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Speech of Natasha Cazenave, AMF Managing Director, Investment research – A FinFees' event " Initial assessment six months after MiFID 2 came into force " – Tuesday 19 June 2018
22 June 2018

Speech of Natasha Cazenave, AMF Managing Director, Investment research – A FinFees' event " Initial assessment six months after MiFID 2 came into force " – Tuesday 19 June 2018

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Good morning Ladies, Gentlemen,

I'm delighted to be participate with you to this morning's discussion dedicated to research funding – and I would especially like to thank Bernard Coupez for this invitation. As you know, this is a particularly important matter for the AMF, and one on which we have been actively focused for quite some time.

I have been asked to say a few words to introduce this morning's exchange of views. So I will try to present – briefly – the Authority's position. But I am especially keen to ask you some questions and listen to you, as professionals, suppliers and consumers of research.

Impact assessment of the new framework applicable to research – One of the AMF's key priorities

Since January 3, 2018, a new regime is in force. It transforms profoundly pre-existing business models and accentuates a more general industrial transformation that is a result of the surge in passive or quantitative management and of the increasingly electronic nature of markets. It is for this reason that the AMF has set as one of its 2018 strategic priorities the assessment of the new rules' impact on the provision of research and on its ecosystem.

As such, your preliminary feedback and debate today are for us essential. Six months on from application, it is important to stop for a moment to take stock of initial findings and the first lessons that can be drawn.Natasha Cazenave

As everyone knows, this topic emerged in what is known as the Level 2 discussions when it came to clarifying the provisions of the new Markets in Financial Instruments Directive, MiFID 2. In this context, it was specified for the first time that the provision of research constituted a benefit that can give rise to risks of conflicts of interest and that the payment of research should be decorrelated from the payment of trade execution (" unbundling ").

After intense negotiations in which the French authorities, including the AMF, sought to limit the damaging consequences of this reform, especially for SMEs, a compromise was found in the form of a new framework for the funding of research. This is defined in the delegated directive of MiFID 2. Article 13 now requires that the supply of research be paid either directly by the investment service provider from its own resources; or paid by the investment service provider's client out of a separate research account, the latter being controlled by the investment service provider, under a number of conditions linked to transparency and the account's functioning. This framework has been completed by a series of questions and answers published by ESMA, the European Securities and Markets Authority.

Throughout the process, the AMF has worked hard to assist market participants and provide clarification on the operational implementation of this new regime. Stakeholders have been widely consulted to identify early on market participants' questions and potential challenges.

In July 2017, the AMF published a practical guide providing as many responses as possible to pillar questions such as: the reform's scope, what constitutes research, what can be qualified as a minor non-monetary benefit, the treatment of macro-economic research or corporate access. This guide has since been updated notably to take the concomitant communication between the US SEC and the European Commission on the application of European rules to US broker dealers into account.

While we can only support the objective of mitigating conflicts of interest that justified this reform, we can only regret the absence of a political debate on such a sensitive subject, and the lack of prior impact analysis.

Pending issues – impact study goals

Indeed, today the texts apply, but outstanding questions remain. In its role as a regulator, the AMF is keen to accompany the implementation of these new requirements and to understand the operational hurdles market participants are facing. As much as possible we will also strive to measure the impact of this reform (on fund management, independent research, fixed income, on European participants' competitiveness) and to identify any unintended consequences (by way of example: the research coverage for Small & MidCaps).

In line with this logic of accompanying the industry, but over a medium-term horizon, the AMF wishes to assess the impact of the new rules on the financing of research on the French market– and on the European market as a whole, as well as from the point of view of the actors involved (asset managers, brokers, independent research providers, issuers). To this end, the AMF lent its support and contributed to the industry initiative called MiFID Vision, launched last February by the SFAF, the French financial analysts association which federates all actors in the financial value chain (SFAF, AFG, AMAFI, Euronext, Paris Europlace), with the participation of the French Treasury. The aim of this initiative is, via a barometer published on the websites of the organisations involved, to analyse trends affecting market participants as well as the competitiveness of the Paris financial centre.

