Staying abreast of regulation is proving both a challenge and a distraction concluded a recent industry forum. For the asset management industry, regulation, particularly in the post trade space is proving dangerously onerous. It is the fund management industry’s responsibility to gather assets and deliver performance for the end investor, not to decipher current regulatory initiatives.
The projected impact of regulatory distractions are a slowdown in product innovation, as well as stifled investment performances, as the cost and complexity of red tape, such as the need for central clearing of OTC derivatives is implemented. At the very least, this regulatory spotlight will create an increased focus on products as such as listed derivatives, which can deliver similar returns as OTC derivatives without the impending post trade complexities faced by OTC derivatives. This point epitomises a new concept where the middle office has become the new front office; or in other words investment choices in the front office are being determined by post trade complexity and the uncertainty of post trade regulation.
A further impact of the regulatory drive will be the bifurcation of the asset management industry into those organisations who view their middle office as a cost centre versus those that view it as a competitive differentiator. Operational excellence and the ability to stay ahead of regulatory change will surely improve the chances of success.
That said, there will be opportunities that will be created by the regulatory tsunami. Overall, the consensus is that the transparency and robust operational processes that will ensue as a result of the revised regulatory regime will restore investor trust in the fund management industry. And there will be benefits which ensue as a result of individual regulatory initiatives, such as the cost savings delivered by the master feeder fund structures permitted by Ucits IV or the new generation of Ucits-compliant hedge funds with the freedom to market themselves to a wider group of investors.
The forum finished with a plea from buy-side participants. To banks and infrastructure providers: help us make sense of this regulatory quagmire and to policymakers and regulators: don’t use a sledgehammer to crack a nut.