ESMA finds no material evidence of harmful impact of MiFID II unbundling

The European regulatory watchdog has seemingly countered claims that unbundling has harmed research coverage and quality.  

There is no material evidence of harmful effects from the MiFID II unbundling rules for research payments, the European Securities and Markets Authority (ESMA) has stated.

The European regulatory watchdog made the claims as part of its trends, risks, and vulnerabilities report, where it included results of an in-depth study of 8,000 EU companies between 2006 and 2019, analysing the impact of unbundling on EU sell-side research.

Introduced in 2018 under MiFID II, the unbundling regime enforced the separation of payments for research and execution. The rules have proved controversial for many market participants, with critics claiming unbundling has had a limited impact on transparency, reduced research coverage, quality and the number of analysts, and dented liquidity in certain stocks.

Outlining the results of its study, however, ESMA stated that it found that the number of companies losing research coverage has been steadily falling since 2012 and does not coincide with the MiFID II regulation.

It also found the number of analysts used by firms to conduct research has not materially changed following the implementation of MiFID II and research quality has remained ‘stable’, if not increased, post-MiFID II.

“The descriptive findings in this article are consistent with the emerging data-based academic literature on the impact of the MiFID II research unbundling provisions and are complemented by a forthcoming ESMA econometric study,” ESMA said.

In July, the European Commission confirmed it would be removing certain unbundling requirements under MiFID II as part of a package aimed at advancing Europe’s recovery from the COVID-19 pandemic. The Commission proposed that asset managers be exempt from unbundling when paying for research on small- and mid-cap companies and in fixed income, including rates, credit and loan research.