Buy-side independence, a double-edged sword

It’s no secret that market reforms are having a dire impact on the sell-side’s cost base. Increased capital and compliance costs, coupled with margins being eroded in fixed income and OTC derivatives, are reducing the sell-side’s role and power within the market.

While the buy-side might feel it has got off lightly and be enjoying its new position of strength, asset management firms might find themselves unprepared for this new, more independent existence.

A report from consultancy Aite Group, highlighting the major trends it expects to develop in 2014, predicts the buy-side will become more independent this year, though not necessarily by choice.

While the cost of carrying positions that sell-siders are no longer able or willing to take on themselves is likely at the forefront of buy-siders’ worries, Aite suggests that the withdrawal of regulatory support the sell-side could be a bigger headache.

In particular, the buy-side has had relatively little involvement in lobbying around the introduction of new regulations, which has left many struggling to get to grips with how the financial world is changing. Sell-siders have been deeply involved in the regulatory process and Aite suggests that buy-siders have been held back by a lack of expertise due to their former reliance on the sell-side.

This lack of involvement means many are facing a major challenge to understand the scope of change, with multiple new regulatory regimes introduced over different timetables and in different regions. All of this presents they buy-side with a highly confusing path which must be navigated without the kind of resources that their sell-side counterparts have at their disposal.

“A tried and true cliché, it is much better for the buy-side to invest the appropriate time, money, and effort on its own if possible, and storm-proof upfront rather than struggling to deal with the damages afterward,” the report concludes. Asset mangers who have been reluctant to get the ball rolling on the various regulatory changes coming in during 2014 would do well to heed this advice.

The message seems to be getting through: our recent poll on revealed that almost half of readers believe a focus on regulatory compliance will be at the forefront of buy-siders’ minds this year. However, I would hope firms have already been putting significant effort into this last year, as the first compliance deadlines of 2014 are now less than a month away.

On 12 February, firms will need to begin reporting their OTC derivatives trades under the European market infrastructure regulation. This is particularly onerous for the buy-side as Europe, in contrast to the US, will require both counterparties to a trade to report. While sell-siders are offering their clients a delegated reporting service, buy-siders will still be responsible for making sure these requirements are met.

As if that weren’t enough, just days later on 16 February, US rules that require certain swaps to be traded on swap execution facilities will come into force.

In recent years, firms have had the luxury of endless delays in the regulatory process enabling them to delay making major changes to the way they run their business. Implementation is set to be a big focus this year; hopefully the increasingly independent buy-side is up the challenge.