2018 Compliance Trends for the Buy side

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Every day is different in the financial markets, and asset managers know to expect the unexpected. Even so, it’s almost always possible to pick out some themes that run over time.

We’ve identified six trends that have been building over the last several years, and we think will continue in 2018.

Trend #1: Regulatory pressure is increasing:

Asset managers used to be regulated lightly, but their compliance burden has increased significantly with the introduction of MiFID II and the Market Abuse Regulation (MAR) in Europe. Importantly, the regulators want proof that firms have systems and controls in place to not just detect, but also prevent market abuse. Moreover, these regulations are having a global impact: firms are applying the strictest standards across all jurisdictions.

Trend #2: Regulation and market structure changes are leading to disintermediation:

Buy side firms have many more choices for transacting business: they can do it on regulated exchanges, multilateral trading facilities, and organized trading facilities, and through systematic internalizers. In addition, new unbundling rules are leading firms to bring their research in-house instead of buying it from the sell side.

Trend #3: Investor scrutiny is becoming more intense:

Investors want to know more about the funds they invest in, and negative news could lead to massive outflows, damaging firm reputation and even threatening the closure of the fund.

Trend #4: Gatekeepers are exerting more influence:

Over the last decade, buy side firms have engaged consulting firms to audit their processes and provide a rating to investors. Previously, gatekeepers’ analysis focused on performance and classifying financial strategy. With the demand for “pervasive transparency” nowadays, their analysis has become more data driven, and it focuses on every aspect of the business, including operational risk.

Trend: #5: Firms are consolidating:

The higher compliance burden, tighter investor scrutiny, and regulatory and market structure changes are pushing some firms, particularly smaller ones, to achieve scale through mergers and acquisitions.

Trend #6: Buy side firms are outsourcing non-core processes to cut costs and leverage outside expertise.

While handling core business processes internally may be justifiable, outsourcing non-core, compliance, risk and back office processes is often more cost effective, especially given the benefits and greater acceptance of cloud services. Besides, you can take advantage of the most advanced technology, including machine intelligence and user behavioral analytics, to improve surveillance. Ultimately, the regulators, the gatekeepers and your investors will thank you in the end.

So what does this mean for your firm? You need to be far more proactive in monitoring activity to ensure that your staff aren’t violating any rules and regulations on insider trading or market manipulation. Random sampling, spreadsheets and simple rule-based alerts aren’t going to cut it anymore. You need to automate your surveillance processes and empower your analysts to prioritize alerts, so when and if the regulators come knocking or the gatekeepers arrive for the audit, you have all the answers. And you have to find a cost-effective way to do it.

To learn more about how technology can help your firm remain compliant, download the Nasdaq Buy-side Compliance factsheet >

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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