The Markets ConversatION Podcast

The burden of NBFI crackdown

May 22, 2024 | Duration: 19 minutes

Speaker: Steven Strange


On today’s episode we explore the world of regulatory compliance for non-bank financial intermediaries or (NBFIs) and buy-side firms.

In an era of increased regulatory scrutiny, NBFIs are facing growing demands for transparency and risk management, while buy-side firms are grappling with evolving best execution standards and order handling requirements.

Steven Strange from ION Markets will help us understand some of the regulatory and compliance challenges faced by industry players and strategies that you can employ to help you stay ahead in an environment of regulatory change.


Ali Curi: [00:00:00] Markets ConversatION is an ION podcast where we discuss topics of importance to capital market participants with product owners, subject matter experts, and industry leaders.

Steven Strange: Being open with the regulator going, in some cases pushing back, saying to disclose that amount of data is going to impact my strategies and working with the regulators.

Because at the end of the day, these controls aren’t meant to be there to be a burden. They’re meant to be there to provide risk control. We need to really be open and make sure you’re part of that discussion early and not scrambling late, trying to put in a solution that may not work for you.

Ali Curi: Hi everyone, and welcome to Markets ConversatION.

I’m Ali Curi. On today’s episode, we explore the world of regulatory compliance for non bank financial intermediaries or NBFIs and buy side firms. In an era of increased regulatory scrutiny, NBFIs are facing growing demands for transparency and risk [00:01:00] management, while buy side firms are grappling with evolving best execution standards and order handling requirements.

Steven Strange from ION Markets will help us understand some of the regulatory and compliance challenges faced by industry players and strategies that you can employ to help you stay ahead in an environment of regulatory change. Let’s get started.

Steven Strange, welcome back to the podcast.

Steven Strange: Thank you, thanks for having me.

Ali Curi: Great. Let’s start with some background. How would you describe the evolving regulatory landscape for non bank financial intermediaries, NBFIs? And going forward, we will refer to them as NBFIs. And what are their concerns from regulators, in particular, the United States Securities Exchange Commission, the SEC?

Steven Strange: Sure. Just to give a quick definition of what we mean when we say NBFIs, it previously was referred to as shadow banking. So what we mean by this is essentially all the non banks. So in this case, a lot of buy side firms, so it could be asset managers, insurance firms, hedge funds, financial [00:02:00] organizations, such as that, who are not regulated by the banking side of things.

So your traditional investment banks, you know, the banks that we use and know today. And so that’s what we mean by the NBFI. So it’s a different side of the financial sector. Hence the term shadow banking, meaning it kind of sits just behind the banking community that we know. So it’s worth just putting that definition in place.

And the concerns from the regulators are that this is a growing area, which has got a significant amount of wealth in this area. It’s increasing considerably. And therefore it is prone to risk and therefore the SEC and other jurisdictions want to ensure that there’s appropriate regulations in place to ensure that that’s a safe community, that there’s not going to be any concerns with that sector in terms of losses and financial losses that could impact the community.

Ali Curi: And let’s continue with risk for a minute.

Steven Strange: It really means we just need to be aware that we need to be able to assess our financial exposure. Firms need to be able to report quicker and just ensure that they’re not [00:03:00] particularly highly leveraged and that there are the appropriate risk controls in place.

So it’s essentially proposing that there’s more disclosure and transparency in the non banking sector.

Ali Curi: And how are regulators in different regions approaching the NBFI crackdown? For example, the U.S. and EU regulations tend to be different. What are the differences between them?

Steven Strange: There’s certainly some differences, and there’s equally a common consensus that this is an area that is worth reviewing.

So there was a few issues in the U.S. with smaller family office firms, which were basically out of the lens of the audits and the SEC that ended up having some financial losses that had a severe impact on the market. So it basically heightened awareness in the U.S. to take a closer look at firms that are, that fall under this NBFI umbrella.

So that gave some awareness going to the SEC going, “Is there a risk here? You know, do we need to do a little bit more?” Equally in Europe they still see the same risks and are still reviewing the same risks. And the UK are [00:04:00] going through that process. The only difference is the stage of who’s going to actually put regulation in place.

Now, all of it’s still in a consultation period as each tries to determine if by putting in more regulations, it will actually benefit financial community, or is it going to put a lot more constraints on firms and actually make them less competitive? So they’re all slowly moving in the same direction. It’s just at a different pace.

