1st Theme of SIBOS: Regulation

Regulation has always been a fundamental part of financial markets. In recent years, however, the volume of regulation has increased significantly, a trend which was exacerbated by the financial crisis and the consequent focus on risk.

In Europe, for example, we have seen the introduction of MiFID and further iterations of UCITS. In the United States, the Dodd-Frank Act aims to promote stability by improving accountability and transparency in the financial system. Other new rules, such as FIN48 and the HIRE Act, potentially affect the taxation of trading activity, among other problems.

Regulations can have a positive effect. For example, UCITs allows European-domiciled funds to trade freely across Europe. According to Eurekahedge, the number of UCITS III hedge funds has shown "exceptional growth", while the proportion of European hedge funds domiciled in the Cayman Islands has fallen from more than 60% to less than 40%, as funds look to take advantage of UCITS.

The pace of regulatory change shows no sign of slowing, with Europe preparing for MiFID 2 and the European Market Infrastructure Regulation. Further regulations are also being considered. One possibility is that buy-side firms will have to report their transactions. In principle, this is already a requirement within the MiFID area but in practice it is mainly done by brokers on investors’ behalf. In the US, firms that trade more than a set amount will have to do their own reporting, irrespective of whether their brokers also report.

As regulations are introduced in one part of the world influence the rules elsewhere, convergence is becomes inevitable,. This has already been seen in Europe and the US, and the question is whether Asia will follow. With Asia leading growth in 2011 and global interest rates remaining low, the region is becoming more attractive to investors, especially those seeking alternative investments. Investors allocated more than $3.6bn to Asian hedge funds in the first quarter of 2011, the largest quarterly inflow to these funds since capital flows were first tracked. The number of hedge funds investing purely in Asia has also increased to 1055, the highest figure since 2008. This growth can create new regulatory burdens for Asian fund managers. The rising proportion of assets coming from the US means that many managers will be required to register with the SEC, as a result of Dodd-Frank.The European Union’s Alternative Investment Fund Manager Directive may also have implications for funds that rely on European assets.

The one certainty is that firms everywhere can expect more regulation to come over the horizon.  Effective post-trade system should be easily adaptable, so it can take these developments in its stride. If new regulations require a trade to be reported and cleared, for example, then a system that is currently used to match a trade would also benefit from having the flexibility to report it and send it to a clearing house.