Academics Find MiFID II Requirements Improve Market Efficiencies
A recent academic paper from Harvard professors reviews the history and impact of soft dollars and the regulatory and policy discussions around MiFID II, the European Union’s directive for its capital markets to unbundle trading commissions from research services fees in the payments for securities trades. The authors assert that the weight of empirical evidence suggests that the theoretical arguments in favor of soft dollars are not robust and that MiFID II’s unbundling of commissions appears to have improved European market efficiency by eliminating redundancy and producing information that is of greater value to investors. They noted that academic studies that explored the impact of European market reforms demonstrate that MiFID II’s requirements have resulted in a reduced level of research analyst coverage with respect to large companies but not with respect to small- and medium-sized companies. Further, the studies show that the unbundling regulation has increased the quality and impact of analyst coverage. The professors wrote that implementation of MiFID II has overall had a significant impact on the global financial services industry, including asset managers and investment banks doing business in both E.U. and U.S. markets. A number of global asset managers have chosen to unbundle research commissions on a worldwide basis, and a handful of domestic U.S. asset managers have followed suit, bringing themselves in line with what might be perceived to the emerging best practices in the area, the professors observed. The debate is far from over, as the SEC has yet to establish a final position, extending MiFID II relief for U.S. firms until 2023. And recently, questions have arisen as to whether the European Union will retain the unbundling provisions of MiFID II once the United Kingdom has exited the European Union and British authorities no longer play a role in the deliberations, the professors wrote.