ConvergEx, the US broker, said that removing commission sharing arrangements under Mifid II will result in only the largest buy-side institutions being able to afford research.

In a comment letter to the European Securities and Markets Authority, Timothy O’Halloran and Christopher Tiscornia, co-presidents of ConverEx, said: “The use of CSAs in the United States and in the UK has been successful to date, and the EU would be prudent to implement a similar framework. To experiment with an untested hard dollar research market model will most likely harm the investment industry, local economies, the growth of valuable research, and most importantly, the investing public.”

Under the new MiFID II regulations, covering financial services in the European Union, Esma had initially wanted all research to be paid for directly by fund managers and to ban the cost from being included in dealing commissions in order to reduce conflicts of interest.

However in December, after industry comments, Esma proposed allowing asset managers to either pay for research from their own resources or make payments from a specific research account funded by a client.

Last month the UK Financial Conduct Authority endorsed Esma’s new guidelines but also said it believed that commission sharing arrangements are not compatible with Esma’s new guidelines. The public consultation period for Esma’s proposals ended on March 2.

ConvergEx said it believed that Esma’s technical advice has been too narrowly interpreted by the UK regulator. “There is no reason that CSAs cannot comport with Esma’s proposal to create a separate, ring-fenced, payment account,” added ConvergEx.

The broker’s letter said CSAs allow smaller managers to compete on a level playing field and have been used to separate the costs of both research and execution while ensuring that a research budget is not linked to the volume and or value of transactions. ConvergEx said it pays tens of millions of dollars through CSAs to more than 700 broker-dealers around the world and each payment is specifically for research and services that have been provided over a specific period of time.

“Managers have the flexibility to seek best execution as they trade with the brokers they want, while obtaining the research that they need, from virtually anywhere,” added ConvergEx. “Additionally, managers have the latitude to control costs by paying brokers pursuant to a budgeted research target, and then move to an execution only rate.”

The Association for Financial Markets in Europe, which includes pan-EU and global banks, brokers, law firms and investors also expressed concerns that Esma’s equity research proposals will harm smaller firms in its comment letter.

AFME said: “For equity research, we support Esma’s recognition that research is not prohibited as an inducement if it is paid for by the recipient investment manager or by its clients. However, we are concerned that the proposed conditions for using client resources to fund research are so restrictive that in effect they will render the regime unworkable.”

The AFME also said in its comment letter that Esma’s definition of liquidity in the bond markets will make it more difficulties for companies to raise finance.

“For bond market transparency, we are very concerned that the proposed definition of liquid markets is overly broad and does not recognise the dynamic nature of liquidity, and that the SSTI (size specific to the instrument) and LIS (large in scale) thresholds for pre- and post-trade transparency are unsuitably high,” added AFME.

The International Capital market Association agreed in its comment letter that Esma’s liquidity proposals for bond markets needs refinement. A technical working group made up of heads of fixed income dealing desks on both the the buy-side and sellside was put together to comment on the MiFID II consultation paper which included participants such as Bondcube, GAM, Goldman Sachs, Nordea Investment Management and Société Générale.

ICMA said that the only true way to calibrate liquidity is daily trading behaviour. The letter said: “Any other methodology will generate a high proportion of false liquidity as evidenced in Esma’s data.”

The trade association has included tables for defining liquidity in specific instruments in its comment letter based on an instrument by instrument approach (IBIA) alongside a COFIA (class by class) approach.

“If Esma continues to be of the view that COFIA alone is necessary – in the interest of regulatory simplicity, it will be vital to at least reduce the ‘Large in Scale’ and ‘Size Specific to The Instrument’ thresholds for determining market transparency obligations,” added ICMA.