Transaction Cost Analysis (TCA) provider GSCS and research cost analysis (RCA) provider Rontech are forming a pan-European alliance to help buy-side firms both comply with and benefit from the European Union’s Markets in Financial Instruments Directive (MiFID) that comes into force in November.
The two service providers offer different areas of expertise that in combination solve the thorny policy management and conflict of interest problems created by MiFID in the areas of best execution and payment for research, the firms say. The combination offers an integrated approach that allows all conventional managers and hedge funds to meet the MiFID deadline at low cost and with minimal implementation risk.
Robert Kay, managing director, GSCS, says, “We found ourselves being introduced by mutual clients confronting the issue of how exactly to manage the business of commission allocation post-MiFID. This arises from the increased focus on best execution and handling conflicts of interest created by the differing views of traders and portfolio managers when rewarding the sell-side.
“With the advent of commission unbundling, asset managers find themselves having to manage and allocate research and execution commissions separately. Commission Sharing Agreements (CSAs) are a useful mechanism but in themselves do not help managers determine who gets paid what, why and, perhaps most importantly, whether actual trading activity is consistent with targets and expected execution results.” MiFID will further accentuate the need to manage the allocation of commissions more formally and to review the process regularly on a firm-wide basis, adds Kay.
“The combination of our two systems – almost two sides of the same coin – TCA and RCA together with CSAs make most of these problems go away,” comments Stephen Parker, chairman, Rontech. “So it was a natural step for us to approach MiFID together – not just in equities where both firms started – but across multiple asset classes, where we both have product,” he continues.
Research released last month found that 60% of European financial institutions are not expected to meet the November 2007 deadline for MiFID. The study conducted by BPM firm HandySoft Global Corporation found that UK-based financial institutions are in a more advanced state of preparation that the EU average, but nearly a third are still unlikely to comply in time.
Kay and Parker agree that, “Although MiFID creates uncertainty and risk, the combination of GSCS and Rontech’s systems provides an important new process for managing best execution and the payment of commissions. These systems create the opportunity for buy-side firms to exploit the commercial benefits of MiFID whilst also eliminating reputational risk created by the temptation to delay. This is one of those big changes in industry practice where the greatest commercial advantage lies with the innovative and first movers.”