Dodd-Frank uncertainty boggles buy-side investors

Rule Financial, an independent global business and IT consultant, released the results of a study on Monday on how the 2010 Dodd-Frank Act has impacted the buy and sell sides of securities.

The research polled 33 respondents and found that sell-side institutions, firms that sell securities and make customer recommendations, are making significant operations and IT changes, clearing proposals that will be operational this year and investing primarily in client performance. The buy side, or securities purchasing, however, has heavily relied on the sell side to develop solutions to issues that arise as a result of the increased regulation.

Mounting regulations have forced the sell side to revamp its operating models, and many are consolidating OTC, prime, collateral and exchange operations into a single business entity. Because of its impact on profit and loss, collateral management departments are becoming increasingly important for investors.

The buy side cited a range of mandated OTC clearing times, from September 1, 2012, through September 1, 2015, demonstrating that the buy side sees the Dodd-Frank Act more as a regulatory burden than a reason to alter business models.

“The sheer scale of change to the global OTC derivatives markets agreed by the G20 has overwhelmed many of the regulatory bodies,” David Holcombe, a markets and trading specialist for Rule Financial, said. “Despite the G20 target being the end of 2012, there is still no finalized regulatory landscape, no specific compliance dates and no completion of the rules mandating clearing in any jurisdiction. It is not, therefore, surprising…that confusion reigns.”

Holcombe said that uncertainty over the clearing times does not seem like a hurdle for the sell side as they continue to invest in new processes and systems.

“These institutions have ambitions to thrive in the new landscape, so they are not waiting for completed rules from the regulators to launch their client clearing propositions,” Holcome said. “The ‘golden circle’ of large banks seeking high market share have, on average, spent over $100 [million] each in building their propositions, to date.”

Holcombe said that the changing OTC derivatives market will likely increase, assuming that collateral charges will impact returns significantly.

“Consequently, buy-side firms are looking to clearing brokers and futures commission merchants to minimize the increase in cost of the central counterparty model, via collateral optimization and pricing,” Holcombe said.

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