Paying for equity research under MiFID II and MiFIR: Challenges with unbundling research and execution

Camilla Dot Milandt & Jonas Egholm Jørgensen

Student thesis: Master thesis


The current structure of the equity market in Europe is to pay for research trough dealing commissions. The European Commission’s Markets in Financial Instruments Directive (MiFID) has regulated the EU financial markets, since its implementation in 2007. On 2 July 2014 the update for MiFID entered into force. The update included a new directive and a regulation, MiFID II and MiFIR. MiFID II must be transposed into national law by June 2016. MiFID II and MiFIR must apply in practice January 2017. The European Securities and Market Authority (ESMA) were asked to give technical advice on the areas within both the directive and the regulation. It is in their draft technical advice that the treatment of research as an inducement in this context appears the first time. This categorisation of research demands unbundling. The thesis examines the challenges and consequences arising from unbundling research and execution. In addition to presenting the idea behind unbundling, the thesis seeks to convey and stress the implications of unbundling, under which arguments of proponents and opponents are reviewed. The review is based on the responses to ESMA’s consultation on their draft technical advice for the Commission; to which there was a general reluctance found within the responses from the market participants. They disagreed with ESMA’s treatment of research as an inducement. The concerns raised by the market participants are mapped using quantitative methods and on the basis of this the main concerns are found. These were that ESMA went beyond their mandate from the Commission, unbundling will create an un-level competitive playing field for the European market and the investment managers regulated by the legislation, and that there are already policies in place that regulate the conflicts resulted from paying research through dealing commissions. The majority of the concerns are found valid. When examining the concerns and current practices, it was found that there is already an initiative in place in some countries and the use of it is spreading rapidly, namely the use of commission sharing agreements. The thesis elaborates on the use of these and stresses proposed advantages and disadvantages. Our studies indicate that there are less invasive alternatives to mandating a ban on research commissions. Otherwise, it was found to have unintended consequences for the equity business.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2015
Number of pages170