Complying with new rules is the chief concern for buy-side firms ahead of wide-sweeping regulatory change in the US and Europe, according to new research.
Some 85% of investment managers declared that regulatory change programmes will be a top priority next year, with 75% claiming uncertainty over the new rules is causing strain on operational risk processes.
The figures, from UK-headquartered investment consultancy Investit, show the growing unease impending regulation in the US under the Dodd-Frank Act and in Europe with MiFID II and EMIR has caused institutional investors.
The Investit study also showed that 57% of investment management firms lacked enough staff to support the operational risk function, while only 14% were actively hiring for such positions. A total of 22 investment management firms took part in the Investit study, which was released this week.
The results suggest further challenges lie ahead for buy-side firms as they prepare to revamp execution and clearing processes in line with new regulation and create new agreements with central counterparties (CCP) for settlement and custody, with over-the-counter (OTC) derivatives due to be cleared through CCPs in both Europe and the US next year.
Another study, from trading solutions provider Eze Castle Integration, has shown hedge funds and alternative investment firms will increasingly turn to new technology to deal with compliance with new regulation.
The Eze survey, which heard from 320 respondents, found new rules demanding further transparency - including those required by Dodd-Frank implementation - will play a crucial role for firms’ choice of trading system.
In the US, the Dodd-Frank Act will force buy-side firms to make major changes to execution, reporting and clearing processes for OTC derivatives, with some firms claiming compliance will bring a US$1 million price tag per instrument.
Clearing costs in particular are set to rise, with both Dodd-Frank and MiFID II rules forcing OTC derivatives to be centrally cleared. This will force buy-side firms to manage collateral much more carefully to limit the predicted rise in costs.
The new rules under the Dodd-Frank Act will apply largely to derivatives trading, as the opacity of the derivatives market was seen as a major factor in the 2008 financial crisis. The new rules on derivatives trading will be enforced by both the Commodity Futures Trading Commission and the Securities and Exchange Commission, with rules coming into force next year.
In Europe, the EMIR regulation will push OTC derivatives through clearing houses and is due to come into effect at the start of 2013, while MiFID II is due to come into force in 2014.