To Bundle or Unbundle? A Look at CSAs, RPAs and MiFID II

The European Commission’s draft of MiFID II delegated acts, which was leaked in December, caused a stir regarding the use of commission sharing arrangements in paying for research going forward.

The European Commission’s (EC) draft of MiFID II delegated acts, which was leaked in December, caused a stir regarding the use of commission sharing arrangements (CSAs) in paying for research going forward. While the final drafts are not expected to be released until later this year and each individual national regulator will still need to make its own interpretation, the leaked document prompted industry speculation that CSAs may be allowed to coexist with research payment accounts (RPAs) in a post MiFID II environment.

Regulators are seeking greater transparency throughout the trading process, part of which will entail separating the costs of trading activity from research spend. The concept of unbundling is now very much on the table. However, it is important to understand the distinction between CSAs, RPAs and how bundling vs. unbundling works in practice.

CSA breaks down the commission a buy-side firm directs to its brokers into a distinct execution component and a distinct research (CSA) component. This allows a buy-side firm to use the CSAs accrued with its brokers to pay for research from a provider of choice, including independent research houses. Prior to CSAs, any particular piece of research did not necessarily have an absolute price. For example, if commission rates remained unchanged, but a firm traded 50 percent more this year than last year, essentially they would pay 50 percent more for the same research service.

MiFID II has proposed the creation of RPAs, which would allow firms to set an absolute monetary budget to pay for their research to help divorce the relationship between trading activity and research spend.  Reviewing the language that ESMA and the EC have used to describe an RPA, it is possible to conclude that an RPA is merely an enhanced CSA. RPAs could also be interpreted as separate accounts.

Currently, buy-side firms have several ways to pay for research—depending on their approach to the “unbundling” of the relationship with their broker. A firm that has a bundled approach pays one rate of commission to its broker and essentially receives its research as an add-on.  Regulators are looking to bring more transparency to this process, since bundled commission and research spend do not provide clarity on the actual cost of the research.

Unbundling is the process by which a firm separates its execution commissions from its research spend. It will generally use CSAs or other mechanisms to manage that process. Many firms use the CSA mechanism to build up a research “pot” during the early part of a year and then switch to “execution only” commission rates once an acceptable research budget has been established. Other buy-side firms set up CSA accounts with as many of their executing brokers as possible in order to satisfy their own liquidity or “best execution” requirements.  Clearly, this leads to confusion about the various options available.

Bloomberg Tradebook recently conducted a survey of over a hundred European buy-side clients to gauge market sentiment around some of these issues. Of those respondents whose firms pay for research, 45 percent are presently paying with bundled commissions, something that will not likely be possible once MiFID II is implemented. It will be interesting to see how these firms adapt; they could institute CSAs or RPAs, pay directly from their own resources, or possibly stop paying for research all together. 37 percent are paying for research using mainly CSAs, and have therefore already made strides toward unbundling–a step closer to what the regulators are looking for.

When asked if their interpretation of the MiFID II drafts mean that research payment accounts will allow for CSAs, a majority of respondents—67 percent—didn’t know.  This underscores the level of uncertainty in the market and also the reluctance to make decisions until more clarity is offered on the final release. Sixty-one percent have not considered how they will pay for research once the new regulation is implemented.

The path to compliance will be smoothest for UK–based firms where CSAs have been in place since 2006. Throughout much of continental Europe, local regulators still do not endorse CSAs, so bundled commissions are much more common. Despite the lack of clarity, we think that firms should examine the benefits of thoroughly budgeting and accounting for their research spend before the regulations come into force. Irrespective of whether CSAs do eventually gain clearance, regulators will certainly require increased accountability and attribution in some way. Additionally, there are savings to be made. With the microscope on buy-side research spend and a movement away from bundled costs, we anticipate the total spend by firms on research to decrease. Eighty percent of our survey respondents agreed, expecting their total amount paid for research to either stay the same or decrease.

With all the above factors in mind, investment managers will need to start to evaluating budgeting tools that can help them meet their research transparency requirements. Firms will also need clear audit trails and the ability to provide full disclosure to their end-clients in order to demonstrate how they are staying MiFID II-compliant.

Products such as Bloomberg Tradebook’s commission management tool (BCMS) go a long way toward meeting these needs. Clients can create and view research budgets by fund, account and sub-account. The amount spent on research can be clearly calculated and disclosed, providing accurate and comprehensive transparency. This is directly in line with regulators’ desire to clarify the sources and uses of client funds and prevent cross-subsidizing different businesses.

Further attribution and accountability are the underlying themes of the new regulation. Tools that help investment managers in that process will be necessary moving forward. If you are interested in learning more, please email