Sell-side investment banks with over-the-counter (OTC) strategies are investing a substantial amount of time and money ahead of the enactment of the Dodd Frank act, while the buy-side are taking a different approach, according to Rule Financial, an investment banking consultancy firm.
In a study entitled "Dodd Frank 18 months on, is the landscape any clearer?" Rule Financial found that sell-side firms are making large changes to their operations and IT, investing heavily in client execution and clearing propositions that will become operational in 2012. However, the buy-side is taking a different approach and is relying on the sell-side to provide solutions to the problems created by new regulation.
While 70% of the sell-side claim to have finalised their ‘to-be’ business process design, only 20% of buy-side firms have conducted this analysis.
According to the study, total spending by sell-side banks with OTC strategies has been around $10 to $50m annually since 2010.
In addition, those banks planning to adopt a ‘franchise protecting’ minimum day-1 offering have spent less than $5m annually over the same period. The buy-side in comparison is estimated to have spent around $1m to $2m each this year.
The sell-side has also appraised their operating models. Banks are converging OTC, exchange, prime and collateral businesses into a single organisational entity. The collateral management department is gaining in importance and receiving heightened attention and investment. Basel III is driving closer integration of the securities lending and repo units.
The buy-side also displayed much confusion over the mandated OTC clearing timelines, with respondents citing a range of deadlines from 1st September 2012, through to 1st September 2015.
David Holcombe, specialist in markets and trading, Rule Financial commented: “The sheer scale of change to the global OTC derivatives markets agreed by the G20 has overwhelmed many of the regulatory bodies. Despite the G20 target being the end of 2012, there is still no finalised 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.
“This uncertainty has not stopped the sell-side in making a significant investment in new systems and processes, which become operational in 2012. 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. The ‘golden circle’ of large banks seeking high market share have, on average, spent over $100m each in building their propositions, to date.
“The cost to the buy-side of trading OTC derivatives will certainly increase, with the expectation being that charges for collateral will have a significant impact on their returns. Consequently, buy-side firms are looking to clearing brokers and futures commission merchants to minimise the increase in cost of the central counterparty (CCP) model, via collateral optimisation and pricing."