Staying Ahead of the Regulatory Curve


An alphabet soup of regulations on both sides of the Atlantic has sparked frenzy among the buy side to get out in front of the regulatory and compliance curve.

AIFMD, Basel III, Dodd-Frank, Emir, MiFID II and the Volcker Rule, among others, are looming and are testing the ability of capital markets firms to maximize operating efficiency, as the weight of requirements spanning trade execution, clearing and reporting makes itself felt.

Brian Sentance, CEO, Xenomorph

Brian Sentance, chief executive, Xenomorph

For example, Title VII of the Dodd-Frank Act—along with Emir, its international counterpart—will create upheaval in the OTC derivatives markets, with implications for trade capture, confirmation, trade reporting, compliance and margining processes.

Major pain points include “the sheer volume of the regulations being implemented at one time across both sides of the pond, the uncertainty still surrounding both the regulations and the interactions between regulations set between different bodies”, said Brian Sentance, chief executive of Xenomorph, a provider of analytics and data management software.

Centralized data management is key to an organization’s ability to navigate the shoals of regulatory risk in capital markets.

“Traditionally, data has been managed on an organic, departmental basis often leading to isolated data silos and spiraling costs from data vendors,” Sentance said.

Web of Regulations
Access to a broad range of multi-asset broker services, hubs, crossing engines and post-trade systems all around the world is now commonplace, but brings with it the need to implement and run a highly complex technology infrastructure.

Buy-side firms are operating in an ever-more challenging world, with a seemingly constant flow of new regulatory requirements coupled with an increasingly complicated pre-trade, at-trade and post-trade environment.

“There’s a push in terms of going into additional asset classes, transparency and the need to connect to additional venues,” said Megan Costello, president of Fidessa’s North American buy-side business, a trading and technology company. “The landscape is getting much more complex.”

Regulatory compliance entails a robust operational and regulatory infrastructure for both start-up and established hedge funds, as well as a proactive approach in order to fulfill various regulatory requirements.

Recognizing that firms can no longer rely on the provision of FIX engines and networks alone, Fidessa is expanding its service offerings to cover all hosting, management and operational aspects of a firm’s FIX and non-FIX based connectivity and infrastructure, Costello said.

Collateral Optimization
Impending global derivatives regulations will be the most pressing challenge the buy side will face in the next few years.

The transition into the post-Dodd-Frank, post-Emir regulatory environment holds huge implications for asset managers, none more so than collateral management.

Firms that participate directly in the $700 trillion swaps market will be forced to undertake collateral optimization programs in order to unlock an expected $1.6 trillion to $2.0 trillion in collateral shortfalls, according to research firm Tabb Group.

“Surprisingly, from a pure collateral perspective, it won’t be the basic compliance to the regulations that will be the challenge, it will be surviving the unintended consequences of the regulations that the industry needs to address,” said Ted Leveroni, executive director of derivatives strategy and external relations at post-trade processing service provider Omgeo.

Omgeo’s collateral management system, ProtoColl, “has been and will continue to be enhanced with a focus on automation of workflow and automating steps to allow firms to optimize the collateral that they have on hand”, he said.

The system allows clients “to monitor and manage their counterparty credit risk in an automated, holistic fashion across all of their instrument types”, said Leveroni.

Sustained investments in risk management software allow buy-side firms to gain a better and granular understanding of total holdings and embedded risks, to speed up ad-hoc scenario analysis and stress tests, and to update existing regulatory capital calculators satisfying deadlines set by national regulators.

While regulation presents risk for some buy-side managers, others say new rules will not present a burden and can even help by leveling the playing field vis-à-vis high-speed traders.

For example, some pension plan managers say conservative investment charters and internal checks and balances force tight compliance independent of what regulators may come up with.

“I am all for regulation and transparency,” said John Colville, chief investment officer of the City of Sacramento pension fund, which manages about $300 million. “For too many investment cycles this has not been available.”

“We are very conservative and very transparent,” Colville told Markets Media. “We have reporting requirements on a monthly basis, so it is implied that we are going to be transparent. All this regulation coming will have relatively little effect on our day-to-day operations—I think it will affect non-public buy-side entities more. As pension fund managers, we are not driven by alpha or P&L [profit and loss] as much.”

Colville said proposed new regulations to rein in high-speed traders are “a step in the right direction, at least until the PhDs and algos find a new way to circumvent the system”.

New technology enables firms “to take control of their data, to integrate disparate sources and feeds and to present them in a unified manner across the enterprise to systems and end-users alike”, said Sentance of Xenomorph.

Xenomorph’s TimeScape Pricing Services, for example, supports more than 100 different instrument types across multiple asset classes, including fixed income bonds, convertible bonds, FRN, FRAs, futures, forwards, options, swaptions and inflation curves.

The objective is to “provide the necessary tools for structuring vanilla or OTC products and a powerful framework for re-pricing them no matter how sophisticated they may be”, Sentance said.

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