RegTech Intelligence

Buy-side regulatory strategy: getting ahead of the game?

JWG analysis.

We attended an august gathering of 400+ buy-side professionals last week.  Not only did regulatory drivers get a healthy hearing, but the group discussed how they will impact the way business is going to be handled in the future.

Clearly, margins are under pressure, brokers are not giving it away like they once used to, suppliers expect to get paid and it is no longer as fun an industry as it once was!

Regardless, that didn’t stop us from working through the question: what is 2017 going to look like?  We didn’t come to firm conclusions, but covered many meaty issues that will determine the result.  For example, what role will the buy-side have in managing collateral, what new collateral utilities will emerge, will new systems need to be bought-in to manage complex decision making and, perhaps most importantly, what work will be given to large service providers?

The big message that stood out to us was: in order to meet regulatory requirements and optimise your operational model, you need to focus on what your target operating model will look like post reform.  MiFID II, EMIR II, CSDR, CRD IV, UCITS VI, etc. will all change the landscape and ask you to ‘know more’ about your business.  We refer to this as the KYs which regulators routinely build into their rulesets.  The only way to rationalise them is to know your product, customer, deal, report, exposure and firm.

There is no doubt more intrusive and granular regulatory requirements are here to stay.  The key question now is how ready are you – and those that you rely upon to deliver services?  Our general read from the stunned quietness in the room was consistent with the mood outside when speaking to delegates during the networking lunch.  That is, the buy-side is just now getting their heads around ‘what’ regulations say and have yet to whole heartedly embrace the need for new ways of getting it all done … the ‘how’.

It is clear that, despite being five years on from the initiation of the G20 programme, there are still many unanswered questions.  Of course, this is of little surprise, given that there already exists an Eiffel Tower high stack of new regulatory information, with potentially two more Towers to come by 2018.  A scary thought which was aptly articulated by PJ Giammarino during JWG’s presentation “Regulatory reform: helicopter view 2015”.

Despite a mountain of regulatory paperwork, there ARE options to help the optimisation of a firm’s operating model.  Firms need to ask themselves the following questions:

  • Which regulations affect my position in the financial services industry?
  • What are my options when complying with regulation?
  • Who can help me get there and how?
  • When do I need to be making what key decisions?

Some of the answers will be dictated by your appetite for complexity and some will be set by the needs and demands of your clients.  Nevertheless, which choices you make will dictate the level of optimisation you achieve.

However, in order to achieve this, a few fundamentals need to be addressed.  Firstly, you need to get your head round the regulations.  With over 600 regulations, in what is now being called by JWG group the G46, this is easier said than done.  Over 30% of the G20’s regulations are dedicated to trading.  Traditional ways of analysing regulation are no longer usable or, let’s face it, desirable (no wants to read page after page of pdf to find one specific paragraph).  As was very pertinently put by PJ Giammarino, you can no longer use a document and the highlighter function to guide yourself through the regulatory maze.  See his presentation here:

As emphasised by PJ, and unanimously agreed on by the audience, you need to work across the different divisions and departments of your firm.  No longer can you have silos in your organisation.  As one commentator pointed out, “what is important to the operations guys will not be apparently important to the compliance guys”.  Therefore, in order to achieve optimisation and compliance, communication is vitally important.

In conclusion, we fear the soft toys given away at the booths will not be enough for the buy-side.  You need to get ahead of the game and you can only do this by asking yourself questions, familiarising yourself with the KYs and approaching regulation with new tools.

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