The FCA has issued a consultation paper "Changes to UK MiFID's conduct and organisational requirements" (CP 21/9), setting out proposals to roll-back MiFID II on research and best execution.
The changes follow the publication of the so-called EU MiFID Quick Fix rules in the Official Journal, which also contain relaxation of MiFID rules in relation to research and best execution reports (although there is some divergence between the EU and the UK).
The changes allow for research on SMEs with a market cap below £200 million to sit outside of the inducement rules on research. The £200 million figure means this change is unlikely to be considered material by the market. More significantly, Fixed Income, Currencies and Commodities (FICC) research is moved outside of the research rules when provided in connection with a "investment strategy". This could have a bigger impact in the FICC market.
On best execution, RTS 27 (SI/trading venue best execution reports) has already been confirmed as for the "history books" (paraphrasing slightly…). It appears RTS 28 (top five 5 brokers) is to go also. This goes further than the EU Quick Fix.
Research
- SMEs. The FCA is proposing an exemption from the inducement rules for research on listed or unlisted SMEs companies who have a market capitalisation below £200 million. This is provided it is offered on a "rebundled" basis or for free. The £200 million threshold would be assessed for the 36 calendar months preceding the provision of the research. There is no general carveout for equity markets and therefore this "roll-back" is similar to the EU Quick Fix.
- FICC instruments. The FCA is proposing to creating an exemption from the inducements rules for third party research received by a firm providing investment services or ancillary services to clients, where it is received in connection with an investment strategy primarily relating to FICC instruments. The FCA considers that FICC transactions are usually not paid for by an agency commission to the broker (and so "opacity risks" do not arise for these as they may do with transaction fees and research costs for equity research). Many of these arguments were put during the lead up to MiFID II… And it was always suggested by some that FICC research was not properly considered by MiFID II reforms.
- Independent research providers exemption. The FCA is planning to loosen the restrictions for independent research providers who do not engage in execution services (and are part of a financial services group that includes an investment firm that offers execution or brokerage services).
- Openly available written material. The FCA is proposing to exclude from the inducement rules material that is made openly available from a third party to any firms wishing to receive it, or to the general public. For these purposes, “openly available” means that there are no conditions or barriers to accessing the information (e.g. login, submission of user information).
Best execution reports
The FCA is proposing to remove:
- the obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (RTS 27 reports); and
- the obligation on investment firms who execute orders to produce an annual report setting out the top 5 venues used for executing client orders and a summary of the execution outcomes achieved (RTS 28 reports).
