ION AM’s Steven Strange discusses tackling regulatory compliance for NBFIs

July 16, 2024

Key Takeaways

  • Regulators are shifting their focus towards the buy-side.
  • The challenge for participants is handling data for reporting.
  • Firms must review operations and automate workflow processes.

Steven Strange, ION Group’s head of product for asset management, recently shared his insights on non-bank financial intermediaries (NBFIs) with The Markets ConversatION Podcast.

The regulatory landscape for NBFIs, previously referred to as shadow banking, is evolving. NBFIs include buy-side firms such as asset managers, insurance firms, and hedge funds, which are not regulated by the banking sector. Due to its potential systemic risk, the growing wealth in this area has attracted the attention of regulators, particularly the United States Securities Exchange Commission (SEC).

Regulators aim to ensure that appropriate regulations safeguard this sector from financial losses that could impact the community. “This involves firms being able to assess their financial exposure, report quickly, and ensure they are not overly leveraged,” Strange said. The goal is to increase disclosure and transparency in the non-banking sector.

Regulators in different regions are approaching the NBFI crackdown differently. In the US, family office Archegos, which fell under the NBFI umbrella, experienced billions of dollars in financial losses that severely impacted the market, prompting the SEC to take a closer look. “In Europe and the UK, regulators are also reviewing the same risks, but the pace at which regulations are put in place varies,” Strange said.

These regulations focus on non-banking financial institutions. Since the 2008 financial crash, a significant amount of regulation has already been put in place for the sell-side. “However, the focus now is shifting towards the buy-side, potentially making it harder for some firms to compete in the market due to the amount of reporting, disclosure, and regulation required,” Strange said.

Data’s critical role

Data plays a key role in compliance with regulatory requirements such as best execution and order handling. Strange said the challenge lies in storing, extracting, and formatting the data for reporting. “Data management teams and technology become critical in handling the volume of data and making it available to regulators or internal stakeholders.”

Smaller buy-side firms face bigger challenges due to limited resources. They need to understand the regulations, have the data available, and have the systems and technology in place to ensure compliance, he said. “Technology is helping these firms automate much of this process, freeing up resources to focus on understanding the regulations and ensuring compliance.”

Open discussions and active engagement between regulators and industry participants are crucial in addressing these regulatory changes. According to Strange, “Firms need to be part of the discussion early on and not scramble late to put in a solution that may not work for them.”

Leveraging technology

Firms are leveraging technology to enhance their control functions and meet regulatory obligations. They need to understand the regulatory rules or obligations, have the data, and have technology in place that can automate the process for them. Strange said this technology needs to be adaptable, flexible, and able to handle new requirements quickly.

“To future-proof their data sets and infrastructure, firms need to understand how to consume, source, and use data,” he said. “They need to set up a data committee involving all stakeholders within the firm to discuss data needs and challenges. Regular reviews of the technology platform and alignment with the digital transformation strategy are also important.”

The integration of data science and advanced analytics has influenced regulatory compliance efforts within the buy-side sector. Complex analytics and AI are being used to understand firms’ businesses, assess exposure, and provide accurate data to regulators.

Recent regulatory changes have impacted firms’ operational dynamics. Firms need to review their operations as a whole and determine whether they can meet these requirements with their current team or rely on vendors and technology providers to automate much of the process.

According to Strange, the regulatory landscape is as complex as it has ever been. Firms need to be in the best position to adapt to any changes and make reporting easier. Open discussions with peers and vendor partners and participation in user groups and industry events can help firms face these challenges. “Reviewing the technology platform and speaking with peers can also put firms in a good place,” he concluded.

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