Investment banks on collision course over free research

Some of the world’s biggest investment banks are on a collision course about how to distribute their economic and fixed income research after new rules come into force next year.

Several banks, including BBVA, NatWest, Credit Suisse, ING and Daiwa, are preparing to provide some or all of their fixed income research for free in preparation for new EU rules, under “Mifid II”, requiring fund managers to pay directly for analyst research, instead of the current practice that includes it with other costs such as trading commission.

But another camp, led by the biggest US banks, says that making research available for free could be risky and does not make commercial sense. They also say they will not defy the “spirit” of the rules, which they believe is that research should be paid for.

The banks taking a “free to all” approach have been emboldened by an April decree from Esma, the EU securities regulator, which said that some fixed income research could be given free of charge if it did not provide recommendations, was not valuable for the investment process and was freely available to any investors who wanted it.

Many banks argue that much of their economic research falls into this category, as do thematic reports that can look far into the future.

The Esma bulletin also recognised that it could be operationally difficult for banks to charge for fixed income research because they make their money from the difference between the price they buy inventory at and sell it on to clients. That makes it harder to introduce a research charge than in equities, where banks are paid commission for trades and can allocate some of that commission to research.

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One bank said it believed that, “given the Esma update in April”, the price of fixed income, currencies and commodities — FICC — research would “gravitate towards zero”.

Javier Serna, the global head of credit research at Spain’s BBVA, told the FT his bank will provide some written research free of charge to any one who wants it.

NatWest told clients in July that its “written desk strategy” will be available free of charge on its website. Credit Suisse will also provide some research for free, according to a person familiar with the bank’s strategy.

Japan’s Daiwa will provide large parts of its macro research for free, according to a person famliar with that bank’s plans, while ING publicly announced a new hub for free economic research last week.

Bank of America Merrill Lynch tried to avoid directly charging for research by asking regulators if it could tell clients the cost of their research consumption over a period and then offset this against spreads paid on their trades. The proposal was refused, according to people familiar with the situation, and the bank will now charge.

Most US and some of the larger European banks, believe fixed income research will continue to be paid for, and several argue that not charging is unwise.

“Clients know that the rules mean that if fixed income research has anything of value it cannot be free, let alone part of trading [spreads],” said Terence Sinclair, Citi’s global franchise director for research. “The mechanism for paying for FICC is going to be quarterly payments on invoice,” he added.

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Another large US bank said: “From a compliance and legal perspective, our working guidance is that we need to charge for research and we are not looking to take the risk of actively defying that.”

That bank also said that widely available free research would require “[being] comfortable that retail investors could see it — and we don’t advise retail so it would be hard to be OK with it”.

“We would also be giving our competitors free access at the same time, which may not make commercial sense.”

A third bank cited “Know Your Customer” rules that aim to prevent money laundering as a potential problem with making research universally available.

A fourth bank said US regulations required them to limit most of their FICC research to institutional clients.

A banker at a fifth said he was not worried that no one would pay for his research if so many other banks made theirs available for free. His team was already trying to move away from “low value” research, he said.

Mark Holman, chief executive of TwentyFour Asset Management, which specialises in the fixed income market, said it was a “perfectly logical step” for some fixed income research to be free because bid/offer spreads had “nothing to do with research”.

“That said, we’re only going to read it if it’s relevant and good quality,” he added.

Mifid II is a major piece of post-crisis legislation that aims to strengthen protection for investors and bring more transparency to financial markets. It will come into effect at the start of January 2018. 

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