14 September 2020

EFAMA’s position on EC proposal to modify Investment Research

A. Swift, but…

EFAMA1 appreciates that the European Commission is pursuing an alleviation of certain MiFID II requirements in the interest of promoting a swift recovery from the economic crisis precipitated by the COVID-19 pandemic. Loosening research and execution unbundling requirements when the research relates to small and mid-cap companies is one of several measures envisaged to improve the visibility and financing opportunities of SME companies during the recovery.
We note that, according to ESMA’s findings2, the decline in SME research coverage is a long-standing trend which pre-existed the entry of application of MiFID II research unbundling rules.
Financial market participants and investors have adjusted their practices to the unbundling requirements, and - while the market is still in the ‘price discovery’ phase - have largely adapted to the new landscape. We, therefore, welcome the optionality of the regime proposed. Introducing a compulsory set of specific requirements for research relating to SMEs would indeed significantly increase operational complexity for all market participants involved, including asset managers.
We also consider that the proposal to adapt the regime applicable to research on fixed income instruments is a positive step forward. We welcome in particular the recognition that trading in fixed income instruments is fundamentally different to equity trading and that obliging investment firms to create an additional artificial payment for fixed income and macro research increased costs, would not bring any benefits for end-investors.

B. … there are more effective ways to foster SMEs’ access to markets.

To achieve the European Commission’s objective support the EU’s economic recoveryto promote the European economy, we would strongly recommend the European Commission to consider the following measures3:
- Sponsored research can play an important role in facilitating SME’s access to market-based financing, provided that it is clarified that it can be regarded as ‘minor non-monetary benefit’ and that the rules applicable to pre-IPO research are confirmed,
- Free trial, i.e. the period during which the issuer can adapt its offering based on investors’ feedback, should be extended to six months.

C. Quick Fixes should not alter the need to improve other aspects of MiFID II

We believe that a deeper review of MiFID remains necessary, at least in the following areas:
- data quality and data costs. Data costs are surging. We therefore call on the Commission to enforce the creation of a consolidated tape for all financial instruments, starting with post-trade data
- Liquidity protection. We need all sources of liquidity to deliver the best results to our clients, including the Systematic Internalisers,
- Trading burdens. The Share Trading Obligation (STO) and the Derivatives Trading Obligations (DTO) should be completely removed,
- Professional investors and eligible counterparties. These types of investors should either be allowed to opt-out of many cost disclosure or should be out of scope, being allowed to opt-in.
- Client categories. The creation of a fourth client category should be avoided and could be achieved by (1) calibrating the types of institutional clients to opt-up under certain conditions and (2) providing a flexible regime for professional investors.

EFAMA

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