K & K G L O B A L C O N S U LT I N G
RESEARCH
Transaction Cost Analysis (“TCA”) is an old subject we have been researching for years but the
new MiFID II regulation suggests that buy side have established stronger ex-ante processes which
automatically lead the discussion to pre-trade TCA. With additional asset classes being in scope of
best execution, the buy-side head traders are trying to figure out the best technologies to satisfy
the requirements for each asset class; should the choice be between best-of-breed or one solution
for all? Whilst we all know MiFID II transparency is a double-edged sword, one expected benefit is
better data and TCA analysis, especially for fixed income (it’s unlikely it can get any worse).
Most heads of trading are or will be planning to revise their policies ahead of 3rd January 2018. This
is proving to be a challenge especially for the OTC asset classes such as fixed income and foreign
exchange. We see two very different approaches between the two; the fixed income buy-side head
traders are in full progress trying to learn and resolve this upcoming challenge while the specialist
foreign exchange buy-side community have generally taken a more passive stance and are waiting
for more direction; expecting their fellow compliance colleagues to perform a major part of the
heavy lifting to complete this process. K&KGC's experience and concern is that compliance
departments are rarely resourced to develop such policies without the involvement of their
head trader. K&KGC believe our FX trading community would benefit from the research K&KGC has
collected both from our FX buy-side community and other asset classes.
PAYMENT FOR RESEARCH
Most buy side are already familiar with the fact that both Research Payment Accounts (“RPA”) and
Commission Sharing Agreements (“CSA”) are going to co-exist under MiFID II. The surprising new
findings are that more buy-side firms are going down the route of paying out from their own P&L.
More than half of the DACH equity buy side voted that they would do this instead of choosing
between CSA or RPA. One buy-side head trader commented that, paying out of P&L is the
easiest and cleanest model. Another head trader mentioned that this is likely to be the easiest
model for smaller firms that doesn’t have the resource for complex administration. In the end the
client will pay so one wouldn’t be surprised to see a bump in management fees.
This applies similarly to the fixed income asset class where there are no dealing commissions.
There is an indication that most buy side are likely to pay out from their P&L and make a separation
between government and corporate bonds.
Some European pension funds, with no need to adhere to MiFID II, are still planning to continue
bundling research fees in their commission rates.
TRADE AND TRANSACTION REPORTING
The reporting requirements are still a problematic challenge for the buy-side heads of trading. Will
the trading desk be resourced to report on its own or will they need to hire a specialist firm to assist
them? The trading desks would need to understand the detail on how to leverage the publication
delays where possible to minimise market impact. Within fixed income, some head traders plan to
transact all trades electronically to leverage the platform vendors reporting capabilities. Other buy-
side are discussing the need for an independent Smart Order Router (“SOR”) for all trades
that can route the trade reporting to the correct approved publication agreement ("APA")
when needed.
Summer 2017
www.buysideintel.com
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