In the last few years, the financial markets have undergone dramatic change. While some of this is down to natural evolution, much of the change can be directly attributed to new rules introduced in the wake of the 2007 crisis. Regulators, legislators and central bank governors have been determined to avert another bubble bursting or an unexpected event that could threaten markets.
Lawmakers have targeted key financial practices for reform, radically altering the expectations and behavior of industry participants. The combination of the Dodd-Frank Act, European Markets Infrastructure Regulation (EMIR), MiFID ll and Basel lll signify the biggest regulatory change in decades. These reforms have resulted in major change to how financial products are traded, settled, collateralized and reported, resulting in deep and ongoing structural changes to the markets.
There is no doubt that these new rules are directly impacting buy-side firms – be they asset managers, hedge funds, insurance companies or pension funds. But while the changes have certainly brought challenges, they have also brought opportunities. Firms that can proactively evaluate structural and operational dislocations in the marketplace and tailor business models to leverage the opportunities while addressing the challenges will be in the best position to stand apart from their competitors. Revised business models call for revisions to supporting processes and systems. 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.
While the market reforms have impacted all players, it is the sell-side (liquidity creators) institutions that have borne the regulatory brunt much more than buy-side (consumers) institutions, thanks to the central position they hold in the global financial system. The worldwide reach of the sell-side, their size and interconnectedness to other institutions make their survival critical to the survival of the entire system, hence regulations are designed to protect the financial markets from the systemic risk stemming from these institutions.