Key Takeaways
- • MiFID II regulations mandate that brokerage firms separate research costs from execution commissions beginning January 2018, fundamentally restructuring the $15 billion investment research business model.
- • Institutional investors are adopting a "waiting game" strategy with brokers, delaying research purchasing decisions in anticipation that prices will decline as regulatory deadlines approach.
- • The SEC is preparing relief measures to mitigate disruption from MiFID II compliance, signaling regulatory flexibility for U.S. broker-dealers navigating the unbundling requirement.
- • The regulatory framework requires EU-based asset managers and brokers to invoice research separately, removing traditional bundling structures that previously embedded research costs in trading commissions.
- • Market participants—both buy-side and sell-side—remain in a negotiation standoff as January 2018 implementation approaches, with pricing and service delivery models still in flux.
Summary
As MiFID II regulations move toward implementation in January 2018, institutional investors and brokerage firms find themselves locked in a critical negotiation cycle over research costs and delivery models. The Markets in Financial Instruments Directive II, a European Union legislative framework governing financial market regulation, mandates the unbundling of research costs from trading execution commissions. This structural shift directly impacts the $15 billion investment research business globally, forcing market participants to establish new payment mechanisms and contractual relationships.
According to a Greenwich Associates survey, institutional investors are adopting a patient negotiating stance, choosing to delay research purchasing commitments while waiting for broker pricing to decline as the regulatory deadline approaches. This high-stakes negotiation dynamic reflects the uncertainty surrounding how the market will absorb and price research once it becomes a separately invoiced service. Historically, research costs were embedded within trading commissions, creating an opaque pricing structure that MiFID II explicitly seeks to reform.
The U.S. Securities and Exchange Commission is actively preparing relief measures to "blunt the fallout" from MiFID II regulations, indicating regulatory willingness to provide transition flexibility for U.S. broker-dealers. The SEC has issued no-action letter relief permitting broker-dealers to receive separate cash payments for research without triggering automatic classification as investment advisers subject to U.S. regulatory oversight. This accommodative stance acknowledges the operational complexity of implementing unbundled research pricing across transatlantic market participants.
The regulatory overhaul represents a fundamental restructuring of research economics. Asset managers and brokers must transition from bundled commission models to explicit research fees, creating operational, legal, and pricing challenges across the industry. As January 2018 approaches, the market remains in transition, with neither buy-side nor sell-side firms having fully resolved optimal pricing models, service tiers, or long-term contractual relationships for research delivery in a unbundled environment.
According to a Greenwich Associates survey, institutional investors are adopting a patient negotiating stance, choosing to delay research purchasing commitments while waiting for broker pricing to decline as the regulatory deadline approaches. This high-stakes negotiation dynamic reflects the uncertainty surrounding how the market will absorb and price research once it becomes a separately invoiced service. Historically, research costs were embedded within trading commissions, creating an opaque pricing structure that MiFID II explicitly seeks to reform.
The U.S. Securities and Exchange Commission is actively preparing relief measures to "blunt the fallout" from MiFID II regulations, indicating regulatory willingness to provide transition flexibility for U.S. broker-dealers. The SEC has issued no-action letter relief permitting broker-dealers to receive separate cash payments for research without triggering automatic classification as investment advisers subject to U.S. regulatory oversight. This accommodative stance acknowledges the operational complexity of implementing unbundled research pricing across transatlantic market participants.
The regulatory overhaul represents a fundamental restructuring of research economics. Asset managers and brokers must transition from bundled commission models to explicit research fees, creating operational, legal, and pricing challenges across the industry. As January 2018 approaches, the market remains in transition, with neither buy-side nor sell-side firms having fully resolved optimal pricing models, service tiers, or long-term contractual relationships for research delivery in a unbundled environment.
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