Last year was one of two steps forward and one step back as far as post-trade operations. As in previous years, regulatory overhauls particularly for over-the-counter (OTC) derivatives drove operations for the industry while there were some interesting disruptions such as the emergence of FIX for post-trade efforts.
From an operations standpoint, the extremely controversial rule will immediately mean a new set of auditing and regulatory reporting requirements. The buy side might experience major changes in their relationships with investment banks, which will likely be transitioning to more of an agency-style business. In addition, if they haven’t already, banks will be spinning off their hedge fund and private equity activities. This could lead to a surge of new hedge funds in a year that could finally see a real economic recovery.
But, more importantly, the Volcker Rule, despite the expected legal challenges and interpretations to come in 2014, will likely change the dynamics for investment banking in ways that resemble the Glass-Steagall Act. During the dying days of the ill-fated Carter administration, Paul Volcker, the former chairman of the Federal Reserve, after whom the current rule is named, took on the stagflation of the late 1970’s and early 1980’s and won despite much opposition. We will see if the Volcker Rule lives up to its hype and bolsters investor confidence or proves its detractors right.
2.) The Federal Government Shutdown: The 21st Century version of the U.S. federal government shutdown from Oct. 1 to Oct. 16 had direct impacts upon all the government regulators, and particularly the CFTC. The shutdown came as the regulator was trying to clarify the fine print for swap execution facilities (SEFs) and reformed over-the-counter (OTC) derivatives. The commodities trading regulator did the best it could to advance OTC reforms but inadvertently created confusion for those in the industry trying to get ready for SEFs and advance clearing regimes. Mercifully, the shutdown ended and the CFTC and others got back to work after what turned out to be a complete waste of time and money.
3.) OTC Reforms Become Reality: The nitty-gritty of OTC derivatives reform hit home for many operations staffs during 2013. They started to plan and prepare for SEF connectivity, reassess their collateral and margin management infrastructures, and set up regulatory reporting and clearing regimes, among other chores. At the same time, regulators were refining the deadlines for compliance and sorting out complex issues such as the CFTC’s controversial “made available to trade” (MAT) rules, which will decide the instruments to be transacted via SEFs. The regulatory reforms for derivatives trading will hit home even harder in 2014.
4.) FIX Disrupts Post-Trade Processing: The FIX protocol for electronic trading has made major inroads in the front office and many buy- and sell-side firms have heartily embraced the standard for the efficiencies that it offers. In fact, many firms are so wedded to FIX that they are willing to extend their FIX infrastructures for trade affirmations and confirmations. The protocol is also gaining ground for connectivity to post-trade network services, exchanges and other trading venues. A bigger role for FIX in operations could begin to pose real challenges to SWIFT’s dominance in operations and to the providers of centralized trade matching.
5.) Scandals: Financial services scandals unfortunately did not end with the multiple Madoff nightmares and the fall of Lehman Brothers. In 2013, one of the more dramatic scandals peaked when SAC Management Companies, based in Stamford, Conn., pled guilty on all counts of the criminal indictment for securities and wire fraud that were part of a large-scale insider trading scheme, according to government officials. The government charged that employees of the SAC Companies traded on insider information or recommended trades based on insider information to portfolio managers or the SAC owner; the affiliated hedge fund companies were founded by adviser Steven A. Cohen. The government also charged that the “systematic insider trading” was the result of “multiple institutional failures.”
The SAC scandal coupled with J.P. Morgan’s $100 million settlement with the CFTC because of the aftermath of the $6.2 billion loss caused by the “London Whale” trader Bruno Iksil strongly reinforced the need for even more effective anti-financial crime measures. These shocking developments also served as fodder for even more investments in operational risk and compliance technologies and services.
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