The increase in regulations throughout the financial industry is leading to greater risks and more opportunities for buy-side firms, according to a white paper released by Misys.
The white paper dubbed regulation a ‘global Goliath’ that is a significant driver of industry change, leading to capital and liquidity burdens and, in turn, higher operational cost and generally reduced profitability.
As banks take steps to reduce risks and comply with regulations, opportunities are being created for sophisticated investors on the buy-side. The paper pointed out the disproportionate effects of regulation for sell-side institutions that are prompting investors to move to a more institutional position, thereby changing the face of the whole investment industry.
Investors are now taking on more risk, a point highlighted by 75 percent of industry participants surveyed for the paper. More than 80 percent also said they felt overwhelmed by the mounting pressures of regulation and compliance, and many are re-assessing their core business platforms.
Firms are leveraging their institutional relationships to act more like investors in their deals, changing the market dynamics and blurring the lines between investor and investment managers.
This opens up opportunities for buy-side institutions to benefit from the transition of risk, as well as non-bank institutions that are therefore non-regulated.
Buy-side and non-regulated institutions can capitalise on inconsistencies between regulated institutions and differing rules across jurisdictions, however this also brings concern over the costs of implementing systems and technology to integrate with other institutions.
The white paper also discussed the unintended consequences of regulations such as Basel III and the Dodd-Frank Act in the US. Banks are facing liquidity issues and reduced profitability, and becoming less active in capital-intensive products and business units. In extreme cases, smaller participants are ceasing trading altogether, due to increased operational costs.
It also highlighted the issue of slow growth in the post-crisis global financial economy, in which slow economic growth plus market conditions of low interest rates and high volatility has lead to a slower recovery than anticipated, putting further pressure on financial institutions.
The white paper, by Will Dombrowski and Bradley Ziff, included views from more than 50 industry players, representing more than $9.5 trillion in global bank assets and more than $12.4 trillion in assets under management. The firms questioned were mainly UK and North America-based with a global presence. Their views were presented between May and June 2014.
