The capital markets sector is facing rapid change. The economic turmoil since the financial crisis and regulators reactions to it, as well as the fast technological developments are challenging capital markets firms’ business models. Capital markets participants are facing several challenges:
- As more institutional investors, hedge funds and large asset managers rely on their own quantitative specialists, the traditional research-and-service brokerage model needs to be reviewed.
- The inherent risks in Over-the-Counter (OTC) markets have been in the spotlight since the financial crisis and the G20 have agreed several reforms aimed at reducing these risks. Capital-blocking margin requirements on the one side and enhanced expected transparency through centralised trading, clearing and reporting and a push towards on-venue execution on the other side will most likely cause profit margins to shrink.
- The evolving regulatory landscape requires the industry to restructure and realign in order to achieve compliance. New reporting obligations as well as enhanced pre-and post-trade publication requirements challenge the often fragmented and isolated IT infrastructure.
- To maintain growth, market participants need to make significant decisions on which areas to focus on as core business and were divesture is required. This process is catalysed by the continuous demand for delivering.
- The increasing regulatory pressure to change compensation models is leading to a drift of talents from traditional sell-side firms to other segments within the industry. Capital market firms should re-think their compensation policies to re-gain attractiveness and counter the increased competition on the talent market.
In order to secure long term success, financial services firms need to elaborate on a holistic strategy and should initiate the transformation of their operating models. The integration of regulatory requirements combined with a clear strategy will be the key success factor to be well positioned and capture market opportunities. Especially in the current regulatory transformation process, successful firms should follow some basic principles:
- Recognition, that the simultaneous constraints imposed by several regulatory initiatives will have far reaching impacts on the future landscape of the industry
- Dealing with regulatory compliance should not only be seen as a compliance exercise. When embedding the regulatory requirements within the operating model, thorough considerations about the future business model should be given in order to avoid sunk costs
- In order to keep the oversight on multiple and simultaneous regulatory evolvements, a system to track applicable regulations will be key to understand how to turn regulatory requirements into a competitive advantage
We support you in having a clear view on the regulatory challenges ahead and their impact on the trading landscape, as well as the implications for your business and operating model.
Key regulations for capital markets participants include:
The capital requirements regulation and directive (CRR/ CRD IV) which applied from 1 January 2014 within the EU Member States – govern the transposition of Basel III into European law - contain stronger requirements for EU banks regarding sufficient capital reserves and liquidity. CRR/ CRD IV include also requirements regarding corporate governance, inter alia, the strengthening of the risk oversight by management and supervisory boards.
The Markets in Financial Instruments Regulation (MiFIR) contains standards and requirements which have a direct effect on trading platforms and investment firms, their systems and trading processes. The main topics can be summarized as follows:
- Regulation of all execution venues (regulated markets, multilateral and organised trading facilities, systematic internaliser)
- Increased pre- and post-trade transparency
- Trading obligation in certain shares and derivatives
- Scope and content of transaction reporting
Through a harmonised ruleset, MiFIR intends to increase the overall stability of financial markets and reduce opportunities for regulatory arbitrage between Member States. Some of its provisions, particularly the increased transparency regime, registration obligations for all execution venues and the obligation to trade certain financial instruments exclusively on-venue are likely to have far reaching impacts on the trading landscape within the EU.
FMIA (Financial Markets Infrastructure Act, also known as FinfraG [Finanzmarktinfrastrukturgesetz]) regulates market infrastructures and OTC derivatives trading in Switzerland. The regulation will come into force beginning of 2016. FMIA adopts the principles agreed on by the members of the G20 at the 2009 Pittsburgh summit and, therefore, entails similar provisions on derivatives trading than the European Market Infrastructure Regulation (EMIR) and the US Dodd-Frank-Act. In addition, FMIA entails provisions for financial market infrastructures such as trading venues, central counterparties (CCP) and central securities depositories (CSD) in order to align the Swiss regulation to new standards developed by international bodies, in particular the CPSS-IOSCO rules for CCPs and CSDs.