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Regulatory Investment for Competitive Advantage

Surfacing for air after financial crisis recovery, firms are now able to execute their post-crisis management strategies and now is a good time to invest for competitive advantage under regulatory initiatives, or is it?

With the burden of organisational change being unprecedented and at its core, forcing decisions on whether or not to participate in markets, are firms consciously accelerating roadmaps in a coordinated and proactive way in response to these regulatory mandates? Are they driving their regulatory projects to combine and extract competitive advantage from organisational change, or just going with the flow in a state of tunnel vision, just to get over the line in time? Although the latter seems to prevail at the moment, there are compelling reasons to use the regulatory catalyst of change for material benefit.

Asset Silos Consolidations

The response to regulation has provided the platform to sort out many legacy operational and business structural issues, so is this all regulatory spend or is this business transformation by stealth or indeed both? The temptation to use readily available funds from the regulation pot to re-engineer legacy parts of the business, previously starved of adequate funds, may have been just too much to pass over, as budgets have increased to eye watering amounts. One of the win all the way opportunity, is to consolidate existing asset silo regulatory reporting into a single enterprise hub in a repository solution. However, any opportunity, whichever way it is viewed is, nonetheless, a monumental management challenge and in many cases, a challenge too far under a go live chasing operational environment.

Operational Optimisation

New regulations have turned traditional organisational development on its head by almost prescriptively determining the structure, shape and type of firm that can participate, but whose operation still has to be carefully optimised, to comply fully in a market. There has been a positive catalyst to orchestrate business re-organisation in the name of compliance around the roadmap of winning new customers, process improvements and business resilience under a corporate acceptance of must-change responses. The nagging prospect of finally achieving one view of operational risk, funded from a regulatory budget, is an enticing proposition. The investment in workflow solutions to pull together multi-asset transactions from across a firm’s trading enterprise for consolidated regulatory reporting, provides an excellent place to start turning the corner on effective risk management.

Investment Banking Hierarchy

An investment bank’s typical budget hierarchy, today, places compliance at the top, followed by risk controls, then client growth and tail-ending with cost reduction projects. However, in many ways, compliance outcomes are interwoven with all lower order elements of the budget stack, i.e. solving one resolves the other. For example, ensuring all data elements for regulatory trade reporting are available, reduces operational risk and reduces the future cost of out trades. With such interdependent operational relationships, it is challenging to articulate a justification for funds from the main budget for a single project alone. So, for all the acknowledged whispers of budget disgruntlement, every regulatory project is having a silver lining effect downstream and is masking the home truth that long overdue operational investments are being made under the compliance halo. If it’s compliance, it just has to be done.

Organisational Responses to New Regulations

The organisational responses to new regulation and some of its unintended consequence, will be the clustering of firms into distinct business model variants around regulatory asset class or product level themes, potentially both reducing the number of firms serving certain markets and concentrating those that do into popular markets. So are top management consciously re-drawing their firm’s lines of competition and markets, such that the peer groups of today will not be the same peer groups of tomorrow? Obviously, until key market go lives have come and gone and future order flows are analysed, the picture is not entirely clear, but amidst all the regulatory upheaval, the industry has to put its faith in strong-minded and far-sighted leadership.

Firms Readiness Plans

So how successfully are firms monitoring their readiness plans across each asset class they operate in and to what extent are share analysts integrating compliance readiness in their calculation of stock values and if so, how are they measuring it? Is it just from the P&L;, balance sheet movements or by benchmarking peer groups’ capabilities to retain and secure new clients by the quality of their compliance reporting services? Sadly, none of the above it seems, as not unsurprisingly, the impact is not fully understood across the market. Even the most recent, but first EMIR related, non-compliance fine of over $45million given to a firm, hardly moved its share price dial on the day, or since it was announced.

Positive Industry Balance Sheets

What is good news is that the strength of balance sheets has long since returned post financial crisis, as the capital investment required today to be compliant, could not have been underwritten at the turn of this decade. The tautology, of course, is the chicken and egg of market failure and regulatory fix; we would not have had one without the other. So, one could take a view overall that regulations have forced the intensive investment into moving the industry to a better place much earlier than it had duly envisaged it needed to be.


FOW’s product focus is global exchange traded derivative listings and our contextual symbology for both trading and transaction reporting, i.e. trade data. We continue to develop data solutions to meet ever more exacting demands on the industry and for MiFID II and EMIR RTS 2.0. We provide essential taxonomy and extended tagging of our global product database, all within our powerful community data model. Contact us to find out more.


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