A renewed focus on counterparty risk by fund managers is driving the trend towards commission sharing agreements, which could soon become the dominant research payment system in
Australia, according to Investment Technology Group (ITG).
Michael Corcoran, managing director, sales & trading – Australia at ITG, said commission sharing agreements had experienced rapid growth among Australian fund managers over the last six to 12 months, with the global financial crisis hastening the trend.
A greater awareness of counterparty risk and a willingness to conduct “Best Execution” trades was causing many institutions to pare back the number of counterparties they deal with, he added.
“The collapse of Lehman Brothers caused the industry to have another look at counterparty risk,” Corcoran said.
“It forced institutions to look at who their counterparties are and the risks that they may go the same way [as Lehmans], and it forced clients to take a much stricter view of counterparty risk. In many cases they’ve actually pared back who they conduct trades with.”
A commission sharing agreement splits execution and research and allows traders and fund managers to pay separate providers in the value chain without incurring additional costs or administration.
Corcoran said super funds have a role to play in encouraging their fund managers to adhere to Best Execution principles, ultimately driving down costs for members.
ITG believes commission sharing agreements are likely to replace the panel system as the dominant research payment system in
UK, where principles of Best Execution must be applied under the Markets in Financial Instruments Directive (MiFID), 70 per cent of asset managers are now using commission sharing agreements.
There is no regulation requiring Best Execution in
although the Investment and Financial Services Association released a guidance
note in December 2006 on disclosure of brokerage arrangements.