Christian: There’s always a regulatory pendulum swinging in the market. At one end it favours the small firms and at the other it favours the larger firms. At the moment, particularly when it comes to global trading (for example where an Asian investor using a European broker wants to access an American exchange), firms need to leverage their size in order to stay ahead of the regulatory curve.
However, we mustn’t forget that in each of these regions there is a sizeable domestic market where Europe only wants to invest in Europe, and so on. These domestic markets are an area where smaller brokers or buy-sides could grow. Stripping out the regulatory complexity by focusing on one region instead of many means that whilst a smaller firm might not be able to serve all clients they would gain considerable cost advantage because of lower overheads. This approach presents a real opportunity for the smaller players.
So firms are refocusing on their core competitive advantage?
Christian: Yes, and this is a global trend, where everybody concentrates on their unique selling proposition. At Fidessa, for example, we are well placed as a technology provider because it is our area of expertise. Smaller brokers are generally very good in their specific market, while other firms might specialise in providing a global standardised service across all markets and that’s why they focus on that.
In that sense technology and advances in outsourcing are enablers, allowing everybody to focus on the one thing that they’re really good at.
Lewis: In Asia there are a number of single market brokers that focus on just Thailand or Taiwan and so on. As those markets grow and begin to attract global interest then the global brokers wanting to access those markets start looking for partners. What’s next for the small market broker? They might start to look to expand into other markets or regions, or to go global. The challenge for them is they have to start looking at the regulations in new regions, they have to figure out how to access those markets, and they start to look for the best solutions and technology to help them grow in each area.
Many struggle beyond their home markets, whether a single market or outside Asia, because they don’t necessarily have the in-house expertise, and that is when they start looking for outsourced solutions to help them.
Henri: Announcements published since Regulation AT indicate they are trying to introduce globalisation to the US futures industry which has traditionally been more regional. To Christian’s point, many futures market participants focus on a distinct aspect of their home market.
In the US, we were a little more apprehensive given that Dodd Frank and the broader derivatives initiatives caused a number of regulatory headaches. But now, five years on, people are starting to realise that regulation is not something to shy away from but essentially to digest, understand and find ways of adapting to.
To what extent do firms have to guess what the regulator is going announce?
Christian: There are many finer details which are still being negotiated not only by the regulators but also the legislators. As MiFID II is so large there are inevitably a significant number of outstanding issues to be resolved. However, having said that, there are a lot of things that can be done.
While we don’t have certainty in some areas, there are others where there has been real progress. This is encouraging considering that firms need to be ready by January 2018. The customers we speak to are all in the process of preparing as much as they can now, so that when it gets closer to the go-live date there will be spare resources to react to market demand.
Lewis: We have seen with a number of our clients that where regulation might be stricter in one region, then they will adopt that standard globally. A good example of this relates to the rules around data security and data protection in Singapore; they are much stricter in Singapore than they are anywhere else in the world.
Christian: We’ve just experienced a period of five to seven years where each region has made significant changes to its regulatory framework. The likelihood that the outcome is neatly aligned across borders is very slim.
Looking forward optimistically, many of those differences should be smoothed out over time. The longstanding debate between the US and Europe over the acceptance of US CCPs or EU CCPs is one example. After more than three years’ debate, the EU and the US finally came to an agreement. Identifying and adapting to those differences will be difficult for a business to manage, but the regulators have a mutual interest in aligning to a common standard. Therefore, I’m optimistic that those issues will be resolved in the future.
Henri: Risk is just one component of the cost to operate in the global landscape. Companies dealing with global regulations have to be aware of how the rules interact with one another. They have to be prepared to spend the time, money and energy in ensuring that they keep up with regulation because there is always a risk of regulatory impact between what might otherwise be similar business practices across jurisdictions.
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Moving Beyond the Regulatory Headache
