Unbundling and EU BrokerDealer Commissions: A $3bil Hickey

As brokerdealers in Europe brace for the Jan 2017 implementation of new MiFID II regulations, the topic of unbundling research and how broker-dealers can continue to capitalize on proprietary research made available to institutional clients is leading many to believe that investment banks in the EU could be looking at a per annum $3bil hickey.

As reported by TradersMagazine, with coverage provided by senior staffer John D’Antona, “That’s a lot of scratch in a global equities market that is still struggling to regain its commission-based profitability since 2007.” Below is an excerpt from TM’s most recent reporting..

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According to a new report from equity market consultancy Greenwich Associates, whatever the Euro regulators decide to do regarding their upcoming decisions on the issue of “unbundling” will determine the fate of approximately 1.7 billion euros in European equity brokerage commission payments used by institutional investors. Believing that regulators may restrict or even prohibit the use of commissions to pay for research, investors are preparing to internalize some research functions and expect to increase the amount of “hard currency” payments to sell-side providers.

In its latest report, “Payment for Research; The Calm Before the Storm,” the consultancy reported that if regulators prohibit buyside traders from including as part of their trading commissions paid to a broker an amount targeted to pay for research or “unbundling” could force some brokers or other research providers to stop providing research to institutional investors. In turn, this could open opportunities for conflict-free, independent research providers.

According to Neil Azous of global macro think tank Rareview Macro LLC and the publisher of “Sight Beyond Sight“, a daily global macro-themed analysis and trade idea provider, “European institutional investment managers are presumably looking to alternative sources of high quality research in advance of the new regs, and this could provide a fresh reset to the way in which content is provided and who provides it.

Greenwich Associates reported that institutional investors paid brokers $3.4 billion in commissions on trades of European equities during the 12 months ended Q2 2015. Roughly 52% of that amount-or 1.7 billion euros was directed to pay brokers and third-party research providers as compensation for research.

While 1.7 billion euros is a considerable sum, it is nonetheless far below peak levels and many brokers now do not see cash equity research on its own as a profitable endeavor, Greenwich rote. Also, the consultancy noted that many sellside brokers have already begun to anticipate unbundling and a drop in commission by either downsizing or making research and distribution teams less important than other functions on the desk.

“Should regulatory changes drive down institutions’ overall expenditures for research, even a modest reduction likely will have a substantial impact on the availability of research,” said John Colon, managing director of Greenwich Associates market structure and technology practice, and author of the new report.
Colon added that U.K. respondents were much more likely than their counterparts in continental Europe to expect an increase in hard currency payments. Institutional investors were mixed in their opinions of whether new rules would lead to a decrease in their use of research from global investment banks.
Impact of 2017 Implementation.

Regulators are expected to publish MiFID II-delegated acts relating to payment for research this month. This will give investment managers and brokers greater clarity on the direction of regulation, but will also kick off a scramble to address myriad issues and put in place compliance processes by MiFID II’s January 2017 implementation deadline.

Colon said that current broker vote processes and commission sharing arrangements bring structure to valuing and paying for research and provide investment managers with a high level of access and flexibility, while protecting the interests of their clients.

“Compared to the current broker-vote driven process of allocating payments, administrative burdens on investment managers will be huge,” he added. “We believe that the new rules as currently discussed may cause institutional investors to cut down on the number of research providers they use simple as means of limiting administrative burden and costs.”

China IPOs and Stock Smack-Down, Global Macro Says

brokerdealer china ipo rareviewmacro jun29

BrokerDealer.com blog update profiling the boom bust of China IPO activity and the latest China stocks ‘smack down’ is courtesy of 29 June 2015 extracted observations from global macro strategy think tank “Rareview Macro LLC”, the publisher of global macro trading investment newsletter “Sight Beyond Sight” and authored by Neil Azous..

We have stated many times in these pages that China’s stock market is driven mainly by liquidity and much less by corporate operating performance. Therefore, in order to better understand what is driving prices at the moment we wanted to provide this brief background and our view on the stock market correction.

