Financial institutions have to provide more data than ever before in the drive for transparency – and asset owners and managers have to understand the impact on their business and what compliance really means.
In the wake of the financial crisis, the Group of 20 (G20) countries agreed to obligate firms to be more transparent around the risks they take and the risks that their customers face.
As a result, businesses are providing more information than ever to regulators and the market, impacting cost, revenue and competitive dynamics.
Market participants and regulators have had to invest in technology and the supporting operational models that allow them to capture, process, transfer and record the necessary data. Asset owners and managers have been impacted across several areas:
• Budgeting: Analyst firm Aite has estimated compliance technology spent in capital markets will have increased by 35 per cent from 2012 to 2015 to build or buy the necessary tools to support all requirements and integrate them within existing infrastructure.
• Organisation: The finance and risk functions within firms have developed separately but they are now working together more closely in order to meet the demands of regulators.
• Strategy: As each firm’s counterparties, clients and competitors adapt to the new levels of disclosure, it will have a structural impact on market organisations and change the business model of some firms. For example, the emergence of new infrastructures – such as execution platforms, trade repositories or new models for fund distribution – is directly linked to new transparency requirements.
As a result of these changes, senior management needs to identify the true impact of transparency on their business and how to react:
• Mutualise costs and increase efficiency: Some sell- and buy-side firms have delegated some functions to technology providers in order to reduce cost. There are also several shared initiatives across the industry aimed at reducing cost and increasing transparency.
• Exit specific businesses/transactions: Some institutions are being restricted by the extra costs of transparency requirements impacting the economies of operations such as over-the-counter (OTC) derivatives or securities lending transactions. Consequently some are restricting their use of instruments and dealers are withdrawing from the business.
• Innovate in new products: The global level of investment in ‘fintech’ firms tripled to US$12 billion year-on-year over 2014, according to consultancy Accenture.
• Use transparency as a value added feature: In some cases institutions can use enhanced transparency as a value-added differentiator.
Going forward, transparency requirements will continue to have a tremendous impact across the value chain and transform financial markets.
Every asset owner and managers will need a strategic plan to address the impact of these changes on the shape of the market, their business and the response needed to excel in this environment.
To maximise the value of regulatory change programs and adapt to the new landscape, management should ensure that:
• Changes in cost and risk modelling for the business are fully understood.
• Information on changes in market structure and external businesses are mapped out.
• Any divergence or uniformity of activity between firms is noted for the risks and opportunities that it might create.
Beyond the compliance with transparency rules, the greatest technical challenge for all market participants will be the management of vast volumes of data. In most organisations data is held in different silos, so a universal approach to the management of data, increasing its quality and granularity, is required.
If data is to retain its value in the future after new rules are imposed, it must be captured and aggregated in a flexible manner. This will be a major issue not only for market participants, but also for market regulators who will have to assemble the mass of data they see into a coherent picture.
Josephine Maiorana is Product Manager Fund Services Australia at BNP Paribas Securities Services.