More than half of market participants believe impending regulatory change in the US and Europe is the main driver behind efforts to improve risk and compliance monitoring, according to the latest poll on theTRADEnews.com.
The November poll asked about the principal drivers behind the trend towards improved quality and timeliness of risk and compliance monitoring was and 59.3% of respondents thought new regulation and associated regulatory risk was the chief cause.
The second highest reason cited by respondents was risk of losses from fraud, rogue or erroneous trading (25.4%) and industry wide trend towards real-time business was third with 13.5%. Only 1.7% of those polled did not see the trend occurring at all.
Guy Sears, director of wholesale at UK buy-side trade body the Investment Management Association, believed the results highlighted buy-side concern regarding wide-sweeping changes to regulatory structures.
“It’s no surprise risk and compliance monitoring is being driven by new regulation. The regulators are asking for richer information, faster and the buy-side will have to update systems to meet new requirements,” Sears said.
Sears said global initiatives led by the G-20 countries to strengthen markets were implemented differently in each jurisdiction, and cited discrepancies between new regulations such as Dodd-Frank Act in the US and the European market infrastructure regulation on OTC derivatives trading as creating particular challenges for upgrading monitoring systems. For UK-based buy-side firms with US clients and exposure to US markets, this would create various legislative overlaps, adding further complexity compliance and monitoring.
“In Europe and the UK, we’ve implemented the same amount of regulation in the past 25 years that we’re trying carry out in the next two. We’re still feeling the reaction to the financial crisis and the need for countries to get their financial systems into shape,” added Sears.
He added that while nearly one-third of respondents said fraud, rogue and erroneous trading was the main reason to upgrade risk and compliance systems, such issues would be more pressing for sell-side organisations who engage in proprietary trading with their own capital.
Theo Hildyard, director and capital markets product manager at trading technology provider Progress Apama, said the uncertainty new regulation has created was clearly hampering risk and compliance preparations for market participants.
“Organisations should be prepared today even though the details of impending regulation are still being etched out. Once there is certainty over these rules there will be a rush to instate new rules and trading firms may well have trouble establishing adequate systems in time,” Hildyard said.
Faster processing of high-volume data to satisfy the needs of regulators and clients was a major factor facing market participants, according to Hildyard. He also thought the trend toward higher levels of automated trading activity would foster increased fears of rogue algos.
“I would have thought rogue and erroneous trading would have rated higher, with firms wanting to avoid major problems such as Knight Capital algo glitch or the UBS rogue trader, due to the large losses incurred,” Hildyard said.