Post-trade realities hit home on the buy-side
By Virginie O’Shea, senior analyst at Aite Group
The ongoing global regulatory debate
about the Tier-one asset management community’s systemic significance reflects
the dramatic shift in attitude toward the buy-side over the last 24 months.
Though it continues to be fiercely debated, the potential impact of a large
asset manager’s failure on the financial markets is at the forefront of the
regulatory crackdown on non-bank financial institutions. The buy-side community
has already faced a gamut of new regulatory requirements, and it is confronted with
the prospect of many more in the coming years. Buy-side-focused regulation may
begin to rival that focused on the sell-side in five years if nonbank reform
continues to be drafted at this pace.
All of these requirements have already
impacted the buy-side’s middle- and back-office operations, and firms that put
technology purchases on hold during the 2008 economic and market crisis are evaluating
their internal technology environments. Systemic and operational risk concerns
have also heightened these firms’ scrutiny of third-party outsourcing
relationships, leading to an uptick in reconciliation processes and the
introduction of additional reporting layers between firms and their service
providers.
The regulatory burden has increased
significantly for these firms overall and several regulatory items are top of
mind for the 58 buy-side firms we surveyed as part of our recent research
including the Foreign Account Tax Compliance Act (Fatca), the Alternative
Investment Fund Managers Directive (AIFMD), and the upcoming Undertakings for
Collective Investment in Transferable Securities (Ucits) regulations. Potential
challenges or issues are even related to the interconnectedness of regulations
in one region; for example, there is some concern about the interaction between
fund regulations Ucits V and AIFMD and the over-the-counter derivatives
clearing requirements under the European Market Infrastructure Regulation (Emir).
Given regulatory change’s wide scope, it
is no surprise that the buy-side community is still somewhat divided between
those adopting a firefighting approach versus those that are able to approach compliance
projects strategically. Not all firms are looking at compliance requirements
holistically; some firms are focusing on implementing specific technology
projects aimed at meeting individual regulations’ requirements. Others are
examining a strategic, more centralized data framework from which to draw data
for reporting purposes; hence, these firms have multi-year technology projects
in flight.
It is commonly recognized, however, that
data sets are being heavily impacted by regulatory change, especially risk and
valuations data. Firms are much more aware of the data management process’
shortcomings than they were before due to data-quality issues’ increased
visibility when aggregating required data for reporting or risk measurement
purposes. Regulators are probing portfolio data in unprecedented ways, which
requires more systematically centralized client and portfolio data in a world
still clinging to spreadsheets for valuation modeling and record keeping.
It is not just a case of buy-side firms
meeting their regular reporting obligations; they must also deal with a whole
slew of ad hoc reporting requirements and, sometimes, on-site visits by
regulators, which are likely to increase if systemic importance is designated.
The pace of regulatory change has not helped matters, since firms are often
reliant on manual processes and therefore cannot scale to meet an uptick in
demands on a daily or weekly basis.
Our research indicates that the majority of
firms are reliant on at least some manual processes to respond to regulators’
ad hoc requests for information, and only 12% of respondents to our survey feel
that they are in a good place to respond in a largely automated fashion.
Moreover, regulators are not the sole issuers of ad hoc reporting requests;
external clients, internal audit teams, and risk management teams are also
demanding information about certain data items or sets on a more frequent
basis.
Middle- and back-office desires to reduce
costs and improve efficiency is reflected in respondents’ operational
priorities: 86% of firms indicate that they have prioritized reducing costs via
vendor rationalization programs and process industrialization. The introduction
of workflow processes, which is deemed very important by 76% of firms and
somewhat important by 24%, is also aimed at increasing staff productivity and
reducing manual effort. Along with the reduction of costs and manual processes,
firms are focusing on bringing down operational risks and retiring older
systems that may pose technology risk or key person risk, as a limited number
of staff members are likely to know how to operate such systems. Firms’
post-trade priorities also reflect support for expansion into new asset
classes.
Overall, the buy-side is still a long way
from optimally efficient post-trade processes. Firms continue to grapple with
core operational issues, which is not a surprise given the many regulatory and
market infrastructure changes over the past few years. The efficiency and
automation improvement process is ongoing and will continue to be an area of pain
for the foreseeable future and Aite Group expects increased evaluation and
investment in the middle- and back-office for some time to come.
The report, Buy-Side Post-Trade Realities: Keeping Cool While Under Fire, is posted on Aite Group’s website here: http://www.aitegroup.com/report/buy-side-post-trade-realities-keeping-cool-while-under-fire
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