Use of commission management tools by buy-side firms has become a global trend since the 2006 implementation of regulation in the US and UK. While take-up has been slower in Asia, attitudes are beginning to change, says a new report by research consultancy Aite Group.
“The use of commission sharing arrangements (CSAs) is definitely growing within the Asian markets but compared to the US and European markets, it is still lagging behind. One thing that’s missing is a regulatory framework that’s pushing the use of CSAs. The developments that we have seen in some Asian markets are being pushed by buy-side clients that have a global mandate,” said Sang Lee, managing partner at Aite Group and co-author of the report, ”Global Commission Management Update: No Credit Too Small'.
Total percentage of commissions paid via CSA/client commission arrangement (CCA) programs worldwide reached 25% at the end of 2010. The Aite Group expects the figure to reach close to 35% by the end of 2013, driven by the need to optimise every single commission dollar and further increase the flexibility of buy-side firms in determining how to divide commissions between execution and research providers.
The CSA was initially developed as the UK industry's response to the Financial Services Authority (FSA)'s Consultation Paper 176 (CP 176) and the resulting final rules, Policy Statement 05/9 (PS 05/9), which were intended to create greater transparency in the use of commissions between execution and research. Under the CSA scheme, buy-side clients can build up commission credits with their CSA brokers (which typically provide execution) so that payment for research-related services can be administered and distributed by CSA brokers. CCAs are the US counterpart to the UK's CSAs. Similar to CSAs, buy-side clients build up commission credits under the CCA scheme, and CCA brokers administer and distribute payments to third-party brokers and vendors that are eligible for payment under section 28(e) of the US Securities Exchange Act.
In Asia, given that no regulation currently insists on the use of commission management, many firms don't use these arrangements. Even so, their attitudes are beginning to change, the report noted.
“Unlike large global buy-side firms that have more clout, smaller buy-side firms may be locked into a relationship with one or two large broker dealers and they don’t really have a say in terms of and demanding unbundled services. At the end of the day, it is a balancing act and it does seem like CSA is a growing part of the business which makes it easier for all types of buy-side firms to better manage their relationship with multiple brokers,” Lee said.
The report noted three key trends occurring in the commission management market: increased adoption and acceptance of payment via commissions; demand for aggregation services; and increased demand of global commission management platforms.
As this trend continues, some buy”side firms are dealing with 10”plus firms to allocate their commissions. This means that they have 10”plus accounts to manage, 10”plus passwords to remember, and 10”plus contact people to deal with. This is not only inefficient, but extremely complex and time”consuming. In response, certain commission”management providers have created an aggregation service for their clients that allows clients to pool all their commissions into a single pot. In essence, credits accrued at various brokers are all sent to a single broker for any particular client. This single broker then gives the client a single central portal that they can use to conduct all payments.
“We are seeing growth in the demand of commission management in the Asian markets,. One”to”one research relationships have typically existed between the asset management industry and the sell”side in Asia, but we are now beginning to see growth in the number of independent research providers in these markets,” the report noted.
The report also noted that use of CSAs is not currently acceptable in Japan, Korea and Taiwan. There is no regulation in Japan that states the use of CSAs is illegal; as there is no regulation that states that buy-side firms have to utilise this mechanism to pay for research, most choose not to.
Alongside Australia, the most developed Asian market in terms of commission management is Hong Kong, which introduced the ”Hong Kong Soft Dollar Code of Conduct' in the mid”1990s. Most use of commission management tools and arrangements in Hong Kong is by global buy-side firms that already manage commissions on an unbundled basis in the US and Europe, and want to be able to generate commissions on the trades their trades in the Asian markets.
Author: Jill Wong