Tuesday, November 06, 2012 7:38:27 AM

Buy-side will outsource more to meet new rules

As asset managers will outsource more of their business to cut costs and meet sweeping regulatory change, boosting the revenue of outsourcing providers by over 40% in the next five years, new research has shown.

The study conducted by consultancy Aite Group estimates outsourcing revenue will hit US$9.6 billion this year, rising to US$13.7 billion in 2016.

While the outsourcing of traditional back office functions grows, asset managers have increasingly looked to subcontract middle and front office functions in recent years. Trade compliance and trade routing, both front office functions, are more likely to be outsourced now, compared to results from the same survey Aite published in 2009.

Five of the world’s top ten outsourcing providers took part in the Outsourcing Services Landscape for Investment Managers survey, conducted in September and October, namely BBH, Citigroup, HSBC, Northern Trust, SS&C.

Regulation was a key driver of change, with impending rules in Europe under EMIR forcing over-the-counter (OTC) derivatives to be cleared centrally, and in the US with Dodd-Frank reforms bringing in similar changes.

Lyn Marcrum, senior analyst, securities and investments, Aite Group, wrote that firms were cutting costs in response to the depressed macroeconomic environment and the suite of new rules with which they must comply.

“Due to the sweeping nature of current regulatory change, these solutions will be differentiators for the next two to three years. As the push for transparency increases and performance measurement and risk analytics come under scrutiny, asset managers will look to outsourcing providers to bear the increasingly heavy burden of this typically middle-office function,” Marcrum wrote.

The service level agreements (SLA) which define the relationship between asset managers and providers have also tightened in recent years, with reduced reporting timelines and stricter wording to meet expected regulation.

New rules on OTC derivatives are expected to come into force in the US next year under Dodd-Frank mandated regulation through both the Commodity Futures Trading Commission and the Securities and Exchange Commission. Meanwhile, in Europe, new EMIR rules agreed upon earlier this year will force OTC derivatives trades through central counterparties and will be applied from 2013.

Richard Henderson +1 212 217 6916