In this special series, we’re reporting on the highlights of the RIMES II Client Conference EMEA 2018, which took place in London on May 2.
In the final session of the RIMES 2018 Client Conference, Ocatavio Marenzi, Co-Founder and CEO of Opimas, a financial sector analyst, discussed the direction of travel for RegTech in the buy-side.
Octavio’s presentation commenced with a look at the increasing volume of buy-side regulations. While the increase is predominantly occurring in the EU, Octavio pointed out that firms in the US were also faced with a regulatory challenge, and the de-regulation forecast for the Trump Whitehouse is not progressing at the expected pace.
What are the consequences of increased regulatory oversight? According to Octavio’s research, fines for market manipulation have decreased significantly since their peak in 2006 but are beginning to creep up again. With many of these fines directed at large sell-side firms, Octavio reported that some mid-sized asset managers are taking something of a laissez faire approach to compliance.
Looking at the RegTech market, Octavio explained that spending is not yet as much as might be expected given the regulatory challenges facing firms. Most firms have reacted to regulations by increasing the size of compliance teams. However, with the costs of compliance set to increase dramatically, this will change, and firms will start adopting RegTech solutions in volume. This will lead in turn to a reduction in headcount in compliance teams. For Octavio, this trend is important as all too often firms use their large compliance teams as a fig leaf for inadequate compliance efforts.
Next, Octavio provided an overview of the market surveillance technology market, which is important in helping firms address regulations such as MAR and MiFID II. Artificial Intelligence technologies are an emerging trend in this area, and Octavio argued that such technologies could prove very useful in helping firms monitor trades and communications for suspicious activity. At present, the use of AI in market and trade surveillance is limited, but set to grow.
Taking a closer look at MiFID II, Octavio demonstrated that the buy-side is being hit particularly hard by compliance costs in relation to this Regulation. According to his figures, leading asset managers need to spend €4mn each year to maintain compliance with MiFID II; for banks, this figure rises to €9mn. Firms are starting to realize that they need to put in place a comprehensive solution for MiFID II compliance, ahead of its implementation next year. This is much more than the ‘patch-job’ most expected would suffice.
Part of the compliance challenge facing firms relates to the increase in volumes of ‘alternative data’: data that include satellite imagery, mobile geolocation data, video feeds from webcams and private data sets from universal banks. Alternative data is a focus of hedge funds, which use advanced analytics to find trends in this data. As this area grows in importance, new systems will need to be put in place to facilitate the market. Regulations like GDPR, for example, are making it difficult for mobile geolocation providers to supply their data in a compliant way. As a result, many plan to stop providing to the EU, putting asset managers and funds in the region at a competitive disadvantage.
Octavio concluded his presentation with a look at the varying uses of RegTech solutions. Some RegTech services can be leveraged in multiple ways. For example, communications surveillance technologies can also be used for research evaluation, while comms and trade surveillance systems can also be used for sales force optimization. At present, however, few firms are realizing value in this way.
Octavio’s presentation brought to a close another lively RIMES Client Conference. We would like to thank all our speakers and attendees for their participation and we look forward to meeting again next year.
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