♪ nejra: how low can you go? falling research prices under mifid ii leave asset managers with a dilemma. do they pass on the costs of investment research? back to work for washington. how likely is the repeal of the volcker rule? and what will it mean for u.s. banks? plus, we need to learn the lessons from the crisis. that is the message from bun desbank. we would hear what he has to say on regulation, over banking, and

the low rate environment. welcome to "bloomberg markets: rules & returns." i am nejra cehic. rules and returns is the show where we delve into regulatory challenges and opportunities around the globe. from mifid ii to dodd-frank, we will speak to those reacting to a new generation of rules. let's get straight to mifid. the new regulations are set to change the landscape for investment research ahead of the legislation going into effect on january 1. -- january 3. take a listen. mifid ii is disrupting the world of investment research. in the past, investment research and corporate reports have typically been offered as a free service to carry out their trade. from january 3, that research will have to be paid for separately. why? eu lawmakers wanted to curb conflicts of interest that could leave investors facing opaque, steep costs. under the new rules, investment firms will have to demonstrate they are getting the best

execution for their clients when they trade. regulators hope this will lead to more transparency and competition. analysts are rushing to prove their worth, and investors are growing increasingly selective about what they will pay for. then there are the regulatory conflicts in the europe and the u.s., along with who pays. some buy side firms are planning to pay for research out of their own profits, while others pass costs on to clients. there are various offers. packages being modeled by sell side companies include basic pay-as-you-go to all-in offers. prices vary widely, in some cases it from as little as nothing to over $450,000. as the january 3 deadline looms, the overarching question is how much the buy side is willing to pay and whose research is worth it? for more on the hot topic of research ahead of implementation of mifid ii, and where fund managers will absorb the costs or pass them along to clients,

guy foster joins us now. guy, great to have you on the program. you have a unique perspective on this. you work for the buy side, but you are head of research. one of the big questions is what asset managers will do. we keep getting news coming out of who will absorb the costs, who will pass them on to clients. it is a growing list. some have not come out with anything yet. will those who say they will absorb the costs come out better, or is it not that straightforward? guy: i think none of this is straightforward. ultimately, all the users of research have their own particular fortes. they are using different parts of the research for different products. if you take a firm like ours, we use external research but we are dealing with private clients so they typically have very similar needs, so all the research we consume is applicable to the clients we have.

it is easy to say that we will absorb the costs. if you have a boutique fund management company with two products, bonds, equities, something like that, then it makes much more sense to apply the costs of the research directly to the funds using them. because they are using distinct pieces of research. that is the reason why some firms will treat this differently than other firms. the important thing is that clients ultimately will be footing all of the costs of the fund. they have always done that, and that is the nature of the regulation. it is to make sure those costs are visible to clients. some of the research costs were paid in and had not revealed. nejra: in terms of costs, will we see a race to the bottom, or could the costs go up?

guy: the costs will go up, as the research costs will go up, but they have started high and they are coming down quite rapidly as we approach the implementation of mifid. it is a challenge for firms, because many don't want to charge for this research. even if it was not designed in order to attract and prompt transactions, they may still see it as a cost of doing a broader type of business, particularly if you are a bank and have an equity capital markets division. you want to show you have a really good understanding of the market. so in order to do that, what firms need is a lot of clients and in order to an sure they -- to ensure lots of clients, they are becoming more

and more competitive on pricing. nejra: i want to take a listen to the ing ceo about what they were going to do about their research costs. >> we always want to be very clear. as soon as possible. we have made up our mind, and we have been very clear as to general economic research, ecb research, the kind of research we want to make freely available. we did so already this week through a website available to anyone and accessible to anyone. nejra: free, general research seems to be within the rules but how useful is that for an asset manager? guy: not hugely. to be honest. i think you can see in the product types where this is being considered that it is typically economic or credit-based research where it might support a banking division much more as a form of promotion. it is less so in equities. there are equity firms that will be providing what might have been previously considered research, but is now effectively

pr for free, but largely the reality is that most value most investors get is not from a hard copy piece of paper. it is the ongoing dialogue with analysts in order to understand the particular nuances of how they have reached their view. nejra: how difficult would that be to get? more difficult under mifid ii? guy: that will be more expensive. when i say more expensive, it will be more explicitly expensive for those who have previously paid for it by directing trades, and that is in truth most of the market. the written research that people receive is, as i would term it, commoditized. ultimately, nobody gets much of an edge by even signing up to the highest rated analyst on

