Recent advances in technology have given US buy-side firms greater control over how they unbundle execution and research payments, which is likely to lead to a global approach in commission sharing arrangements (CSAs) within the next few years.
These predictions are part of a new report by consultancy TABB Group titled ”Commission sharing agreements: Navigating the new market structure', which studies trends in unbundling, buy-side attitudes toward commission management, CSA aggregation, impact of CSAs on broker relationships and product innovation.
According to the research, the coming years will see a drive towards the development of a single CSA application that will be used to manage balances and payments, and separate trade decisions from research allocation globally.
It says that the use of CSAs among buy-side firms has grown substantially in the last few years, being employed by 72% of US firms in 2010, up from 40% in 2007, and to 81% in 2010 from 64% in 2007 in the UK.
“From the broker voting process to the payout of research, the use of spreadsheets and manual input is no longer satisfactory,” said Cheyenne Morgan, research analyst at TABB Group and co-author of the report. “Using broker voting software and commission management offerings to help manage multiple commission arrangements, the buy-side can now more readily ensure that the consumption of broker ideas and research is aligned with the exact requirements within the firm.”
She added that recent advances in CSA services help the buy-side to extend their use of CSAs across jurisdictions, improve confidentiality of commission payments and ensure safety of assets.
The report notes that as the use of CSAs increases, brokers are restructuring their platforms to better cater for global asset managers that trade across multiple regions and asset classes, and hedge funds looking for high-value investments globally. Taking this route allows commission credits to be generated from trades in all regions and applied to CSA accounts in any location. This enables clients to cross-subsidise CSA credits in areas that have insufficient trading activity and reduce the burden associated with managing a fragmented, global CSA programme.
“A global approach to CSAs will give large long-only asset managers, i.e. those that want to trade Europe from the US for example, a more holistic way of considering broker relationships and allow them to manage commission payments more efficiently.” added Morgan. “Those buy-side firms that do not want one broker offering may opt for a third-party virtual aggregator that will display all their CSA payments across multiple brokers on one platform.”
But the report highlights that not all buy-side firms have a global commission management process, with most still working on a regional basis, and that different regulatory requirements, such as variation in taxes, can pose hurdles to implementing a global system.
Although the ability to separate research payments from execution costs offers the opportunity for buy-side firms to use specialist brokers for research and execution, there is no indication that this is taking place, says the report, suggesting market uncertainty has led to cautious behaviour.
“[The financial crisis] caused an increase in counterparty concerns,” it reads. “It was a double-edged sword: the banks that held the majority of their commission balances were no longer viewed as infallible, but those were the banks that tended to have much stronger balance sheets.”
“Whether you're a large buy-side institution with 75 research providers looking to aggregate the commission payout process or a small asset manager with a handful of brokers focused on making the most of every commission dollar, today's commission administration offerings should be able to efficiently streamline all the tasks and challenges associated with commission management,” added Adam Sussman, partner and director of research at TABB who also co-authored the report.