The New Normal of Regulatory Compliance

Terry Flanagan

Derivatives market participants are preparing their businesses to take advantage of volume growth and new revenue opportunities in the future.

“Historically, financial institutions have been focused on investing in operations to support business expansion plans including a move into new markets or rolling out new business, all of which require a re-tooling of infrastructure to manage greater volumes and business growth,” John Omahen, vice president of post-trade derivatives at SunGard Capital Markets, said in a recent blog post.

However, in the last two to three years this focus has shifted away from growth and towards regulatory compliance.

Hit by various regulations including Dodd Frank, EMIR, Basel III, MiFID II and others, operations managers at banks of all sizes are focused on weathering this regulatory storm by allocating the majority of their resources and budgets to either support the compliance required or reduce operating costs in order to boost overall efficiency.

“Most firms have accepted that this is the new normal and in fact, this isn’t a change from the last year,” Omahen said. “However, firms have now resigned themselves to the fact that this is how it is going to be for the foreseeable future until the market turns a corner.”

Achieving an aggregated view of executable content and approaching new market structures such as SEFs will be major issues for 2015.

“It is very difficult to adhere to best execution policies, manage risk and compliance effectively, engage in processes to limit market abuse and promote best trading practice if you have a fragmented view of the market,” said Shai Popat, director of global OTC content at Interactive Data Corp. “Disparate liquidity, multiple venues – increasing in number – is making it ever more difficult to get a transparent view of the entire market.”

Just as with exchanges a few years ago, it is widely accepted that the number of SEFs will contract. “We are already hearing of SEFs in the IDB space potentially consolidating, but for now at least our clients are spending a huge amount of time and money trying to get an access to a consolidated view of trading venues such as the SEFs,” Popat said.

Another problem is that many data vendors themselves are SEFs, and there are clearly other sensitivities around the sharing of this data. “The market needs an independent aggregator and our customers are certainly asking us to be that provider,” said Popat.

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