The China Securities Regulatory Commission (“CSRC”) is in ultimate charge of regulating the issuance, listing, trading, registration, depository and clearance of securities, and ensures that the operation of the stock market is in compliance with laws and regulations.

As way of background, China A-share IPO subscriptions need to be 100% pre-funded by cash (no margin loan) and allocations are done on a pro-rata basis via a lottery system (i.e. brokers have no discretion). Once you apply, your funds are put in escrow. Collectively, a large pool of money is out of the monetary system for short periods of time.

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The 1-day average performance of an IPO in this latest uptrend has been over 40% and it is not uncommon for an issue to be 1000 times over-subscribed. Even if you have to lock up funds for a short period of time, and only receive a portion of your order, that setup is akin to a lottery ticket if you are allocated any shares at all.

To put the degree of the math in place consider this: In the week starting June 14, the CSRC approved 24 IPOs to raise ~$6.5 billion. In turn, this effectively, even if only temporarily, locked up ~$1.1 trillion during the escrow period. The main IPO culprit was Guotai Junan Securities Co which listed on Friday. The capital raise for this brokerage equated to $4.9 billion and was the largest in China since 2010. The final numbers are not available but it is fair to say that hundreds of billions of dollars was locked up in escrow as part of their lottery system.

In an effort to clear a large backlog of IPOs created during an over-year long freeze in 2013, the CSRC doubled the pace of IPO approvals to ~20 per month in January, then doubled it again to more than 40 per month since April. This is the main problem that is impacting liquidity, not margin trading, in our opinion.

The pace of secondary issuance is even greater. In the first half of 2015, proceed from capital raises totaled over $70 billion, double the amount raised in all of 2014. (Source: Reuters, Business Insider)

Attached is the Bloomberg China IPO Index (BCIPO), a capitalization-weighted index which measures the performance of Chinese stocks during their first publicly traded year.

As you can see, following a ~32% correction off the highs, the head of the dragon has now been cut off. Not surprisingly, all 10 of this month’s worst-performing stocks in the broader Shanghai Stock Exchange Composite Index (SHCOMP) are IPOs from the class of 2015.

We highlight this because as much as sentiment has turned negative, even at the local level, the risk is that the correction triggers one of two outcomes: a suspension of IPOs or an acceleration of a restructuring of the lottery system. Both of which would be constructive and portend to higher equity market prices going forward.

Now before dismissing this rationale as overly optimistic, we would note that the CSRC has suspended IPOs eight times in the history of the yuan-denominated A-share market, five of which were imposed since 2000 (Source: Xinhua News Agency, Bloomberg). The last moratorium was enforced in late 2012 and not lifted until December 2013.

For the avoidance of doubt, while we are mindful that the local equity markets on Monday rejected the large monetary stimulus provided over the weekend, we are not in the camp that believes the “bubble has burst”. We simply believe it is a function of liquidity and timing of IPO’s. For example, the CSRC approved another 28 IPOs on Friday to hit the market in the next two weeks and the liquidity required to be placed in escrow and absorb the issuance is larger than the monetary stimulus provided over the weekend.

To be fair, in order to restore confidence, ideally we would like to a see a similar situation that occurred at Central Huijin Investment Ltd at the beginning of the month. As a reminder, one of the top three catalysts for the start of the correction, alongside an increase in bank margin requirements and large IPO issuance, was the news that Huijin, the domestic investment arm of China Investment Corp (CIC), sold some of its holdings in Industrial and Commercial Bank of China and China Construction Bank.

Following a sizeable sell-off in A-shares Huijin said the next day in a short statement that President Xie Zhichun has stepped down with the board’s approval. Huijin didn’t explain the personnel change nor name a successor. The Beijing News cited a source as saying…… Xie will go to Shenzhen University to teach, denying that his departure had anything to do with last week’s crash. (MNI)

We have no edge in whether there was any truth to the “teach in Shenzhen” story, or whether that is just a Chinese code word for “he will work in a prison camp until he dies”. For his sake, we hope it is the former – although we suspect it may be the latter.

