ESMA warns on FICC MiFID II research pricing

MiFID II research pricing war has seen price of fixed income research plummet as banks compete against each other.

The EU financial watchdog has warned that firms will need to have clear documentation of pricing structures for fixed income, currencies and commodities (FICC) research under MiFID II.

The latest Q&A published by the European Securities and Markets Authority (ESMA) outlined that subscription-based agreements for FICC research could come into conflict with inducement requirements if not properly explained.

“ESMA considers that in some cases written FICC research could be capable of being priced and paid for through a subscription agreement. However, firms would need to document how they arrive at their pricing structures and ensure there is no inducements risk in order to comply,” the Q&A warned.  

FICC research has been more challenging than equities or other asset classes, in terms of complying with MiFID II’s unbundling rules, due to a lack of established practices to allow for it to be paid for separately from commissions.

ESMA’s Q&A stated it is aware that FICC markets do not currently have explicit execution commissions and mechanisms that allow research charges to be deducted alongside transaction fees. The traditionally incremental nature of FICC research has seen a major research pricing war among major financial institutions.

Credit Agricole, BBVA, Credit Suisse and ING are among some of the institutions to have slashed the price of fixed income research, or in some cases offer it for free, despite the practice being largely controversial and debated among market participants.

Deutsche Bank also reportedly halved the price of its fixed income and macro research amid the intense battle between major European players to maintain buy-side relationships.

Asset managers have been forced to pay for research explicitly under MiFID II, rather than through execution missions or a commission sharing agreement (CSA) as part of unbundling requirements.

The move has resulted in greater scrutiny on broker relationships in terms of the provision of research, execution quality and costs, and in some cases a reduction in the number of brokers buy-side firms have used in the past.