Only the strongest commodity analysts will survive new European rules that require funds to pay separately for bank research from January, with independent firms seen as big winners in the new regime. The regulation comes under the umbrella of a sweeping new EU law called Markets in Financial Instruments Directive (MiFID II), the biggest overhaul of securities rules in a decade, designed to apply lessons from the 2008 financial crisis.
MiFID II specifies that the cost of research is budgeted separately from other trading fees. The aim is to ensure that the costs are transparent and come out of fund manager revenues, rather than being bundled into a single trading commission fee paid by investors as they are now. Some of the world's largest fund managers may choose to develop their own research functions, but that will not be possible for smaller firms that do not have the resources.
"We don't have the capacity to do the research in-house. Our research budget is going to at least double. Even so, it won't be enough," a fund manager focusing on natural resources said. "We'll have to be more discriminating, it won't be difficult - on a given day I might get 40 research notes of which I might read five. It does mean only the best will survive."
Sources say commodity research is unlikely to cost as much as that for equities or bonds, which account for more than 80 percent of allocated investor money. But without giving any numbers they did say the expense will be significant. Choice of vendor for individual managers will hinge on relationships, quality, the resources devoted to commodities and whether the research is core or an add-on.
Some are planning to opt for independent research. "Why would I buy the skewed 'let me talk my book' bank research, when I can get better quality research from someone like (independent commodity consultancies) Wood Mackenzie or BCA Research," a source at a Europe-based private equity firm said. "If I have to pay for research, I'm going to be super selective, focus on what I really need, what is useful. Bank analysts get data on things like cost curves from the independents anyway."
Other commodity consultancies mentioned include Energy Aspects, CRU Group, Roskill and Rystad Energy. "There's been more interest from that side of the fence (funds) this year. We've had more enquiries about our research, how much it costs and where we get our information from," a marketing source at a commodity consultancy said. "Decisions are going to have to be made very soon." Fund sources expect contracts to be signed by the third quarter as banks will need to ensure they have the necessary expertise to provide the promised research by January.
"There really is no alternative in commodities," one banking source said when asked whether plans by banks to exempt currency strategists from the new rules by changing their job titles could be an option. Guidance from the European Securities and Markets Authority (ESMA) says firms can treat "short term market commentary on the latest economic statistics" as minor non-monetary benefits that are not covered by the regulations. "You won't be able to shoe-horn commodities research into that definition," the banking source said.