European Commission Equity Commission "Re-Bundling" Proposals
As the UK prepares to leave the European Union, various European entities including the French Securities Regulator (AMF) and the European Commission itself, have advanced proposals to reform MiFID II rules related to research.
In a report published in January 2020, the AMF concluded that MiFID II had harmed SME research production and proposed that MiFID II research rules should be withdrawn for Fixed Income, Small Cap Equity (Market Cap. of up to 1 Billion Euros), and suggested that the European Union should review the research inducements regime.
In July 2020, the European Commission published the EU Capital Markets Recovery Package. This included proposals to increase the limit of the MiFID II equity research exemption to companies with market caps. of up to 10 billion Euros.
Raising the market cap. limit for MiFID II research exemptions to 10 billion Euros transforms the proposal from a minor afterthought for small/micro-cap funds to a mainstream consideration for even large asset managers/ owners. This is because it significantly expands the percentage of stocks potentially included in major equity indices that form the benchmark for thousands of funds and separate account /institutional mandates worldwide as the chart below illustrates.
The blue bars represent the percentage of stocks in various indices that would have been subject to the MiFID II research exemptions under the 1 Billion Euro limit. The green bars represent the percentage of stocks included under the 10 Billion Euro limit.
The net result is that a majority of stocks in many important indices are included under the higher limit, thus changing the competitive calculus for even large cap. (and large AUM) managers.
The European Union ultimately selected a 1billion euro market cap limit. It is likely that this will be reviewed over time.
In the UK, the FCA is in the process of considering how to respond. Similar measures may also be considered in the UK.