such and such stocks. the edge comes from understanding the basis of their decisions, and also getting them to help you with the basis of your decisions. that is much more of a personal service which clearly will be expensive. nejra: how much is there a risk for asset managers of being accused for taking inducements for cheap analysis? guy: i think that is a source of great anxiety for them. if you, again, everyone uses research in a different way, and if you read lots of hardcopy research or pdf research, that has little marginal costs to produce. so, it becomes difficult to ascertain what the value is, and that is where they have a real problem. if you use an hour of analyst's time, that is expensive, and you can pay accordingly. nejra: thank you so much. guy foster, brewin dolphin group

head of research. still to come on "bloomberg markets: rules & returns," find out what he has to say about regulation, over banking, and the low rate environment. this is bloomberg. ♪

♪ nejra: welcome back to "bloomberg markets: rules & returns." i am nejra cehic at bloomberg european headquarters in london. let's get a roundup the latest on the latest news on financial regulations, here is sebastian. sebastian: asset managers are mostly taking the hit on mifid research costs. rather than passing them on to clients. the regulations come in force in january and are designed to make markets fairer and transparent, forcing money managers to pay separately for research and trading services. only a fraction have publicly stated their plans for the new regime. japan's financial regulator will

conduct inspections at the nation's major banks investment products. people with knowledge of the matter have said, the fsa is planning to interview bank officials and visit branches to check how they implement policies. this will lead up to the government's expansion program. bitcoin tumbles the most after china's central bank said initial coin offerings are illegal. issuing the strongest regulatory challenges so far. the people's bank of china said that all ico's should be stopped and refunds provided, although it did not specify how the money would be paid back to investors. the decision to relocate its headquarters out of sweden has been seized on by opposition politicians who say it is the latest example of jobs leaving the scandinavian country. nordea is moving to finland as the only nordic globally systemic important bank inside the eurozone. they say the decision will save

$1.3 billon in regulatory cost. that is your regulation news roundup. nejra: thank you, sebastian. a bundesbank board member says he has had discussions with bankers who are considering moving to frankfurt post-brexit. bloomberg's david westin spoke to a central banker attending the morgan stanley conference in frankfurt and asked him about the importance of regulation in the finance sector. >> it depends on the size of the banks. the top level of the banks need that sort of regulation. we need to learn the lessons of the crisis. if you get to very small banks, i still believe the capital and liquidity rules are correct. what we may do a little less with is the amount and frequency of notification to the supervisors. for example, if you were to cut off banks below a balance sheet of 3 billion euros, in germany you would reach 82% of the banks with only 14% of the aggregate assets.

a rather small risk with a large number of banks. i am thinking of some relief in the administrative issues and administrative costs of the banks rather than changing the regulations per se. so, you do not need to notify the supervisor about each and every single data and high-frequency as much as large banks need to do. david: i'm not going to ask about interest rate setting, by the ecb, but, in general, are smaller banks under a great deal of pressure in germany, because you have this low, even negative, interest rate situation? >> actually, they are. if you look to the german banking sector, 75%, three quarters of all earnings, are interest-rate sensitive, coming from the interest rate margin, and only 25% come from income. if you have that sort of business model prevailing in germany, you can imagine this

very low interest rate environment is causing a lot of pressure on interest rate margins. having said that, this did not start with ecb policies. actually since the 1980's, we have compression of interest rate margins and have seen interest rates going down, so banks had a lot of time to prepare. but our business models are geared towards interest rate income, which means, you are more heavily affected by a low interest rate environment than others. it depends at the end of the day how long this very low interest rate level will maintain. we are expecting each and every bank whether in germany, europe, or elsewhere is adjusting to which ever interest rate level there is. david: when we talk about consolidation in the german banking system, it is not just in germany. there is also foreign investment interest. you have hna from china investing in deutsche bank, maybe allianz.

