Buy-side Perspectives Issue 3 - Page 19

The Swedish Model Hans Lindh, head of trading at Swedbank Robur The Swedish model offers the prospect of complete unbundling between commission payments for research and execution. Champions of the new model believe that it offers the only means to achieve true best execution. Hans Lindh, head of trading at Swedbank Robur, played a key role in the development of the new model. “When I began work on this area back in 2007, we quickly realised that the old bundled model wasn’t benefiting the end consumer,” Lindh told the Buy-side Perspectives. “We realised we had to do something to reach best execution. I wasn’t happy having the payment for research linked to the execution of the trade.” Lindh has been in the industry since 1985, when he was part of the equities team. In the late 2000s, Lindh began to lobby within the firm for the adoption of CSAs. However, at the time it was something the firm did not want to do. The breakthrough came in 2014 when Swedish regulator Finans Inspektionen (“FI”) released a letter to asset managers that stated that research and execution payments must be separated. Lindh and a few others in the industry started to question the CSA model. It seemed to have limitations – why create a limited number of accounts and then grow them? Might this not undermine best execution? Instead, Lindh began work on an alternative that would avoid linking execution with research payments completely. The idea was that whether a buy-side firm traded with one or a thousand counterparties, it would not affect the research costs in any way. “It was a huge relief”, he said. Under the new model, Swedbank Robur sets aside a fraction of a basis point every day and transfers the total every quarter to an RPA, which pays the firms the portfolio manager finds useful. “We didn’t have to hire any people,” added Lindh. “Taking the CSA route would have been more of a burden due to reconciliation and things like currency trades and run-offs, which we don’t have to worry about. CSAs would require surplus money on the account, which is less efficient.” In terms of best execution Lindh is directly involved in reviewing reports and signing them, checking outlier trades and picking up on any unusual performance. His role today covers FX and fixed income as well as equities – but it is fixed income that is the most difficult asset class in which to demonstrate TCA due to the huge range of products, the lower liquidity per instrument and the complexity of the market. In line with this focus on efficiency, Lindh reports that one of the impacts of this new model has been to shift more flow to electronic channels, and to increase the use of TCA. The flip side is that the firm has made less use of research-only firms than expected, and particularly less maintenance research – a factor that Lindh believes does improve the quality of the research being consumed compared to some of the material produced in the past. 19