’s CEO for EMEA, said. “The impact of Brexit is complex, particularly given the uncertainty surrounding negotiations. Our findings highlight how asset managers are proactively tackling the challenges it presents, and safeguarding their ability to support clients, remain competitive and access markets in a post-Brexit world.”

Major asset management firms including T. Rowe Price, Columbia Threadneedle, Fidelity International and M&G Investments have confirmed plans to move funds from the UK to other European cities, such as Luxembourg and Dublin.

The survey also found that 46% of buy-side firms believe fragmentation of fund regulations will be increased over the next five years given the uncertainty around the negotiation of Brexit.

State Street said that the result reflects industry concerns about the different approach to industry regulation and capital markets by the UK and Europe, with 51% of respondents looking to target the UK as a future domicile choice for fund distribution.

“Despite the ongoing geopolitical dynamics, the data shows managers realise that, whatever barriers to trade and international cooperation may grow out of these dynamics, maintaining access to global markets and investors around the world remains essential to their business models, as well as to the institutions and individuals who rely on them for their savings and investments,” added David Suetens, head of State Street in Luxembourg.

The EU watchdog publicly warned UK firms to prepare for a possible ‘no-deal’ or ‘hard Brexit’ scenario earlier this month, and reminded them of deadlines and procedures for setting up EU bases outside of the UK.

Trading venues such as Cboe Global Markets and TradeWeb have also confirmed plans to move operations to Amsterdam, while a number of banks have already begun moving staff from London to Paris and Frankfurt in preparation for the UK’s departure from the EU.

The post Brexit to bolster buy-side hiring in non-UK locations appeared first on The TRADE.

Providing the keynote address at this year’s IDX event in London, John Glen said that it “defies logic” for the UK to “rip up regulations for the financial markets” in a post-Brexit environment.

While there is ongoing uncertainty as to which financial regulations will apply to the UK markets post-Brexit, particularly concerning the pan-European regulatory regime MiFID II which came into force at the start of this year, Glen denied that there will be a further split between the UK and EU as concerns financial regulation.

“Whatever the outcome of the Brexit negotiations, we will strengthen our assets and position the UK as a long-term leader in the global financial markets,” he said. “It is neither in the UK’s or EU’s interest to exclude the financial services sector from the future. We are under no illusion that there will be significant additional costs to corporations and consumers if the fragile ecosystem we have built is to fragment further.

“The major winners from fragmentation would not be Paris or Frankfurt, Dublin or Luxembourg, but New York, Hong Kong and Singapore. There is recognition from the EU and the UK to address the market access issue,” Glen commented.

Glen also lauded regulatory efforts to introduce greater discipline and financial stability in the decade since the global financial crisis, citing the “triumphant return of discipline and robust regulation”, in particular the introduction of the Senior Manager Certification Regime aimed at “changing the culture” of the how the markets operate.

The post UK MP: No bonfire of financial regulations post-Brexit appeared first on The TRADE.

European non-cleared derivatives regulations are set to severely impact pension funds and buy-side traders handling sovereign debt on their behalf.

The sovereign concentration rule – first outlined in the European Systemic Risk Board’s report on sovereign debt exposures – will require large derivatives users to diversify their collateral across two sovereign bonds.

For UK-based asset managers this will mean posting another sovereign bond alongside GILTs which will introduce currency risk into the transaction.

“It really doesn’t make sense as you are being forced to introduce currency risk in the equation,” said Vanaja Indra, market and regulatory reform policy at Insight Investment.

“We are really scratching our heads to see where this has come from because usually there is a legitimate desire to mitigate risk by regulators when they propose rules.”

Under the new rules, a UK-based pension fund, for example, would use inflation and interest rate swaps to manage liabilities in sterling. So those users would typically hold UK GILTs and post them as collateral to support margins on derivatives contracts

With the proposed sovereign concentration rule, a large user of derivatives would not be able to do that once past a certain threshold, they would also have to diversify across two different sovereigns.

“The issue with the Sovereign concentration rules has always been a concern to us,” added Indra.

“I can see how for end-users in the Eurozone it makes sense because they have more than one sovereign issuer of government bonds. But not all 27 member states are in the Eurozone.”