Ali Curi: Now, these regulations affect both buy side and sell side. Correct? What challenges do buy side firms specifically encounter when they’re trying to meet these increasing regulatory demands?

Steven Strange: So this is a interesting question. So it really is focused more on the buy side community.

And this is where a lot of the conversation is happening. So the sell side broker community, the banks and that side of the financial community, since 2008, after the financial crash that we all still remember, there was a significant amount of regulation put in place saying that the banks needed to do more reporting.

There’s a lot of regulation on the sell [00:05:00] side. And there was a degree of comfort to say, okay, we feel we’re in a safer place now that we can see exactly what’s happening. And the banks aren’t at risk of going through another financial crisis. So what’s happening is going, “Well, why do that for the sell side, but then leave this growing area in the non banking community, which includes buy sides, why not focus on those as well?” So that’s really where we’re seeing the shift going. There’s a lot of regulation on the sell side. Let’s start putting more focus on the buy side. Now, the interesting part of that is there is regulation today on the buy side, and they’re dealing with a lot of different rules coming into place.

So this is considered adding more complication to the buy side firms. And the risk of that is that it could leave some not being able to compete in the market based on the amount of reporting and regulation that needs to be in place.

Ali Curi: Continuing with buy side firms for a minute, how do these firms approach the task of evidencing compliance with regulatory requirements, such as best execution, order handling, like what role does the [00:06:00] data analysis play in this process?

Steven Strange: So the data is key here. All of the rules and even the rules that have come into effect, such as best execution and certainly regulatory requirements that have been in place for many years. It all requires data and the really the challenge is to be able to report using accurate data being transparent

when auditors look for information or clients look for information on Beck’s execution that you can report that and be as transparent as possible.

But of course, that all comes down to the data that you have available within your system. So data, we’re blessed that there’s so much of data. The challenge we have is where do we store that data? How do we extract that data? How do we put it into the correct formats, um, reporting templates, et cetera. So the data management role and the data management teams become critical, as does the technology that needs to be able, not just handle the volume and store this data, but be able to present this, distribute this, and make it available to the regulators or the internal stakeholders as well.

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Ali Curi: Now the firms that tend to have the bigger challenges are the smaller buy side firms. How are the smaller firms meeting these new requirements? Can you share any best practices from firms that have overcome these challenges?

Steven Strange: Yeah, absolutely. When we think about the smaller firms, when you have a regulatory rule, it doesn’t really matter in terms of the size of your firm.

You need to be able to adhere to that rule and be able to put in the disclosures, make sure that you’re abiding by that particular rule. Now, the challenge for a smaller firm is the NBFI potential regulation is just [00:08:00] one of many regulations that are either pending, going through a consultation period, or are actually going into effect.

There’s multiple FINRA regulations going to affect this month, and firms have to be able to have the resources in place, the expertise, and then the systems in place to be able to automatically ensure that they’re remaining compliant. And that becomes a problem when you only have a limited resource pool who is having to deal with each of these restrictions, understanding them, making sure you have the data available, making sure you have the systems and technology in place.

And that’s the one thing that where technology is really helping out some of those firms to say, well, I may only have a handful of people to run my

technology and be able to focus on this. But if I rely on vendors and SAS software service type solutions, I can take some of those headaches away, take some of those challenges away and give myself some time to really focus on what matters to say, “Well, okay, do we understand the regulation? Am I comfortable that the system I’m using is able to ensure I remain compliant?” So technology is [00:09:00] allowing it’s not solving it entirely, but it’s taking some of that pain away on teams that have limited resources.

Ali Curi: Now, engaging with regulators is always important. Can you share any insights on collaboration and active engagement between regulators and industry participants in addressing these regulatory changes?

Steven Strange: Yeah, absolutely. The biggest thing with any regulation, there’s a lot of lead time. There’s a lot of consultation periods. There’s a lot of decision. So really, the more open discussions, the more being involved with industry peers, meaning firms, just like yourselves coming together to go, “Well, how are you facing this challenge?”

You know, it’s not a necessarily a competitive edge that one firm is able to meet the regulatory requirements over the other. A lot of these firms are all in the same position. So speaking to your peers and colleagues who are going through the same challenges and getting the best practices is a great way to collaborate and solve that.

