NEW YORK, March 30, 2016 /PRNewswire/ -- The European Commission will soon publish their Delegated Acts and, as expected, clarify that client commissions (CSAs) will continue to be an integral tool used to acquire investment research. As investment managers continue to implement new policies and procedures to prepare for the January 2018 implementation of MiFID II, we expect that establishing an Enhanced CSA infrastructure will move toward the top of the list.
And while regulators have yet to define the term Enhanced CSA, Westminster, a Convergex Business, is happy to offer some thoughts on what we consider to be a practical definition:
An enhanced CSA infrastructure should include proper budgeting for and valuation of research, a sound mechanism for facilitating the compliant payment of all research costs, thorough oversight of all research payments, full reporting, disclosure and archiving of research costs, separate and apart from execution costs, and a methodology to ensure best execution when trading to acquire research.
Clearly, there will be a heightened focus on having a rigorous internal process for managing research. From an operational perspective, this means that an investment manager will likely need a formal broker voting and budgeting process to rationalize and clarify their research spend. Additionally, they will need a comprehensive and compliant CSA management infrastructure for tracking payments and execution. While larger investment managers typically have systems and processes in place to address these needs, we still see others handle these issues in a more informal manner, perhaps on Excel spreadsheets or with a favorite broker.
We expect that this will change. We envision that investment managers will seek to establish a more formal, institutionalized infrastructure which will include broker voting and CSA processes that are more auditable and repeatable and can assist in disclosing more timely information to all stakeholders. (e.g., fund boards, clients, potential investors, etc.)
This also means that commission aggregation, the concept of trading with many brokers while centralizing CSA management and reporting, will likely be in greater demand. In December of last year, while commenting on European policy, TABB Group suggested that client commissions held by a CSA aggregator would provide a greater measure of risk mitigation.1 If for no other reason, we believe that this compliance-centric benefit will drive increased interest in CSA aggregation in Europe. In the United States, commission aggregation is now used by 43% of the buy-side up from only 31% in 2015. (For hedge funds, this number is 57% up from 20%.)2
At Westminster, we have 23 years of experience in providing a flexible CSA aggregation framework which provides complete unbundling of research and execution. Our clients know that, when an investment manager has the latitude to trade where they choose, they improve their ability to seek best execution; this is true regardless of who is providing them with research. CSAs were created with this core principal in mind. Commission aggregation is growing because investment managers with multiple CSAs, or even those with simply two or three, are finding value in having a more efficient and centralized execution and reporting infrastructure.
Lastly, the devil is in the details. The successful implementation of an Enhanced CSA Infrastructure requires an investment manager to have the right tools for the job. This also means selecting the right partner who can provide solutions with the necessary features, capabilities and expertise to ensure compliance. We hope that this brief analysis provides a good starting point for investment managers who are readying themselves for MiFID II and the new world order.
To find out more about Westminster Research, please call us in New York at 212.448.6050 or London (Francis Land) at +44.207.070.0138.
Convergex is an agency-focused global brokerage firm that takes on the industry's toughest challenges, from complicated trades to complex businesses. With clients' interests as the top priority, Convergex delivers comprehensive solutions that span global high-touch and electronic trading, options technologies, prime brokerage, clearing, commission management and beyond. Headquartered in New York with a presence in several other locations including Atlanta, Boston, Chicago, Orlando, San Francisco and London, the company serves nearly 3,000 clients accessing over 100 global market centers.
Convergex is an agency-focused global brokerage and trading related services provider. In the U.S., Convergex offers products and services through Convergex Execution Solutions LLC (member NYSE/FINRA/NFA/SIPC), of which Convergex Prime Services is a division; Westminster Research Associates LLC (member FINRA/SIPC); and Convergex Solutions LLC, of which Connex, Jaywalk and LDB are divisions. In London, Convergex operates through Convergex Limited, which is incorporated in England and Wales (registered with company number 06262150). Convergex Limited is authorized and regulated by the Financial Conduct Authority (FCA) of the United Kingdom. Westminster Research Associates LLC provides services in Australia pursuant to an exemption from the requirement to hold an Australian financial services license under the Corporations Act 2001 (ASIC Class Order [CO 03/1100]). Westminster is regulated in the United States by the U.S. Securities and Exchange Commission, which laws differ from those of Australia.
Convergex provides brokerage services primarily on an agency basis, but may operate in a riskless principal and/or net trading capacity, and in connection with certain ETF or ADR transactions, may act as principal or engage in hedging strategies. Convergex does not engage in market making or investment banking activities, other than as a selling group member.
The material, data and information (collectively "Convergex Information") that is available from Convergex is intended for institutional investor use only; is for informational purposes only; is subject to change at any time; is not intended to provide tax, legal or investment advice; and does not constitute a solicitation or offer to purchase or sell securities. Convergex Information is believed to be reliable, but Convergex does not warrant its completeness or accuracy and Convergex assumes no duty to update such information. Clients should read their account agreement(s) and documentation with Convergex carefully as those documents contain important information and disclosures about the products or services covered thereby. Convergex is not responsible for third-party information or services, including market data from the exchanges. (Rev. 12/2015)
©2016 Convergex Group, LLC. All rights reserved. 3/2016
1 "In addition, where client commissions are held by a CSA aggregator, the individuals involved in both trading and research have no oversight of the overall numbers paid, thereby reducing the risk of potential inducement further still." CSAs Get a Reprieve, Rebecca Healey, TABB FORUM, 15 December 2015
2 Greenwich Associates, North American Equity Investors, U.S. Commission Management Programs - 2015
1633 Broadway, 48th Floor
New York, NY 10019
Timothy P. O'Halloran
Research Associates LLC
Senior Vice President