New rules for non-cleared derivatives are enforcing stricter margin requirements for those products not being clearing through a central counterparty.

European regulators published their final draft rules on the requirement last week containing the controversial rule, much to the displeasure of the UK’s buy-side derivatives users.

“We have raised this issue with the regulators, and although it doesn’t just affect the UK, we are the largest users of derivatives, so we are being the most vocal,” added Indra.

“The gut feeling I am getting is that they are looking at this as a UK issue, therefore they have tried to make the rules work a bit better but fundamentally the issue is still there.

“They have tried to make the rules work a bit better, by saying the rule, only applies to initial margin and not variation margin. That’s an improvement as they have raised the bar on how the triggers work.”

The European Securities and Markets Authority (ESMA) submitted the final draft rules to the European Commission last week. The Commission now has to approve the final rules before they come into force.

The post Sovereign concentration rule to hit UK buy-siders appeared first on The TRADE.

Bailey, who also heads the Prudential Regulation Authority (PRA), will take over the regulatory watchdog five months after previous chief Martin Wheatley stepped down from the role.

In his new role as CEO of the FCA, Bailey will continue to be a member of PRA Board and Financial Policy Committee.

“During his career, he has worked across all of the Bank’s policy areas, combining leadership and innovation to deliver consistently the Bank’s policy objectives,” said Mark Carney, governor of the Bank of England.

The announcement of his appointment comes weeks after Tracey McDermott, interim CEO for the FCA, ruled herself out of becoming the permanent boss. 

“Recent developments have shown that the most pressing issue in the system right now is the need for stable leadership at the FCA,” added Bailey.

“My intention is to move once a successor is found for the PRA, and while I will of course not be involved in that process, it matters greatly to me that it provides for the successful future of the PRA.”

Currently deputy governor of prudential regulation at the Bank of England, Bailey will continue this role until his successor has been appointed.

The post New boss of the FCA revealed appeared first on The TRADE.

The specialist financial services team at UK Trade & Investment was established to raise the profile of UK FinTech companies abroad and to attract overseas investment in
UK FinTech.

Leading the charge is Shaul David, a FinTech project manager with more than fifteen years’ experience, having worked with some of the biggest global businesses including JP Morgan and Barclays.

UKTI’s Oxford-educated FinTech Lead says while the team is very young, it has already achieved some note-worthy successes in its first months.

He says: “Investment banks and clearly the Goldman Sachs of this world do a lot of interesting things on technology, albeit usually in-house and the retail banks have really made a strategic change in the way that they interact with the market.

“It’s gone from denial to embracing the start up community and, while not much has happened in terms of implementing that, they are now more open to discussing and understanding problems.”

A recent report on the global FinTech ecosystem by Accenture highlighted the extent to which banks are now involved in funding FinTech start-ups.

American Express, BBVA, HSBC, Santander and Sberbank have all established corporate investment vehicles over the past four years for exactly this purpose, each with more than US $100 million to invest.

Buy-side buy in

David believes the asset management industry remains some way behind their colleagues in the banking community, however.

He recently returned from the Fund Forum International conference in Monaco, where he had hoped to see an upturn in demand for external FinTech players from investment management firms, but ultimately left disappointed.

He says: “The asset managers are still not there. Most believe technology is a key differentiator and are therefore very secretive. The hedge funds tend to lead on that.”

With the suspicion that exists within asset management, it is perhaps understandable that no one company is willing to move first to show their hand. However, David believes that a lot can be learned from the banking community which has increasingly worked together to develop incubator initiatives and share ideas.

He explains: “I don’t know if it is fear, or over-confidence in the ‘magic’ they produce themselves, but [asset managers] are not always open to tech tools.”

Despite this, not all asset managers are passing up the opportunities. Axa – the insurance and investment management group – recently launched a $200 million fund to ‘accelerate’ development of FinTech projects.

David says projects like will act as a catalyst for the rest of the asset management community and shows that some on the buy-side are willing to investigate what talent exists outside of their building.

He says: “Within the buy-side there is a lot of technology emerging on compliance and data analysis…

“Everything from the behavioural analytics of investment decisions, all the way to better-spotting anomalies in the investment cycle and detecting anomalies in the market.”

The post Global ambition appeared first on The TRADE.