To continue reading the full commentary from Rareview Macro LLC, please click here



Fortune Cookie Says: Outlook Bright For Asia BrokerDealers

Brokerdealer.com blog update with coverage of the Asian Market courtesy of ETF Trends’ Todd Shriber

Following some bullish data points that boosted sentiment during Tuesday’s Asian session, exchange traded funds offering access to China’s onshore A-shares markets are soaring Tuesday.

ETFTrends logoWith local investors warming to equities over property, Goldman Sachs forecasts an estimated 400 billion yuan will depart China’s property market next year with the destination being A-shares equities.

“The Shanghai Stock Exchange Composite Index(symbol: SHCOMP, +3.11%) is showing the largest positive risk adjusted return across regions and assets. In absolute terms, the SHCOMP increased by the most in 15-months and extended its YTD performance to over 30%,” said Rareview Macro founder Neil Azous in a research note out Tuesday.

News that home sales in China’s 54 largest metro areas surged nearly 9% last month is fueling gains for already high-flying U.S.-listed A-shares ETFs.

After ranking as one of November’s top-performing non-leveraged ETFs, the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), the largest U.S.-listed A-shares ETF, is higher by 5.5% today on volume that has already exceeded the daily average. Joining ASHR in the all-time high club is the KraneShares Bosera MSCI China A-Shares ETF (NYSEArca: KBA), which is higher by 4.7% on volume that is more than 30 times above the daily average.

ASHR and KBA are two of just 11 ETFs to hit all-time highs to this point in Tuesday’s session.

The Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK), the oldest U.S.-listed A-shares ETF, is soaring by 5.4% on heavy volume and is trading at its highest levels in nearly three and a half years. Although the A-shares ETFs do not feature the excessive financial services sector exposure found in the iShares China Large-Cap ETF (NYSEArca: FXI), the trio is still levered to investor sentiment to China’s largest financial services firms. The average weight to the financial services sector across ASHR, KBA and PEK is 38.7%.

“Trading values in the Shanghai Composite rose to a record 401.6 billion yuan ($65.3 billion) last week, boosting the profit outlook of brokerages relying on trading commissions as the main source of their revenue,” according to Azous.

For the entire article from ETFtrends.com please click here

BrokerDealer: Saudi Arabia Outlines Plans to Open Tadawul Exchange to Foreign Investors

BrokerDealer.com blog update courtesy of extract from 12 Sept article from Zawya, a Reuters service

Plans for new regulations on direct foreign investment in the Saudi Arabian stock market have been outlined, setting out requirements and limits for oversees buyers seeking to buy into the region’s biggest exchange.

On August 21 the Capital Market Authority (CMA) released detailed information on opening up the Saudi Stock Exchange (Tadawul) to foreign investors, following on from the Saudi cabinet’s approval for the initial proposal in late July.

Although this marks a further liberalisation of the market, a series of caps on trading will restrict the ownership levels within individual companies and overall foreign participation on the exchange.

Emerging market status

The combined market valuation of the Tadawul is around $530bn at present, representing about 45% of the total capitalisation in the MENA region. Jadwa Investment forecasts a $40-50bn injection from total foreign inflows beyond the short term.

The initial response to the reform was positive. The Tadawul rose some 10% up to the end of August, hitting a six-year high on August 26 with a surge in the value of shares bought by foreign investors via equity swaps. Since the release of the detailed draft regulations the market has eased off its highs of late August, possibly as investors digest the operational limits the CMA plans to put in place.

Even with the caps, investors will see the opening of the Tadawul to foreign buyers as a significant opportunity. Over the past decade, and despite the downturn in the wake of the global financial crisis, the exchange has shown a return of 120%, according to an HSBC report, issued in mid-August. Investors will also be lured by the strong fundamentals of the Saudi economy and outperformers such as the world’s biggest petrochemical firm, Saudi Basic Industries Corp (SABIC).

“The opportunity set for foreign investors is too significant to pass up given the quality of the corporations and market breadth relative to other frontier markets in the Middle East that come with a higher risk premium attached,” Neil Azous, founder of research firm Rareview Macro LLC, told Bloomberg.

For the full story, please click on this link.