What is a CSA and how is MIFID disrupting it?

CSA= Commission Sharing Agreement between a buy side firm and a broker.
What are the exact mechanics when a trade is executed and a CSA exists?
And what is MIFID II proposing instead of a CSA agrreement?

Currently (D) a Fund company may share its 1.20% Fee with the depot bank 50/50. The trailer is then paid to the depot bank and part thereof to a advisor (34f).

The front-end sales fee that gives no incentive to an advisor to provide long term support or the ability to reallocate the money to a different fund; is shared between Depot Bank and advisor.

There will be as we know thus far the following changes to the modus operandi under Mifid II.

In order to receive a fee a Advisor (Depot Bank?)
A) must provide cont. substantial service.
B) may have to pay tax (Umsatzsteuer) on these fees
C) Clients must receive at least once a year the amount of fees an advisor has received due to the relationship
D) The advisor due to regulation may be forced to invest part or all of such fees into quality improvement (service)
E) Must (as in the US) review the account an it investments as well the loss tolerance at least annual

Boilerplate Investments may no longer permit an advisor to call him/herself independent.

The question as far as I know nobody has answered is if a depot bank (Like a BD in the US) has compliance responsibilities. (Risk Tolerance, Appropriateness of investments).

Due to the above it is clear why more money will be allocated to ETFs. Advisors who hoped to receive a retirement income for AUM for doing nothing more than having a phone call or lunch once a year may be out of luck.


must receive the information of the exact amount

Thanks for a very clear explanstion

Based on the most recent paper from the European Insurance Oversigth: Eiopa in Frankfurt we may assume that the Mifid II rules will be fully applied to variable life insurance products. The trend is as it was in the US over the last 15 years that brought the DOL rules.

VA and VUL products will only make sense as a fee based product. Insurance Co. are currently asked how much and from whom, when they receive money (inducements) from the Fund Co. Are Funds included because they pay more?

It will (if enforced) change the bAV and VA, VUL market in Germany and Austria.

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There’s another meaning of commission sharing agreement which refers to the relationship between asset management firms and the banks and brokers they deal with. MiFID II is also tackling the way in which research and execution are paid for by asset managers.

CSAs are an popular mechanism used to separate execution and commission charges, enabling fund managers to pay providers of research who may not be execution counterparties.

Let’s say, for example, that an asset manager buys $1,000,000 worth of Daimler shares and pays a bundled commission of 15bps. With a CSA, the executing broker keeps say 5bps or $500 of commission while the other $1000 is put in a CSA pot. The asset manager can then pay any of its research providers from the funds accrued in its CSA pot.

In the inducements section of MiFID II (commonly referred to as “research unbundling”), payments for research must be fully and transparently separated from execution costs.

The relationship has historically been one where banks and brokers have provided additional services to the buy side firm in order to drive more execution business. The commission rate for executing an equity trade has been an all-in rate and while CSAs went part of the way to breaking out a research fee, they have not been universally adopted.

From January 2018, this can no longer be bundled and fees for execution and research services clearly separated. As part of unbundling, sell side firms will need to price and supply execution and research services separately. Buy side firms will need to adhere to the additional requirements of MiFID II which include setting research budgets upfront, monitoring payments, keeping track of the services received, and having management oversight and quality assessment.

The delegated act text leaves room for the use of CSAs to continue as an operational mechanism to fund a newly named Research Payment Account (RPA), although only if the other requirements of research unbundling are met. The RPA can also be funded by a direct charge to the investor in a similar way that a management fee is currently charged.


@andrefassler what is a depot bank in Germany?

The CSA agreement you are reffering to, is between a bank that a financial advisor is affiliated with (for custody or execution or research)?
How does this differ from what @vicky describes below?

Hello Efi,
Custody = Depot Bank. I do not see what vicky describes.
We can talk in more detail if you like. Each compensation structure is
individually negotiated.

Hence, this will be very disruptive as Banks (Custody) have received nice
sums of money from Fund Co.
Some of that money has then been paid to the Introducing Broker/Broker
Pool. Fund Co. will have to lower their fees or show that there is a reason
to exist in comparison to ETF.

The trend under MIFID II will accelerate the move to ETFs. Some BD/IB will
see revenue fall of a cliff combined with regulation and compliance
risk/cost, since under the potential new Reg. one may only receive
compensation for enhancing service and servicing the clients.

It is a similar trend we had starting in the US about 15 yrs ago. A shares
(5% 1x + reg cost)) flagged by compliance became a no go and advisors moved
to C shares (1% annual + reg cost) as a transition to the fee based system
we have today.


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