European investment managers should not wait for regulatory mandate to adopt multi-asset commission sharing agreements (CSAs) which can improve fund performance across a range of strategies, according to a white paper issue recently by German agency broker AQX Securities.
European asset managers that use multi-asset CSAs to create greater transparency on the cost of execution, research and related services from brokers will enhance investment performance through access to a wider range of research, as well as improving cost control, the firm asserts in ‘Honest brokers: unbundling research and execution’.
The Financial Conduct Authority, the UK’s financial sector regulator, has called for measures to better manage inducements to be included in the Level 2 rules of MiFID II, which was passed by the European Parliament last month and is due to become effective in 2016. But AQX Securities head of sales Kish Desai suggests asset managers should act any pan-European regulatory mandate on unbundling.
“There is a clear case for investment managers throughout Europe to more firmly embrace CSAs as a means of obtaining valuable research and execution products and services, using commissions on trades in different asset classes. When managers properly implement CSAs through agency or execution-only brokers, they can improve the products and services they receive and thereby provide substantial benefits to their managed accounts,” he said.
In its white paper, AQX states the bundling together of services by brokers prevents investment managers from understanding what their trading commissions pay for or the cost of individual products and services, leading to higher costs. CSAs, the firm asserts, “allow the buy-side to retain the payment model of using commission to pay for brokers’; research and execution, but with an explicit split: a credit to be used for research and the rest to be used for trade execution”.
Noting the disparity in use of CSAs across different European markets, AQX argued that multi-asset CSAs not only control costs and increase transparency but help asset managers to access better quality research across asset classes and support derivatives-based investment strategies.
“Where fund managers on a UCITS platform are using equity and fixed income derivatives rather than cash products; cross-asset CSAs give them the ability to trade derivatives and collect the CSAs on top,” it said.
Hamburg-headquartered AQX, which also has a UK presence and was originally spun out from German asset manager Aquila, is an agency broker focused on execution services and multi-asset commission sharing agreement services.