Shifting regulations are changing the buy side’s requirements for data collection, storage and management.
“Data management has been on the minds of buy-side firms for many, many years,” said Matthew Nelson, executive director of strategy at Omgeo, a provider of post-trade services. “They’ve struggled with ways to control costs, reduce the number of repositories and ensure consistency across their various repositories."
Matthew Nelson, executive director, strategy, Omgeo
New regulations focusing on transparency and reporting will strain their capabilities further by requiring that they be able to quickly and accurately report on positions, valuations and counterparties, among others.
"Further, both traditional and hedge fund managers will face new requirements, leading to a broad need to invest in data management across the buy side," Nelson said.
Market Access
The Securities and Exchange Commission’s market access rule, or 15c3-5, applies to broker-dealers with market access to an exchange or alternative trading system, as well as to broker-dealers that provide customers or other persons with access to trading securities directly on an exchange or alternative trading system.
Under the rule, the broker-dealer is responsible for having risk management controls and supervisory procedures reasonably designed to ensure compliance with all laws, rules and regulations.
A traditional way that buy-side firms have addressed many of their regulatory compliance requirements has been to transfer the practical responsibility for compliance to their service providers, and particularly to the sell-side firms with whom they deal.
But under the new regulatory regime, this pass-the-buck mentality no longer holds, as buy-side institutions will be required to provide the necessary information to satisfy the broker’s pre-order compliance checks.
“Further burden is being placed on the buy side to show that their brokers are in compliance,” said Jay Hinton, global product manager at Mantara, a technology provider. “This means more responsibility for knowing what their brokers and vendors are doing, which is driving the need for greater storage and computer power. More responsibility means storing more data.”
Historically, data management by buy-side organizations was organized along system lines, which meant that it was very difficult to interconnect a client’s activity across financial instruments.
“Given the changes in the regulatory environment and the increased oversight, buy-side firms will have to separate the data collection, storage and management from individual applications, and consolidate the data into a central repository,” said Philippe Buhannic, chief executive of TradingScreen, a buy-side focused technology provider.
This data will need to be available to a set of services that will affect the necessary processing to produce analysis by asset class, for instance.
“This will be further reinforced by the collateralization across the larger pool of assets with the development of the new centrally cleared products, such as constant treasury swaps and interest rate swaps,” said Buhannic.
Fatca and MiFID II
With the Foreign Account Tax Compliance Act introduction date of January 1, 2013, around the corner, financial firms are trying to assess the impact of Fatca on their operations—on specific functional areas in particular.
The Fatca regulations, a 2010 U.S. law that targets tax dodgers using foreign accounts, stipulate that every foreign financial institution must undertake a search of its client base to identify clients containing U.S. indicia—address, residency, nationality, phone number etc.—and classify each of these clients appropriately.
“The data needs to be stored and managed and distributed effectively—the buy side institution needs to maintain a golden source and ensure the quality of this data does not deteriorate as it is used throughout the organization,” said Alberto Corvo, managing principal of financials services at eClerx, a financial services outsourcing firm.
With new regulations placing greater emphasis on how firms—both buy and sell sides— conduct their business, frequently buy-side firms are being faced with the same regulatory requirements as sell-side firms.
In Europe, MiFID II, which promises sweeping reforms to the region’s markets, will require that an investment firm that provides direct electronic access to a trading venue shall have in place effective systems and controls, and that persons using the service are prevented from exceeding appropriate pre-set trading and credit thresholds, that trading by persons using the service is properly monitored, and that appropriate risk controls prevent trading that may create risks to the investment firm itself or that could create or contribute to a disorderly market.
“European Union regulation such as [the original] MiFID [document in 2007] did not differentiate between the type of firm, but instead differentiated according to the type of activity being carried out and applied the term ‘investment firm’ to any organization that was impacted by these regulations,” said Chris Pickles, Chris Pickles, head of industry initiatives at BT Global Banking & Financial Markets, a provider of networked-based services.
As a result, said Pickles, “buy-side firms frequently have the same regulatory responsibilities as sell-side firms, and that also applies to long-term recording of business activities. That can also apply to all client-facing communication, including email, IM [instant messaging] and voice.”
Being able to replay a market situation so as to justify business activities to regulators is as much a requirement on buy-side firms as on their brokers.
“Building ‘best execution’ into standard business processes increases the amount of data that firms have to acquire, analyze and react to,” Pickles said. “Managing that data, and in some cases over many years to meet regulatory long-term storage requirements, becomes a huge task. And business continuity planning is now being built into more regulations, so losing data due to systems failures is increasingly also a failure in regulatory compliance.”