  • If we consider the issues already identified, the AMF will focus particular attention on Small & MidCap coverage, an issue of crucial importance reported repeatedly to the European Commission. Fears regarding the financing of SMEs via financial markets, as expressed on numerous occasions and by different types of actors, lie very much at the heart of our approach. Financing SMEs – and the economy more broadly – is a major concern for the AMF. In order to assess this matter, we must have accurate and reliable data, which we will work to obtain in the months to come. The European Commission plans to measure the impact of the new rules from this angle too. We hope that the messages we can bring at a European level will strike a similar chord to the feedback obtained by the European Commission.
  • Other questions come to mind. For example, to what extent will the MiFID 2 research funding requirements be extended to fund management? And in case of an extension of the provisions to fund management, what would the applicable requirements be? In France, the new MiFID 2 rules on the funding of research have not been extended: this is a choice, which was taken and reflects a strict reading of the text (fund management does not fall within the scope of MiFID 2). Other authorities, such as the FCA, have made a different choice, which may have led some actors operating within international groups to have to extend the new rules to their fund management activities. Similarly, a certain number of management companies have chosen this path, due to operational constraints, since treating individual portfolio management and fund management differently can be complex. In response to questions from some of these players, the AMF recently clarified how to display research costs in UCITS and AIF prospectuses. It would be interesting to hear market participants' views on this matter. What proportion of asset managers has made this choice? What factors led to this decision?
  • In a similar spirit, analysis must be carried out to assess the effects of this new regime on the fixed income segment. Initially designed for equity research, the new regulation has been extended to fixed income research without necessarily taking into account its specific characteristics. What are the difficulties encountered?
  • A particular focus is also needed on independent research. The logic of the texts would be that the reshaping of the financial analysis landscape provides ample room for independent research, an activity that by definition does not bring about conflict of interest (it is not linked to an execution service). Some argue that the new framework is an opportunity for independent research firms that can offer high value-added research in niche segments. Others, on the other hand, are worried about the impact of the new provisions that could lead to a reduction in the number of research providers and a drastic drop in the price of research in connection with the aggressive commercial practices of certain players (who can afford to "smash prices" and rely on other profitable activities), thus undermining the business models of independent research.
  • What about passive management: to what extent should passive management, which does not contribute to the price formation process, be involved in the funding of fundamental single stock research?
  • Lastly, what impact does this part of the MiFID 2 reform have on market dynamics and European players' competitiveness when one part of the world, interconnected with regions such as North America or Asia, "imposes" more stringent rules related to the funding of research? 

Next steps

As mentioned earlier, the AMF is monitoring the implementation of MiFID 2 and its effects - this is a priority axis of its 2018 strategy. And in this context, the research component is top of our list.

In this light, we are asking stakeholders to share their feedback on this new reform as well as difficulties encountered in its implementation. Moreover I invite you all to share your experience either directly or through your trade association.

Questionnaires have been sent to some investment service providers to collect initial feedback, in particular on the number of securities covered, clients' preferred mode of invoicing (research account or own resources), number of analysts, coverage provided, billing method used (subscription or payment per service), etc.

Similarly, in the case of management companies, AMF supervisory teams are discussing with the entities the impact of these new rules on the number of brokers used by the company, on proprietary investment research activities, on the use or not of independent research offices, etc.

The aim is to document the effects of this reform in order to target possible adjustments. If changes were subsequently deemed necessary, the AMF could, in liaison with the French authorities, share its analyses with its counterparts and raise the issue with the European authorities, who are mindful of this issue. The European authorities are indeed likely to take initiatives, notably in the context of the European Commission's study on the impact on the financing of SMEs through financial markets.

I have asked more questions than I have perhaps answered – of this I am quite aware – but I do hope we will have the opportunity to discuss these topics in the forthcoming round tables and in future discussions. I wish you all a rich and fruitful discussion.

Thank you.