FCA scraps MiFID research rules on small caps

Chris Machin, Chief of Staff at Kaizen Reporting.

The Financial Conduct Authority (FCA) will jettison MiFID rules on research for companies with a market cap of less than £200m to increase coverage for small to medium sized enterprises (SME0 issuers and “create a regime that is proportionate to the risks of inducements that arise”.

In a policy statement, the FCA said the new inducement rules mean research on firms below the threshold can be provided by brokers to asset managers on a “bundled basis” or for free.

Other changes include exemptions for third party research on fixed income currencies and commodities (FICC) instruments and research from providers that do not supply execution services or are part of a company that do.

Moreover, it clarified that openly available written research does not fall within the scope of the inducement rules.

The UK watchdog said the changes were intended to ensure that” the rules for research and best execution are better tailored and more proportionate to the risks arising. This should remove unnecessary regulation, make the requirements less complex and make these markets work better.”

It added that “Our rule changes aim to improve the availability of research on SME firms by providing an exemption to the inducements rules that prohibit the bundling of research and execution fees.

The UK regulator also removed the best execution RTS 27 and RTS 28 reporting. It had temporarily paused RTS 27 reporting requirements in March with a view to abolishing the rules permanently in the future.

“The changes we are making to best execution reporting are intended to relieve trading venues and brokers from preparing and publishing best execution reports that don’t appear to benefit users,” said the FCA

In May, Bloomberg Intelligence said the proposed changes to the MiFID II reporting rules could see asset managers save up to £6.7m in compliance costs a year, with fixed income the most likely beneficiary.

“As is widely known in the industry, best execution reporting has never been fully utilised, was seldom reviewed, and was complex and time-consuming,” says Chris Machin, Chief of Staff at Kaizen Reporting.

He adds, “The FCA’s announcement is not the biggest surprise but will be applauded by industry participants, reducing unnecessary regulation, complexity and ultimately the cost of maintaining and reporting for investment firms.  It’s a big statement from the FCA and will be interesting to see what further divergence we see from them, as we head into 2022.”

Rebecca Healey, Co-Chair EMEA Regional Committee & EMEA Regulatory Subcommittee at the FIX Trading Community, said: “Given the recent news regarding the removal of RTS 27 reports from EU legislation and now the FCA replicating this with both RTS 28 and RTS 27 reports, asset managers are reliant more than ever on post trade transparency via improvements in data reporting to understand where, when and how to trade”.

She adds, “The removal of best execution reports does not negate the importance of best execution, it merely provides the industry with an opportunity to improve execution selection by alternative means – standardised reporting of accurate data.

The FIX Equity Business Practices Working Group recently issued a survey on the use of FIX Tag 851 which is one of several methods in understanding how executions have occurred. This information is then scrutinised for accuracy and completeness to contribute to best execution analysis. The greater the transparency around the execution process, the better buy-side clients and their sell-side brokers can work together on improving execution performance. Clarity over routing practices can be enhanced by the industry working together to better understand and agree interpretations of execution strategies – and that is where FIX can best help.”

©Markets Media Europe 2021

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