Some banks risk US$240mil research loss

HONG KONG: Some global investment banks risk losing up to US$240mil in business by 2020 as a regulatory overhaul, which will change the way securities research is priced and used, makes independent firms more attractive for clients, a financial consultancy said.

Unlike the big banks, the smaller securities research firms do not offer trading or corporate finance. They rely entirely on what they charge for research, as will be required under the European Union’s Markets in Financial Instruments Directive, or MiFID II, due to take effect in January 2018.

Independent research firms are steadily growing, reflecting their capacity to produce analyses at a considerably lower cost than major sell-side brokerages, Hong Kongbased Quinlan & Associates said in a report released yesterday.

“The most important priority for brokers now is to start making decisions around the structural make-up of their investment research offering,” said Benjamin Quinlan, chief executive of the consultancy.

The gradual shift to independent researchers and the high costs associated with sustaining research divisions is piling up the pressure on large global investment banks, the report said.

The Quinlan report forecast that some research departments of big banks could face losses of up to US$240mil post-MiFID II under their current structures.

The potential loss does not take into account additional costs tied to a bank’s MiFID II compliance obligations, the report added.

Under MiFID II, investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.