i know you can't comment on individual banks, but is there concern of foreign investment into the german banking system? >> no, in principle, there is no worry about that sort of investment. we are an open economy. we will look to each investor, be they german or international, and we will do a proper check. if we don't do it ourselves, we will use the ecb for larger banks. those same criteria apply for national or international investors. they need to be fit and proper, but the nationality of investors don't matter to us. david: finally, earlier today, john cryan, the head of deutsche bank, spoke in germany and said among other things that frankfurt was a particularly attractive alternative for banks coming to the continent from london because of brexit. how do you see the competition

among frankfurt and dublin and paris for some of that banking business? >> first of all, let me start by saying germany has always had a great relationship with great britain which we will maintain. they have been partners of us and i strongly believe that london will stay, by far, the most important financial center in this area, but still in the case of the brexit, and we are assuming brexit will happen, there will be movement and the need for licensing banks on the continent. we are in no competition with other european financial centers from a frankfurt perspective, and, clearly as a representative of the german central bank, i i should and will not be competing with others. nejra: that was a board member of bundesbank speaking to david westin. still to come on "bloomberg markets: rules & returns," are repeals of dodd-frank and the volcker rule dead on arrival?

president trump called the legislation a disaster. how likely is it that strict regulations on wall street will be dismantled? we go to d.c. next. this is bloomberg. ♪

♪ nejra: welcome back to "bloomberg markets: rules & returns." i am nejra cehic at bloomberg's european headquarters in london. now rewriting the rules of washington, president trump has called dodd-frank a disaster, but is a fix in the works? when it comes to the volcker rule, how likely is a repeal?

joining us for more is our bloomberg government analyst from washington, d.c. nathan, great to see you. for all the president's talk about repealing dodd-frank, it is going to take a lot of time for some of the key issues to be rolled back. let's talk about the volcker rule first and foremost. the congressional talk about volcker, is that just talk? natahan: it is just talk. you will see people trying to produce bills to repeal or change the volcker rule, but it will not get past the senate. the volcker rule is still subject to the filibuster. you need 60 votes in the senate to get this through. republicans only have 52. it will not happen this year or next year. there is bipartisan support for tweaking the volcker rule. tweaking it to small banks, like $10 billion in assets or below, but that will not go through unless it is a last-minute scenario.

it will be up to the regulators to tweak this thing. nejra: right, so a full repeal not likely, as you say, but about those amendments, what might they look like? nathan: there are two we are telling investors to keep an eye out which are applicable to the large investment banks. first, proprietary trade. the definition of what is market making versus proprietary trading has been a complaint from the banks, so i would not be surprised to see the federal reserve will move to expand the market-making exemption, making it easier for banks to make markets. d.ere is something called rent the federal reserve, and the five regulators that have to work on the volcker rule, you could see actions late this year, early next year, to tackle that market making exemption. the other one we are telling

people to keep an eye on is the covered fund exemption. banks can use 3% of their tier one capital to invest in covered funds, private equity funds, hedge funds. if you ask a bank, the definition is way too broad. if you ask a bank, it needs to be narrowed. the private equity funds will tell you they need investment because they are job creators, so it would not be surprising to see the fed or ecb take steps to make it easier for those banks to invest in those hedge funds and private equity funds. nejra: in terms of timelines, any key dates investors should be watching for? nathan: yes, the short answer is that it will not be happening anytime soon. the occ has asked for comments to the industry saying, tell us what we should repeal or change, but it will be the fed driving this. with janet yellen at the helm, until february of 2018, you will not see a lot of action. it would not be surprising to see the fed say give us ideas,

but you need to enter into a formal rulemaking process, and that takes time. if this does not happen until march or april of 2018, you have to go through a proposal, comment period, cost-benefit analysis, it takes time. the final rule will not be out until 2019, and that's being generous. you're not looking at something that will impact the banks until 2020. there are steps the fed can take to loosen compliance in the short term. this is something you hear about in the political circles in washington. if i am a compliance officer, i am excited about it. if i am a trader in the front office, not so much. it will be limited really. nejra: thank you so much. nathan dean from bloomberg intelligence talking us through the volcker rule. that is it for this episode of "bloomberg markets: rules & returns." next time, we will speak to andrew bailey, and if you have questions or comments for the team, anything about financial regulation at all, email us at

rulesreturns@bloomberg.net. this is bloomberg. ♪

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