Being open with the regulator, going in some cases, pushing back, saying, actually being able to disclose that amount of data is going to [00:10:00] be it’s going to impact my strategies, have some open forums there. And some of that protests and discussions and debates are happening now saying, “Well, actually this is going to impact my business,” and working with the regulators because at the end of the day, these controls aren’t meant to be there to be a burden. They’re meant to be there to provide risk controls. So we need to really be open and make sure you’re part of that discussion early and not scrambling late, trying to put in a solution that may not work for you.

Ali Curi: Now, we often rely on technology as a solution for everything, but, and we know that it’s not, but from a tech standpoint, there are some solutions. How are firms leveraging technology to enhance their control functions and meet these regulatory obligations?

Steven Strange: So really it all comes with understanding what the restriction or the regulatory rule may be, or obligation. Can I do that? Do I understand it? Do I know how to calculate it? Whether it’s a complex exposure test, whether it’s disclosing my particular assets whatever it may be.

Do I, first of all, understand [00:11:00] it? Secondly, do I have the data? And then thirdly, do I have a technology in place that can automate that for me and hopefully be able to report with that on my behalf? So being able to answer all those questions is firstly important, and then you see the gaps that you may have.

So you may understand it, you may have some of the data, and if you don’t have it all, you need to go speak to data providers to get that. But then thirdly, do you have up to date systems that can handle that, calculate that, report that for you? That’s what you need to be focused on because these regulatory challenges, they’re not going to go away.

There’s going to be more and more demand on all of the firms. So you need to be able to have technology in place that is adaptable, it’s flexible, it doesn’t require large upgrade efforts to be able to handle new requirements, it needs to be able to adapt and adapt very quickly. So you just need to review your data stack, your technology platform, and see that you’re kind of keeping up to speed and probably consider how that aligns with your digital transformation strategy that hopefully is in effect in most firms.

Ali Curi: Staying along the lines of technology for a little bit more, any [00:12:00] strategies that firms can employ to future proof their data sets and infrastructure to ensure they’re adaptable and they can evolve with these regulatory requirements?

Steven Strange: Yeah, I think it all comes back to data, which I know most people would agree with. So as I said, at the beginning, we’re blessed now with having more data than we’ve ever had before. There’s data providers, there’s hundreds of different data sets you can get covering from ESG to reference data, whatever it may be, you can get that in place. And I think that’s really important to understand how do you consume that data source that data and use that data. Because ultimately whatever regulatory restriction that’s going to be put in place on you, you’re going to have to, you understand that the data that you have and how you could use that and use that within your systems so a lot of firms typically would consider setting up a data committee.

So somebody who’s, you know, could be a chief attorney on the side of your firm, a chief data officer would be part of that. That’d be a data committee that brings in not just the data scientists and a technical team, but the whole key [00:13:00] stakeholders of a business going, “Well, this is the data we need.” And then you have someone who goes, “This is the data we can guess. And this is going to be the challenge with that data.” So having a committee that involves all stakeholders within a firm, and not a siloed technical team, is definitely a strong strategy. And then going back to the digital transformation plan,

reviewing, reiterating, understanding, how are we doing in terms of moving to a digital world?

So we’re upgrading our applications. We’re putting in the latest technology. We’re allowing our applications to speak with each other through interoperability. And we’re able to use the data and the appropriate calculations and conduct the appropriate calculations that the regulators are asking, where are we in that journey, because you can’t just do it overnight.

So are we progressing? Are we slowing down in a certain area? Do we need to get outside help? All of that needs to be reviewed on a regular basis. And that would allow you to get to a position in a framework that you can quickly be adaptable to any changes that are coming, not just from the U.S., but globally around the world.

Ali Curi: Steven, drawing from your experience, how has the integration of data [00:14:00] science and advanced analytics influenced regulatory compliance efforts within the buy side sector?

Steven Strange: So as I was saying before when we think of regulation and the types of investment regulation, it’s not there to be a burden.

It’s trying to manage risk. It’s trying to ensure there won’t be financial losses, financial crisis crashes, you know, that consumers aren’t impacted negatively. So, you know, a lot of the proposed solutions make a lot of sense and a lot of them can be very complex and the ability to have, as you mentioned, whether it’s data scientist team or using AI or advanced analytics to know more about your firm, I think it’s being helpful. So we have the data in place and then you overlay that with your complex analytics. And if you use AI, you use data science teams to really know your business to understand, are you overexposed, or are you able to answer questions quickly from regulators by providing accurate data?

