Rebuilding Trust in Our Markets in the Year Ahead

Buy and sell side firms alike will be working towards regaining the faith of their investors and counterparties around the globe in the year ahead as a result of the market mishaps that punctuated 2012. This year, regulation, risk management and strong client support will be the keys to rebuilding trust in our markets, firms and infrastructure.

From a regulatory perspective, the differing, and sometimes contradictory, regulations coming from various markets are causing firms to have to pick and choose where they do business - creating an anti-globalization effect. The implementation of Dodd Frank and the ESMA Directives, amongst other long anticipated regulations, are leading firms to face a number of new, and sometimes conflicting, guidelines for different geographies and jurisdictions, including increased reporting standards.

The costs for reaching operational compliance in multiple markets can put a serious strain on a firm’s bottom line, particularly when margins are already so thin and the penalties for failure are so high. As a result, firms are finding it beneficial to concentrate their efforts in, or from, certain markets rather than incurring the costs required to be compliant in non-core assets classes or geographies. As regulation continues to unfold in 2013, firms will be seeking ways to normalize how and where they manage trading lifecycles, or make some tough decisions about what markets still promise positive returns once the full costs are accounted for.

[Swaps Exchange Gears Up for Dodd Frank Mandates]

Beyond cost considerations, regulation will also continue to drive how the industry manages risk in the year ahead. Current regulatory efforts that attempt to tackle pre-trade risk factors include credit control across the give-up process and kill switch mandate proposals. The regulatory environment aside, in order to function at the highest level, a firm should always have a better understanding of their total risk than any regulator would. While regulators focus their efforts on automated or manual exchange-level risk management, firms should ensure that they have proper processes in place to manage risk from their own perspective in order to avoid the pain of repeating notable - and possibly avoidable - mistakes.

In addition to working towards more effective pre-trade risk controls, the new regulatory environment is driving substantial increases in collateral requirements. Though margin efficiency was once a secondary consideration, it has now become an integral part of an effective trading strategy. Because firms are trying to find the perfect balance between maximizing deployable capital and minimizing margin consumption, it is essential to achieve a real-time, aggregated view of the risk accrued across asset classes.

These regulatory and compliance issues are also forcing firms to take a realistic view of what processes are best to handle internally and which ones would benefit from using outside providers. Managed products help firms to maintain control of the critical functions that provide competitive advantage, whether in risk management, trading strategies or customized client solutions, while reducing support burdens where specific resources are lacking. With the support of a trusted partner’s managed product, firms can drive growth and simultaneously enhance client experience.