A regulatory flyover
The post-crisis reforms for over-the-counter (OTC) derivatives markets are in force in almost all jurisdictions and call for unprecedented collateral requirements, in terms of volume and quality.
To manage the high volumes and meet the demands of both efficiency and operational risk management, clients seek integrated, end-to-end services including mark-to-market trade valuation and collateral management.
A number of key regulations focus on the end-client’s best interest. MIFID2, which should enter into force early 2018, reinforces Best Execution obligations for investment firms. This means they must take all reasonable steps to obtain the best possible result when executing client orders or placing orders with other entities to execute.
In parallel, UCITS V and AIFMD managers have obligations to act honestly and in the best interest of the funds they manage. This encompasses their duty to put in place a best execution policy and to obtain best execution of orders.
At Securities Services, we have been working on ensuring that our solutions help our clients meet these new requirements. Concretely, our Dealing Services offers a ‘best execution’ multi-asset class dealing service via an open architecture platform. Clients maintain their sell-side relationships while improving dealing efficiency and cutting costs.
Other regulations deal with capital and the asset side of the balance sheet. Under Solvency 2, the capital position of the insurance company must be monitored against specific indicators such as the Solvency Capital Requirement (SCR). These changes influence insurers’ strategies as asset classes bear different capital requirements.
Take an example from Solvency II, FX risk exposure is factored into the capital requirements. By defining an FX policy to cover FX risks, insurers will effectively reduce the amount of capital they are required to hold. To address Solvency II risk and governance requirements, our clients can opt for our passive currency overlay, an automated solution to hedge FX risk and reduce operational workload.
Regulatory changes have impacts on business strategies and are making it necessary to re-think business models. Topics of concern include efficient risk mitigation and management, operational efficiency, best execution / selection, investor protection, transparency and optimisation of capital usage.