When you get into the spirit of complex financial securities, you know, there’s a lot of calculating that exposure can [00:15:00] be difficult. You want to be able to leverage where we are today with technology and complex analytics to make sure that you are confident and comfortable with the current situation of your exposure, really knowing your business, leveraging that capability to know how you’re performing or potential risks there are.

Ali Curi: And in what ways have the recent regulatory changes, such as increased disclosure requirements for private funds, for example, impacted the operational dynamics of firms? How are they adapting to these changes?

Steven Strange: So this is where it is becoming challenging. As you mentioned with the disclosure changes for private funds, that’s just one of many examples that have occurred in the last few months. That the same individuals, the same teams with limited resources are trying to say, “Well, how am I going to apply my time, our resource, be able to get that information quickly, make sure it’s accurate?” There’s a pressure there that is certainly difficult to make sure that you’re not overstretched and you disclose incorrect information, which could lead to regulatory fines and [00:16:00] reputational damage.

So that’s a lot of pressure, but it goes back to reviewing your operation as a whole. And it’s not that dissimilar to what we said before saying, how are you able to meet these requirements? And is it down to manual work with the team that I have, or am I pushing to my vendors and pushing to my technology providers to say, you need to help me automate a lot of this so I know it’s accurate. I know I’m confident with the numbers and it takes a lot of the operational headache away from me. So it’s either the larger firms I’m sure they can lean on their own proprietary technology tools. Perhaps others who need to outsource this, it is possible by leveraging automation from the many vendors that are out there to help with this and allow you to free up to make sure that you’re, you understand exactly what is being asked for you with all these different changes.

Ali Curi: Steven, what is the one big thing you hope listeners will take away from this episode?

Steven Strange: Really, the regulatory landscape is as complex as it ever has been. You know, we’ve talked for years that there’s new changes coming. We need to adopt whether it’s UCITS, whether it’s new, mutual fund [00:17:00] checks there’s always going to be something coming around the corner.

So the one thing is really to make sure you’re in the best position you can be to adopt to any changes, make your life a little easier in terms of reporting. And it goes back to that, having open discussions with your peers, your vendor partners, participate in, whether it’s user groups, whether it’s a industry events to say how is everybody facing these challenges? Are we doing something a little different? Because at the end of the day, it’s a problem that impacts everyone. It’s a common problem and working together with your key providers would certainly take some of this pain away. And I think it’s, yeah, just staying on top of it, reviewing your technology platform and speaking with your peers should put you in a good place.

Ali Curi: Steven, let’s learn a little bit more about you. Tell us a bit about your background and what is your current role and responsibilities at ION?

Steven Strange: Yeah, sure. Thanks. So I’ve been working in the financial services for approaching 14 years now, previously started my career at TD [00:18:00] Bank, moving on to Fidessa, and finally now with ION.

My responsibilities here is I head the product management team for the asset management part of ION Markets. So essentially the buy side community.

Ali Curi: And now a bit of a whimsical question for you. If you were to write a letter to your younger self, what advice would you give, either personal or professional?

Steven Strange: Great question. I think one thing, if I would look back, is that there’s this hidden potential everywhere within, whether that’s within a firm, whether it’s within a piece of technology, whether it’s actually within an individual person, that’s one thing that I probably wasn’t aware of when I was younger.

And what I mean by that, you start your early career or you’re, through school is everything is to be number one, the get the A’s, be the best at everything, and that’s when you take a step back, that’s not quite, that can be quite a blinkered view. Actually, there’s a lot of hidden potential around you.

There’s a lot of opportunities that are probably missed because you were just focused on being the top of the class or the best at everything and worried about failure. And I think [00:19:00] that can impact you. So being aware of the hidden potential around you would be one thing I think is worth exploring.

Ali Curi: I think that’s great advice. Steven Strange, thank you for joining us today. I hope you visit us again.

Steven Strange: Thank you.

Ali Curi: And that’s our episode for today, you can follow ION Markets on X and on LinkedIn. Thank you for joining us.

I’m Ali Curi. Until next time.