Buy-side financial institutions are lagging behind sell-side firms in getting ready for the sweeping reforms on sectors such as over-the-counter (OTC) derivatives enacted in 2010 under the Dodd-Frank Act, says research issued today from IT consultancy Rule Financial.
Sell-side firms are making large changes to operations and IT, investing heavily in client execution and clearing propositions that will become operational in 2012. The buy-side – such as large fund management operations - is taking a different approach, placing a heavy reliance on the sell-side to provide a solution to the problems created by the new regulation, the report, based on answers from 33 respondents, said.
“Whilst 70 per cent of the sell-side claim to have finalized their ‘to-be’ business process design, only 20 per cent of buy-side firms have conducted this analysis,” it said.
On average, spending by sell-side banks with aggressive over-the-counter strategies has been around $10 and $50 million annually since 2010. The survey found that buy-side spending is estimated to be about $1 million to $2 million for each participant this year.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by the Obama administration in the wake of the biggest US financial crisis since the 1930s, is designed, among other things, to make the financial system more robust to prevent the need for future massive taxpayer bailouts of institutions. As with other US regulation, such as the Sarbanes-Oxley accounting rules enacted in the early part of the past decade, Dodd-Frank has been criticized for being bureaucratic and costly without benefiting the end-consumer. Dodd-Frank also adds to other changes, such as tighter capital requirements as set by the Bank for International Settlements in Basel, Switzerland.
One of the key elements of regulatory change has been to the OTC derivatives market, regarded as relatively opaque and hence a risky area in the event of future financial problems. Policymakers have called for this sector to be made more transparent.“The sheer scale of change to the global OTC derivatives markets agreed by the G20 has overwhelmed many of the regulatory bodies. Despite the G20 target being the end of 2012, there is still no finalized regulatory landscape, no specific compliance dates, and no completion of the rules mandating clearing in any jurisdiction. It is not, therefore, surprising ... that confusion reigns,” David Holcombe, specialist in markets and trading at Rule Financial, said.
“This uncertainty has not stopped the sell-side in making a significant investment in new systems and processes, which become operational in 2012. These institutions have ambitions to thrive in the new landscape, so they are not waiting for completed rules from the regulators to launch their client clearing propositions. The ‘golden circle’ of large banks seeking high market share have, on average, spent over $100 million, each in building their propositions, to date,” he said.
Among other facts in the survey were that 70 per cent of sell-side banks already offer client clearing of OTC derivatives, with 20 per cent planning to offer this by the end of 2012; 10 per cent have no plans to offer this service. Some 60 per cent of sell-side banks claim to already offer cross-asset margin calls, with 20 per cent planning to offer this service within 12 months; 10 per cent plan to offer this service beyond 12 months, it said.