Anti-oil pen­du­lum could swing too far

Warn­ing from Al­berta at Carr con­fer­ence

National Post (Latest Edition) - - FINANCIAL POST - Clau­dia Cattaneo

• Fed­eral ef­forts to build greater con­sen­sus on a long- term en­ergy strat­egy for Canada met pro­vin­cial re­al­ity Thurs­day, as Al­berta warned about the dan­gers of “the pen­du­lum swing­ing too far” against oil and gas, and Bri­tish Columbia stuck to its guns in op­pos­ing the pro­posed Trans Moun­tain oil pipe­line while the prov­ince piv­ots to­ward green en­ergy. In a panel dis­cus­sion at a con­fer­ence con­vened by Jim Carr, the fed­eral nat­u­ral re­sources min­is­ter, Al­berta En­ergy Min­is­ter Marg McCuaig- Boyd urged cau­tion about how a green tran­si­tion is man­aged.

“It’s im­por­tant for us to keep peo­ple work­ing and have a strong econ­omy,” McCuaig- Boyd told the meet­ing. “This is im­por­tant for us be­cause good jobs and eco­nomic op­por­tu­nity un­der­write our abil­ity to tran­si­tion to a low car­bon econ­omy. A strong econ­omy gives us ca­pac­ity to in­vest in re­new­ables, funds green in­fra­struc­ture and funds in­no­va­tion.”

Al­berta’s NDP govern­ment is do­ing its part to help with the en­ergy tran­si­tion by putting a price on car­bon, phas­ing out coal, cap­ping oil­sands emis­sions while still grow­ing pro­duc­tion, said McCuaig- Boyd, one of the few voices at the meet­ing defending Canada’s oil sec­tor and its work­force. Carr is host­ing a two-day con­ver­sa­tion to “cre­ate a long-term vi­sion for Canada’s en­ergy fu­ture" with heavy in­put from academia, in­dige­nous com­mu­ni­ties, the pub­lic and green ad­vo­cates. “Look­ing for­ward, it’s im­por­tant to not let the pen­du­lum swing the other way, over­bur­den­ing in­dus­try, cre­at­ing un­cer­tainty,” McCuaig-Boyd said.

Those con­di­tions have re­sulted in a long list of oil and gas projects be­ing can­celed, i nclud­ing Tran­sCanada Corp.’s En­ergy East pipe­line last week af­ter Ottawa ex­panded its re­view to in­clude up­stream and down­stream cli­mate change im­pacts.

In less than three months, on Jan. 3 to be ex­act, the Mar­kets in Fi­nan­cial In­stru­ments Di­rec­tive ( MiFID 11), a se­ries of changes that will dra­mat­i­cally af­fect the i nvest­ment man­age­ment busi­ness, goes live in Europe and Bri­tain.

At this stage there are no plans to im­ple­ment a MiFID­like sys­tem in North Amer­ica.

A re­cent col­umn in the New York Times noted that the big in­vest­ment bank­ing firms are gen­er­ally re­sis­tant to the goals of MiFID while in­sti­tu­tional in­vestors are sup­port­ive. The Se­cu­ri­ties & Ex­change Com­mis­sion is yet to rule on the mat­ter.

As for Canada, given the length of time it took to im­ple­ment CRM2, and the still- to- be- de­cided mat­ter of em­bed­ded com­mis­sions — both re­tail in­vestor mat­ters — a de­ci­sion is not ex­pected any time soon. But there will be more ac­tion if the SEC fol­lows what the Euro­peans have done.

The new MiFID di­rec­tive — which fol­lows more than six years of study and a planned one- year de­lay — seeks, ac­cord­ing to a re­port by HSBC “to make fi­nan­cial mar­kets in Europe more re­silient, trans­par­ent and in­vestor-friendly.”

The di­rec­tive, part of a se­ries of mea­sures en­acted in re­sponse to the global fi­nan­cial cri­sis, comes in many parts, and will af­fect all mar­ket par­tic­i­pants given that at the core, the goal is to un­bun­dle the slew of ser­vices pro­vided by the sell- side firms: from early 2018, those ser­vices will be of­fered and priced sep­a­rately.

As part of the MiFID’s in­vestor pro­tec­tion frame­work, Price­wa­ter­house­Coop­ers said in a re­port “in­vest­ment firms need to make ex­plicit pay­ments for in­vest­ment re­search in or­der to demon­strate that they are not be­ing in­duced to trade.”

The PWC re­port noted the reg­u­la­tory obli­ga­tion will pose “sig­nif­i­cant chal­lenges” for the in­dus­try as sell- side firms “must dis­close the as­so­ci­ated costs and charges to buy-side firms in or­der for them to demon­strate that they are act­ing in their best in­ter­ests.”

As with any change — and what’s at work in Europe is the over­throw of the cur­rent model where in­sti­tu­tions pay for re­search through di­rect­ing com­mis­sions to the firm that pro­vides the re­search — there will be win­ners and losers.

“The world will change,” said Ed Pen­nock, found­ing part­ner of the Pen­nock Idea Hub, a Toronto-based stand­alone eq­uity re­search firm that doesn’t trade se­cu­ri­ties. Un­der the new regime, sell­side re­search will be broadly de­fined to cover more than re­ports pre­pared by an­a­lysts.

Pen­nock’s firm, which is home to five an­a­lysts, sells its re­search, ei­ther on the sec­tor or on the in­di­vid­ual com­pany, to in­sti­tu­tional clients which ei­ther pay di­rectly or via com­mis­sion shar­ing agree­ments. “The in­sti­tu­tions can pay us di­rect or they can di­rect busi­ness to a bro­ker­age firm, who then sends us a cheque ( for the agreed- upon amount),” said Pen­nock who be­lieves MiFID 11 will have “some in­flu­ence” on the way things get done in Canada.

“If the banks think they can turn this into a profit, they will bring it over in a sec­ond. The U. S. in­sti­tu­tions want their bro­kers and bankers to do the same be­cause it will lower their costs and im­prove trans­parency, ac­count­abil­ity and ( the) au­dit trail. It ticks ev­ery sin­gle box,” said Pen­nock, who ar­gues the re­search pro­duced by his firm would be way cheaper” for in­sti­tu­tions com­pared with what they’re pay­ing now.

Aside from Pen­nock Idea Hub, Ver­i­tas In­vest­ment Re­search is an­other firm that sells its re­search but doesn’t pro­vide trad­ing.

But Pen­nock isn’t wait­ing for MiFID to come here: his firm’s re­search re­ports are posted on five elec­tronic re­search hubs set up in Lon­don. ‘ If in­sti­tu­tions like the work, they pay you ac­cord­ingly,” he said. “We’ve gone from push re­search to pull re­search.”

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