The future of
commission payments
Andreas Wollheim, head of trading and treasury at SEB Asset Management
When thinking about the unbundling
of payments for research from
payments for execution, it can help
to keep in mind best execution. Ever
since MiFID in 2007, there has been
an obligation in Europe for the buy
side to obtain best execution. MiFID
II strengthens that commitment,
requiring asset managers to take “all
reasonable steps” to ensure it. But one of the potential pitfalls
in achieving that vision is the difficulty of doing so under
commission sharing agreements. This led a group of asset
managers to come together in 2014 to produce an alternative,
which has come to be known as the Swedish model: complete
unbundling of commission payments.
“The value of the Swedish model is that it is the only way to
ensure best execution,” said Andreas Wollheim, head of trading
and treasury at SEB Asset Management. “At that time [2014], the
CSA was the only model available. But I never liked CSAs, due to
their complexity. For example, our business has many different
funds and strategies. We need at least 25 brokers to achieve
best execution. But under the CSA model, if you have more
than 15 brokers, it becomes very complex. We don’t have the
time or the resources for that.”
The key question many buy-side firms face, especially the
smaller ones, is whether or not a process can be found to
handle multiple broker relationships, given the increased
obligations under MiFID II. Specifically, it was the prospect
of daily reconciliation with multiple brokers that proved too
much for SEB Asset Management. The problem essentially
boiled down to a choice: either expend substantial resources
attempting to handle the increased regulatory workload, or
cut the number of brokers down to 15. Analysis of the firm’s
business, however, suggested that it would not be possible to
‘make do’ with just 15 brokers.
At the same time, the Swedish regulator Finans Inspektionen
made it clear to the firms under its authority that they did
not like the link between research and the transaction. But as
Wollheim noted, “under the CSA, that link still exists.”
Complete unbundling breaks that link. One of the key figures
in the development of the Swedish model was Hans Lindh,
head of trading at Swedbank Robur (see interview in issue 3).
According to Wollheim, Lindh’s idea sounded strange at first –
October 2016
but the advantages soon became clear, and before long, SEB
Asset Management began using it. Perhaps one of the biggest
potential benefits of the new model, aside from the reduction
of reconciliation burden versus CSAs, was the potential to
allocate payments more efficiently to where they are really
needed.
“In the CSA model, you have to trade with your brokers or you
don’t get research,” said Wollheim. “That can be a problem. For
example, we have a fund that trades twice a year. They have a
high need for research, but if you never trade, under the CSA,
you get no research. Whereas with the Swedish model, we can
allocate research based on the need.”
This benefit may be particularly important, given the
challenges both smaller participants and smaller stocks face
in the light of unbundling and the falling commissions paid
overall to brokers (see America at the Crossroads on page 10
for a comparison with the USA). However, now that the model
is becoming more established, other questions are emerging
about its potential to shape markets – including those beyond
the world of equities.
“Unbundling fixed income is the next big challenge,” said
Wollheim. “I think the Swedish model can be applied to other
asset classes than equities. It’s a bit more difficult. But it can be
done.”
While SEB Asset Management has not implemented the
Swedish model outside of equities, the firm is currently in
discussions internally about how this might be achieved.
However, these developments are at an early stage.
Nevertheless, what is clear is the gain in efficiency and time
involved in the Swedish model, versus the CSA alternative. More
than just a time and cost-saving exercise, the unbundling can
also be used as a selling point to clients of the asset mana