If you’re not ready, the regulators will get you
The complexity of regulatory reforms in Europe and the US are placing pressure on the industry and may catch some participants unawares.
“We have to work out a new operating model to respond to regulation,” said Philippe Renard, head of operational risk at RBC Investor and Treasury Services, at the TSAM conference in London on Tuesday. “We see ambiguity in the regulation. The exact wording and the implementation deadline is changing, and there is regulatory arbitrage. Some firms are even relocating to get advantage from that, and we are still working out what the cost will be to the industry.”
The panellists were referring to the general regulatory push from the European Commission, the national regulators, the US authorities and other sources of legislation towards greater transparency in financial markets. Much of the challenge comes from the need to catalogue and disclose massive amounts of data, including information on positions, while simultaneously upgrading trading platforms and connectivity to cope with evolving market structure.
“Folks need to be very careful about what their unknown unknowns are,” said Joshua Satten global head of OTC structure products at Northern Trust. “Most firms still look at themselves as regional. But there’s a true cross border implication here. You must capture the data and report it. This is not optional. You must do it. Most folks aren’t wrapping their head around that.”
Satten added that there are many misconceptions still present among the buy-side about the best way to handle regulation. While many participants at TSAM focused on building flexible systems, Satten believes they are taking the wrong direction. “It’s not about the flexibility of your system, it’s about a fundamental rebuilding,” he said. “This isn’t just sending an email to the regulators. The requirements are quite specific on how the information must be reported and in what time, and the penalties are severe. You need to monitor this to ensure you can continue to trade.”
Other panellists also pointed to the difficulty and complexity of mapping overlapping requirements originating from different jurisdictions, such as the US and Japan. For example, delegated reporting in the US and Europe is different, with different measures used to calculate how systemically important an asset class is based on volume and many other factors.
“The biggest challenge is dealing with a five year old regulatory change agenda that’s over 300,000 pages long,” said PJ Di Giammarino, chief executive at JWG Group. “Lawyers are good at standards but they are not good at operating requirements. We all know what the quality of regulatory information is – changes are often last minute. That doesn’t change the fact that you have to do it. What’s the difference between what we do in Europe and the US? If you’re not collaborating you’re going to be stuck behind the curve.”
Renard added that identification, analysis and implementation would all require hard work. RBC acts as an advisory service for its clients, which often ask about the direction regulation is taking and what can be done about it. But when the regulation is not coordinated, he said, the firm lost time and effort that could have been avoided by a more joined up approach from regulators.