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The unbundling of sell-side research in the European markets has not led to the feared decline in analyst coverage for smaller companies, according to a review by the European Securities and Markets Authority (ESMA).

The regulator published a new paper that examines the effects of research unbundling provisions that were adopted in 2018 as part of regulatory reforms known as MiFID II.

The rules require portfolio managers to pay for equity research directly, rather than compensating brokerage firms by directing trading business their way.

“These ‘research unbundling’ provisions aim to reduce the potential conflict of interest for those investment firms offering both execution and research services,” the paper said.

Before the requirements took effect, critics complained that they would reduce the quality and availability of research coverage, particularly for smaller firms.

Yet, the researchers found no evidence that research unbundling requirements have negatively affected the quantity of coverage for small companies relative to larger firms.

They also concluded that the probability of small firms completely losing coverage has not increased, nor has the quality of small company research been diminished, relative to a larger firms.

Smaller companies still attract less research coverage than bigger firms, but this hasn’t been affected by MiFID II, the researchers found.

Despite its findings, the paper noted that the research unbundling rules are “likely to evolve in the coming months” amid proposals that would, among other things, exempt smaller companies (market caps under €1 billion) from the unbundling provisions.