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5 Trends Resulting from the Regulatory-Driven Changes to the Markets

| FinReg

By Sol Steinberg, OTC Partners

Originally published on TABB Forum

The biggest regulatory reforms in decades have resulted in major changes in how financial products are traded, settled, collateralized and reported. While the changes have brought about challenges, they also have ushered in opportunities for both buy-side and sell-side firms. But changing business models will need to be supported by corresponding changes to business processes and systems.

The financial markets have undergone dramatic change. While some of this is the result of natural evolution, much of the change can be directly attributed to post-crisis regulation. The combination of the Dodd-Frank Act, EMIR, MiFID II and Basel III signify the biggest regulatory changes in decades. These reforms resulted in major changes in how financial products are traded, settled, collateralized and reported, resulting in deep structural changes to the markets.

1. Sell-Side Exits Bring New Buy-Side Business Opportunities

Under these new regulatory conditions, sell-side institutions have faced the biggest changes to how they do business. The bulk of the new regime is focused on monitoring global, systemic risk in financial systems, and the sell-side acts as the global network for financial transactions. Sell-side firms’ interconnectedness makes them a linchpin, and also requires that they make the greatest reforms.

This change can create new business opportunities for technology providers and third-party risk managers willing to help put those reforms in place. On the buy side, as certain business lines become uneconomic for sell-side players, hedge funds and others can step in to do those transactions.

2. Quest for Higher Yield

On the investor side, new regulations, coupled with slow economic growth and central bank intervention, are making yield hard to come by.  As investors consider their options, alternative investments are gaining ground. These investments are riskier, and sometimes more exotic, but promise the returns investors are hoping for. 

However, as investors shift over to actively managed funds, they will need best-of-breed analytics and new technologies to effectively monitor and risk manage their portfolios. As they adopt these technologies in-house, investors also demand the same of the managers they invest with. In order to adapt, managers will have to be able to show how they actively monitor investments through enhanced disclosures and other technology enabled analytics.

3. Technology Transforms Margin Challenges into Opportunities

Taken together, all of this will require funds to make a significant investment in operations. To be profitable, firms will need to select execution platforms based on independent comparison of cost of funding margins, over the life of trades. Regulation-imposed changes in market practices call for sophisticated analytics and superior operational capabilities.

Successful models ensure profitability by factoring in all costs of executing trades, including value adjustments for counterparty risk, costs of funding margins (initial and variation), as well as cost of capital. Better operational capabilities ensure consistent analysis across the organization and more efficient business processing.

In the past, managing margin requirements was a reactive task, performed at the end of the trading cycle, and done within administrative and back-office operations, usually manually. Today, the buy side is turning to new technology to give firms a complete, front-to-back view of their global collateral assets to allow them to assess multiple sourcing and funding options in real time.

4. Technology Trends

Leading investment managers are examining integrated front-to-back systems that provide a complete solution for analytics, trading and risk. The trend is to optimize and streamline the entire workflow, to ensure greater trade transparency and enterprise-wide reporting.

Characteristics of these systems include:

  • A single technology solution for analytics, trade capture and enterprise risk control, with coupling between front-, middle- and back-office functions.
  • Straight-through processing that starts from trade execution all the way through to central clearing.
  • Independent margin calculation and swaps portfolio pricing tools.
  • Reconciliation tools that account for margin call discrepancies, either at the CCP or clearing intermediary level or both.
  • Transaction Cost Analysis (TCA) tools that can incorporate data from the trading process as well as integrating back office data into the trading process.

5. Systems Rethink

Improvements in the technology available to fund managers are enabling this kind of total systems rethink within organizations.  In order to take full advantage of this enhanced technology, the buy side will have to take into account these key considerations:

  • Cross-asset, multi-strategy support
  • Integrated analytics, trading and risk platform
  • Robust risk management and control
  • Operational efficiency
  • Business intelligence and transparent reporting infrastructure
  • State-of-the-art technology
  • Low total cost of ownership (TCO)


The credit crisis, and the regulatory response it spawned, have fundamentally reshaped financial markets. While the changes have brought about challenges, they have also ushered in opportunities. Buy-side firms should look to re-architect their processes and technology infrastructure, with a goal to strengthen risk control and oversight, enhance transparency, and improve efficiency of front-to-back office control functions.

Changing business models will need to be supported by corresponding changes to business processes and systems. As with every major structural change, organizations that can understand and implement these new realities quickly will benefit the most.  However, funds shouldn’t rush toward the newest technology without having clear goals in place that align the interest of the firm with the interests of investors and regulators. Looking closely at the key considerations outlined above will help to ensure that any change fits within the organization’s broader goals.