It is no secret that buy-side firms have been hit with a wave of challenges that have seen the way in which they operate impacted greatly. The continuing disturbance of new regulation – with another regulatory shift starting in 2016 where all OTC derivatives not cleared by a CCP are to be margined – seems to be the driving force for the upheaval the buy-side are facing; particularly how to manage their time and costs.
Firstly, regulation enforcement continues to create challenges and pressure on the day-to-day workflow of asset managers as well as creating heightened awareness to stay one step ahead of regulators so not to incur fines and penalties. The profound operational changes are highly demanding for those asset managers who have never before had a fixed and regulated infrastructure in place to manage and collateralise their over-the-counter (OTC) Derivatives, and companies need to be in a position where they can firstly strategically evaluate their data management, and then implement a solution to meet these strenuous demands.
Unsurprisingly, the throws of regulation that have been building and building – with MiFID II on the horizon – have affected a firm’s business model as a whole. The changes around trading processes have changed drastically and this has meant that companies now have to do a lot more, with the same old-fashioned resources and that has a huge impact on time management.
Collateral in the past was viewed as a reactive function positioned at the culmination of the trading cycle that didn’t require too much attention or thought. Put simply, a process that was not important. The level of visibility and scrutiny that collateral management is now facing means that firms have to carry out daily margin calls on their collateral, instead of weekly or monthly as we saw in the past. This is a massive strain and time-consuming process, especially for those asset managers who have neither the time nor funds to hire more staff to accommodate the increasing workload set against expanding time pressures.
This leads nicely onto the last challenge the buy-side are facing: Cost. Most buy-side firms simply do not have the capital to throw at hefty IT solutions or the budget to hire more staff to deal with the increasing regulatory demands. Companies have only just started to emerge triumphant from the 2008 crisis but they have returned to a very different landscape – one that costs a lot more than the previous. With such restrictions in place, it is necessary for asset managers to collate, validate and automate their data for greater transparency and control of their business. However, this sort of privilege comes at a price and this is why most of the buy-side uses in-house technology that they independently build and manage. According to AcadiaSoft, over 90% of the buy-side still uses spreadsheets as opposed to external software technology, with this in-house method of managing data still proving costly.
Fortunately, the emergence of new technology is becoming the biggest driver for change and seems to be the main focus for the industry as it tackles all three problems the buy-side are facing; regulations, time and cost.