The latest news on MiFID 2 is even less promising than we had expected. Not only is there no sign of the delegated acts we have been waiting for since last summer, but there has actually been negative progress on regulations which we thought were finalised. The European Parliament decided (among other things) that the position limit rules on commodity futures were insufficient safeguards against speculation in food markets and threw out a number of MiFID 2 rules as being inadequate. They now have to go back to the Commission and the European Securities Markets Authority (ESMA) for a rewrite. All this means that it’s unlikely that ESMA will be in a position to set a new deadline for the research rules, let alone stick to it.
We usually tend to believe that when regulations are delayed, the final text ends up being weaker rather than stronger – the added time and uncertainty creates favourable conditions for industry lobbying. And this is quite likely to be true in this case too – certainly, the investment banking industry is keen to use the delay to re-open the debate about trade reporting in fixed income markets. But we’d caution against being too optimistic with respect to research.
The information vacuum surrounding MiFID seems to have been filled with a number of rumours. We have been picking up from several quarters that people expect that credit research will be exempted from the research rules. We don’t see why anyone would think that, given that there is no official source which has said anything in this direction. The core principle of ESMA’s Technical Advice on the subject was that the practice of paying for research through trading was a conflict of interest and lacked transparency. The fact that fixed income trading is usually a spread rather than a commission business doesn’t affect that.
It is certainly possible that loopholes will be created in the research rules, given the strong lobbying against the past drafts. We would expect to see something done to address the issues in smallcap research (possibly giving some safe harbour for sponsors or issuers to provide research on their house securities). We also expect that some CSA-like structure will be found to address the UK’s concerns about tax treatment. But a loophole the size of a whole industry? That seems like wishful thinking.