Global investment banks could lose millions of dollars on new legislation

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, Reuters reminded.

According to a report released on Monday by Hong Kong-based Quinlan & Associates, independent research firms are steadily growing, reflecting their capacity to produce analyses at a considerably lower cost than major sell-side brokerages.

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 USD 240 million 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.

The immediate impact of the regulation will be in Europe - a recent Greenwich Study predicts a cut of USD 100 million by European money managers in research budgets over the next 12 months - but Asia and the United States will be affected too.

To mitigate the impact, banks can choose to transition from the current "fully-integrated" model to operating research out of a separate unit such as a joint venture or outsourcing research to independent research providers, the Quinlan report said.

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• banking sector,
• economy,
• mifid ii