The European Securities and Markets Authority (ESMA), which brings together national regulators in the 28-nation EU, made market-research proposals to the European Commission in December as part of work to implement an overhaul of the EU financial-market law known as MiFID II.

The commission, the EU's executive arm, plans to publish rules by midyear. The bloc's 28 national governments and the European Parliament will have six months to raise objections. If they don't, the final standards could be issued by year-end and take effect in 2017.

For equities research, the ESMA proposals would require changes to the current system whereby asset managers use dealing commissions to cover the costs of research, effectively passing the cost on to their clients. On the fixed-income side, no such straightforward fee exists.

'It is unclear how the ESMA advice could be applied in practice to fixed-income, commodity, and currency research,'' said Christian Krohn, managing director of capital markets at the Association for Financial Markets in Europe, which represents investment banks such as Nomura, Deutsche Bank AG, and JPMorgan Chase & Co. that are key research providers.

The plan is “fundamentally inconsistent with the structure of the FICC markets where investment managers and their clients do not pay for research,” he said.

Market Size

Under ESMA's approach, asset managers would have the choice between a fully unbundled system where they expressly pay for research as a separate service, using their own funds, and a hybrid model where they set up dedicated “research payment accounts” funded by a specific charge to the customer, with the amount of this charge agreed on in advance.

The size of the fixed-income research market is also hard to assess.

“Globally, equity research commissions are worth about $20 billion a year,” said Neil Scarth, a principal at London-based Frost Consulting, which advises companies on market-research issues.

“Fixed-income is a much bigger asset class, but overall there is probably less research,” he said. “The amount will be less, but it will be in billions.”

Britain's Financial Conduct Authority, a member of ESMA, says U.K investment managers pay an estimated 3 billion pounds (US$4.5 billion) of dealing commissions per year to brokers, with about half of this spent on equities research.

“Evidence suggests there is much less research on the credit markets produced and consumed for fixed income than for equities, and levels of payments for it are likely to be much smaller for this reason” the FCA said in a report last month.

It's an area that is “more opaque than equity markets since research is entirely embedded in implicit transaction costs,” the regulator said.

This contention is contested by the banks, which say the bid-ask spread is based on a range of market considerations. They also say the idea that research costs could be included in the spread is inconsistent with best-execution rules that require trades to be executed at the best available price.

The bid-ask spread is “competitively formed,” Nomura's Bowley said. “It is the existing trading environment and structure which drive the spread formation. Those spreads are consistent globally.”

“Certainly there is a cost involved,” Nicholas Dray of London-based broker Marex Spectron's Independent Research and Commission Management desk, said in an interview.

'Bundled Service'

“Analysts working for the banks don't do it out of the kindness of their own hearts—they get paid. So there is a cost somewhere,” he said. “It's a bit of a fallacy to say it's free, because they are cross-subsidizing it somehow.”

Money managers are keen to see a narrowing of spreads if they're forced to pay separately for fixed-income research, said Daniel Godfrey, chief executive officer of the Investment Association, which represents U.K. investment managers.

“If the buy-side starts to pay cash for a product that was previously part of a bundled service, then the residual part of the bundle should become cheaper,” he said in an interview last month. While measuring a narrowing of spreads would be difficult, “we will need to demand that we pay less in spread if we're paying hard dollars for research.”

–With assistance from John Detrixhe in London.

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