MiFID II Research Unbundling: Cross-border Impact on Asset Managers

Abstract

MiFID II requires EU-based asset managers to separate payments for research from execution costs in trading commissions. Under this unbundling rule, asset managers must either charge research costs explicitly to investors or absorb these costs internally. We model the impact of unbundling on asset managers and investors and find that this new regulation provides global asset managers with a “pecuniary incentive” to use non-EU client commissions to subsidize the cost of European research. Consistent with this hypothesis, we find empirical evidence that the unbundling rule for mutual funds operating in Europe is accompanied by an increase in bundled commissions generated by their US counterparts. Specifically, US funds with an EU twin (an EU-based fund with the same management team and investment style) exhibit higher bundled commissions following the unbundling regulation. Correspondingly, EU twins benefit from this cross-subsidization by increasing value added while maintaining similar management fees and trading activity. Our findings suggest that agency costs are not mitigated but merely shifted from a more regulated to a less regulated market. We conclude that, in global financial markets, only internationally coordinated regulatory actions are effective.

Keywords: MiFID II, soft dollars, unbundling, mutual fund, equity research, brokerage commissions, expenses, cross-border regulations, global financial markets

JEL Classification: G20, G24, G28