Reaction to SME Research Delegated Act

FESE very much welcomes the proposed Delegated Act on SME Research. We share the Commission’s expectation that exempting small and mid-cap companies from the unbundling rule should result in an increase of research coverage for those companies. Moreover, we agree with the definition of small and mid-cap companies defined as those that do not exceed a market capitalisation threshold of EUR 1 billion over a 12 months period.

Pre-MiFID II, research was supplied as part of a bundled service, paid by execution fees. Research post-MiFID II is required to be unbundled and priced separately from execution of trading of financial instruments.

Following the MiFID II application, a growing number of SMEs are paying independent research providers to write research and take the initiative in approaching investors directly. Such a sponsored research can be useful and should be maintained provided potential conflict of interests are disclosed. We nonetheless recognise that this avenue may be limited by budget constraints. Some Exchanges have launched programs sponsoring and enhancing SME research. The first results are encouraging and suggest that it may create additional liquidity for listed SMEs.

Given that the above-mentioned research channels need to be complemented, FESE considers that authorising the bundling of SME research with other services is likely to increase production and distribution of research reports and may have a significant effect on the liquidity of SMEs.

In addition, access to equity research on SMEs could be further improved by:

• Launching a Pan-European program to cover the costs of research coverage.
• Establish user-friendly platforms for analysts to share their reports on.