Investment banks automating their research process could save up to 30% on maintenance costs and improve operating margins in their research business by 300 bps, Crisil Global Research & Analytics (GR&A) said in a report.

Sell-side research has been facing unprecedented disruption driven by unbundling regulations, the rise of financial technology companies, and a structural decline in high-touch trading revenues.

In the medium term, the Markets in Financial Instruments (Mifid 2) regulations would lead to a decline in buy-side research budgets and in the number of banks from which research is purchased, Crisil GR&A said in the report titled "Investment research faces technological disruption, profitability pressures".

According to Says V Srinivasan (pictured), president at Crisil GR&A, the sell-side is under intense pressure to reduce costs and at the same time stand differentiated with their research insights. "For a universal bank, a strong research team is essential to maintain its edge not only in the cash equity segment but in other areas such as capital markets, equity derivatives and structured products," said Srinivasan. "Mifid 2 will bring about a substantial change to the regulation of research as a standalone business. We have been talking to clients about how to make best use of technology in such a changed regime that requires the sell-side to reduce costs of research and produce differentiated research."

Under Mifid 2 product manufacturers are required to apply measures to ensure the independence and operational separation of staff preparing marketing material / recommendations which does not amount to investment research. This means that analysts that prepare investment research will need to be physically separated from those other persons whose interests may conflict with those of the persons to whom that research is disseminated, according to Srinivasan.

"We believe that automating structured research tasks and producing differentiated research offers banks the best chance to counter and address the imminent disruption from unbundling," Srinivasan said. "The time spent on research tasks can be reduced from 45% to 20-25% through research process automation on a conservative basis. In addition, by taking recourse to intelligent automation, sell-side research could improve margins by ~300 basis points and opening up avenues for differentiated, technology-driven research."

According to Srinivasan, research revenue could decline further over the medium term due to multiple disruptive trends which is opening up opportunities as sell-side firms explore options offered by technological advancements to reduce costs and differentiate research. Research unbundling and technology also opens up the possibility of alternative research providers competing with the sell-side - something that was not possible till now because they needed to offer trading execution, too, said Srinivasan.

Going forward, research analysts will focus only on alpha-generating ideas, industry and theme based insights, aided by cognitive automation, leaving structured and low-value tasks largely to machines, said Srinivasan, adding that Crisil GR&A is seeing increasing traction from its existing and prospective clients to adopt tech-based solutions that will embed intelligence into core research functions.

To address this requirement Crisil GR&A has rolled out 'Smart', a technology platform which is powered by 'intelligent automation and enables analysts to emulate tasks and optimize decision making'. Smart enables analysts to perform model updates with 100% data accuracy and 2x speed, get access to a model- ready data for 3,000+ companies and 50+ industry datasets, saves up to 35% of the effort in publishing earnings reports and 60% reduction in collation time of news updates.

Mifid 2 will impose an inducement ban in relation to retail clients to restricted advice as well as independent advice; to prohibit the acceptance of commission and benefits rather than their acceptance and rebating to retail clients; and to broaden the adviser charging rules by applying the ban to the business of providing advice rather than only to inducements provided in relation to the provision of a particular recommendation to a client.

Under product governance obligations and 'the rules applicable to the provision or receipt of fees, commissions or any monetary or non-monetary benefits (Mifid 2 Delegated Directive) third party research is considered 'an important tool for investment firms' as long as it 'allows investment firms providing portfolio management or other investment or ancillary services, to receive research from third parties in a way that does not contravene the inducements rules where the research is paid for by the investment firm out of its own resources or via a separate research payment account controlled by the firm which may be funded from clients'.

Mifid 2 rules also establish how firms should operate a research payment account and collect charges.

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