CSAs come of age in Asia
While commission sharing agreements (CSA) and
the unbundling of commission and research payments from investors still have a
long way to go in Asia – and are not mandated anywhere in the region yet – the
concept is beginning to gain some traction in the region. Meanwhile, the cost-cutting
that is pushing down commissions across the board should actually provide a
boost to good quality independent research providers as fund managers feel the
pressure to make their shrinking budgets work more efficiently than ever.
“The view that you can purchase your research
in one place and pay for that via where you feel you’re getting best execution
is gaining ground as a concept in Asia,” says Peter Twist, CEO of commission
management platform provider IND-X Securities, which announced its takeover of
Asian independent research firm Enzard this month. “There is huge scope for
unbundling in Asia.”
However, regulators in some markets in Asia
don’t allow commission sharing to take place, let alone require it, as is the
case in Europe and the US, points out Edward Stockreisser, head of Asia Pacific at Lombard Street Research and co-chair of the
Association of Asian Independent Research Providers (Asia IRP).
Nevertheless, Twist believes the situation is
moving in the right direction.
“I believe regulators across the board do think
that pursuing best execution, whatever that means to a particular manager, and
being able to maximise returns by potentially looking at alternative sources of
research and not necessarily having a trading relationship with the supplier of
that research, is fundamentally a decent concept,” suggests Twist.
“The specific benefit for the buy-side is that
they are free to go and search for what, in their view, is the best research
and the best execution,” says Twist. “Unbundling really does level the playing
Twist points out fund managers often have four
or five brokers which they are tied to because they have paid research
relationships with them: “What you can do is strike four of them off your list,
add one CSA broker and reward them through there. Streamline your operations.”
The financial crisis actually helped develop
the independent research space in two ways, argues Stockreisser. The lack of
proper coverage being provided to smaller funds by banks since the crisis has
increased the appeal of the smaller research firms, which themselves have been
boosted in number following the exoduses of researchers from the big banks to
launch their own outfits in the aftermath of the credit crunch.
With commissions down as much as 50% in a lot
of markets, competition amongst the expanded independent provider sector is
also heating up and a phase of consolidation may be on the cards.
Research being ‘conflict-free’ doesn’t
automatically make it better, and the smaller houses have to stand or fall on
the merits of their output.
“If independent research isn’t of good quality,
nobody is going to buy it, unlike bulge bracket houses which may have poor
research but because of the full service products they offer, will still get
paid,” says Twist, who makes the point that bigger doesn’t necessarily mean
“When separating the commission dollars from
your execution dollars, there’s no reason why you can’t unbundle one of the
bulge bracket brokers, you might decide that Goldman Sachs’ research is the
best out there,” he adds.
“There is likely to be a shift in emphasis to
quality rather just whether research is independent or not,” says Stockreisser.
“The ultimate issue is that nobody really cares if research is independent or
not, as long as it’s good.”