The Commission Sharing Agreement (CSA) is an arrangement between investment firms and their clients that regulates the payment of fees to third-party research providers. The introduction of MiFID 2 in 2018 has brought significant changes to the CSA model, which has been a controversial topic within the investment industry. In this article, we will explore the basics of commission sharing agreements and how they have evolved with the implementation of MiFID 2.
What is a Commission Sharing Agreement?
A Commission Sharing Agreement is a contractual agreement between an investment firm and its clients that separates the cost of execution from the cost of research. Prior to the introduction of MiFID 2, investment firms often bundled the cost of research into the overall cost of their services, which meant that clients were paying for research whether they used it or not. CSA`s were introduced to allow investment firms to pay for research separately and make it clear to clients what they are paying for.
How Has MiFID 2 Affected Commission Sharing Agreements?
MiFID 2 has brought significant changes to the CSA model by requiring investment firms to unbundle the cost of research from execution costs. Investment firms are now required to provide clients with a clear breakdown of the costs associated with the execution of trades and the costs associated with research.
Under MiFID 2, investment firms are also required to provide clients with evidence that the research that they have paid for is adding value to their investment decisions. This has created an incentive for research providers to provide high-quality, value-added research.
Another key change brought about by MiFID 2 is the requirement for investment firms to establish a research payment account (RPA) to pay for research services. The RPA is funded by the client, who agrees to a research budget at the beginning of the year. The investment firm then pays for research services out of the RPA, and any unused funds are returned to the client.
Finally, MiFID 2 has created new reporting requirements for investment firms, which must report the amount of research payments made to third-party providers on a quarterly basis. This reporting requirement provides transparency to clients and ensures that investment firms are complying with the new rules.
The introduction of MiFID 2 has brought significant changes to the Commission Sharing Agreement model, with investment firms now required to unbundle the cost of research from execution costs. The establishment of RPAs and the requirement for reporting on research payments provides transparency to clients and ensures that investment firms are complying with the new rules. It is still early days with these new rules, but so far it appears that MiFID 2 has been successful in improving transparency and creating incentives for the production of high-quality research.