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The topic of analyst coverage is gaining momentum: The European Securities and Markets Authority (ESMA) is planning to revise the unbundling rules for research services introduced under MiFID II. This initiative could have significant implications for Investor Relations Officers (IROs), particularly regarding the availability and quality of analyst research.
Background: MiFID II and Unbundling
When and why were the unbundling rules introduced in the first place? With the implementation of MiFID II in 2018, financial service providers were required to itemize the costs of research and trade execution separately. The goal was to create transparency and prevent conflicts of interest.
The impact?
This separation led to a decline in analyst coverage, especially for small and mid-sized companies (SMEs), as demand for paid research decreased. A 2020 ESMA study revealed that the number of analysts covering SMEs had dropped significantly since the introduction of MiFID II.
Current Developments: ESMA Considers Changes
In response to these developments, ESMA launched a consultation in October 2024 to evaluate the impact of unbundling rules and discuss potential adjustments. A key topic is the reintroduction of bundled offerings for research and trade execution, regardless of the issuer’s market capitalization. This could allow investment banks and brokers to offer combined packages again, which could be particularly beneficial for smaller companies.
Impact on Investor Relations
What does this mean for IR? These proposed changes bring several potential advantages:
- Increased Analyst Coverage: The possibility of bundling research and trade execution could motivate more analysts to cover smaller companies as well, increasing their visibility in the capital markets.
- Improved Communication: A broader analyst coverage allows IROs to communicate their corporate messages more effectively and reach a larger investor audience.
- More Competitive Pricing: The bundling of services could lead to more cost-effective offerings, which would be especially attractive for companies with limited budgets.
Challenges and Considerations
Despite the potential benefits, IROs should also consider some challenges:
- Research Quality: There is a risk that reintroducing bundling could dilute research quality, as analysts may operate with less independence.
- Regulatory Uncertainty: The exact framework of the planned changes has not yet been finalized. IROs should closely monitor developments and prepare for different scenarios.
Conclusion
The opportunities and risks of adjusting the unbundling rules are closely linked. Increased analyst coverage and improved communication opportunities must be weighed against potential concerns about research quality and regulatory uncertainties.
If the unbundling rules are indeed relaxed, it makes sense to think more actively about analyst targeting. Thus, analyst targeting can be incorporated into IR strategy and planning, and companies can prepare for potential implementation early on. Should the rules indeed be eased, companies can directly begin their analyst targeting efforts. As the saying goes: The early bird catches the worm!
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