Post-trade realities hit home on the buy-side

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:

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