CSAs growing, but may not satisfy regulators

As the industry moves to implement more commission sharing agreements, firms may find they fall short of regulatory expectations.

Use of commission sharing agreements (CSAs) to pay for research is on the increase, but may not be sufficient to satisfy regulators, a panel at FIX Trading EMEA has said.

The panel said CSA balances were growing as asset managers’ question who they pay for research, ultimately driven by regulatory change.

Adam Toms, CEO at Instinet Europe, explained to the FIX audience that Instinet EMEA CSA balances had grown by 40% each year over the last three years as firms are using CSA’s as one of the tools in responding to demand for increased governance on payments.

Glenna Lynch, global head of commissions management at UBS explained that asset managers are all in different places on CSAs, depending on how long they have used them, but SMEs and some smaller players have now started to set up CSAs, highlighting movement.

Global players view the unbundling regulation as a global problem rather than a European one, the panel said. They are looking at their budgets across the board, but some are also paying for research in other regions to avoid European rules.

It was highlighted that regulators globally do not have a common approach across nations, and a level of harmonisation is needed to avoid confusion.

Further confusion with the unbundling regulation was also discussed, as asset managers deal with a policy vacuum and great uncertainty and firms are trying to best position themselves.

While initial Mifid II proposals have outlined a number of options for how to reform the research market, a political consensus has yet to be reached, meaning firms are struggling to react until the final rules become clear.

Rob Boardman, CEO at ITG said that many banks are already unbundling and specifying costs but they do not think this will be enough for the regulators.

The Trade spoke to Boardman who added “I believe regulators are looking for buy-side trading desks to be focused on best-execution and not involved in managing payment targets with brokers. 

“If asset managers use client money to pay for research then regulators expect that asset managers spend clients’ money as if it were their own. This requires a disciplined approach to procurement including pre-agreed budgets, only buying research they consume and reviewing regularly the quality of research they consume. 

“I also believe the managers whose lists of executing broker and research providers are identical will find it difficult to argue that they have properly unbundled research and execution.”

Independent research providers (IRPs) were also discussed on the panel, and it was unanimously agreed that the quality of research and pricing structure will separate the good from the bad.

An audience vote on the proportion of research used from IRPs, found that 44% use below 10% from IRPs, but 24% source more than 20% of their research from IRPs.