Regtech: A Brand New Old Industry

Mounting regulations have given rise to a what some say is a new business sector: regtech.

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The term "regtech" was coined to describe the rise of technology specifically designed to meet regulatory mandates around the world. For some, regtech is the new finch, but there is some doubt about what regtech represents among vendors and market participants.

The phrase was probably coined to sound like fintech, Rory McLaren, senior vice president for regulatory services at Deutsche Börse, tells WatersTechnology. "There are a number of relevant solutions and companies out there but I think it is also a bit of a buzzword. Nowadays, if you call your company a regtech, suddenly it's worth twice as much in the market," he says.

On the other hand, according to Brian Lynch, CEO of Risk Focus, regtech just a different label for fintech. "It's actually good for search engine optimization, since people are looking for it massively on the internet, but at the end of the day, people have been providing these types of solutions forever. It's not new—it's a way of identifying solutions in a specific domain that investors are excited about today."

For McLaren, however, there are key elements that define a new industry and regtech could be a transformation of a part of fintech, or could be just a spinoff. "There are two key aspects of regtech," says McLaren. "On one hand, there is a new take on technology that can help us solve the same problems it always had, such as transaction reporting, best execution and the like. And then there are new technologies and products … and that's actually developing a brand new industry."

Regtech has always existed within the industry, especially since the early 2000s, when regulations began to ramp up. 

Michael O'Brien, head of product management, risk and surveillance solutions at Nasdaq, pointed out during a panel discussion about regtech at the IDX Conference in London that generating and taking orders was not sufficient anymore and that participants need to increase the care and diligence with which they handle orders.

"The regulators started shifting the responsibility to the sell side," O'Brien said. But regtech only became distinctive when regulations actually started heavily affecting the buy side as well. "Lately, we have seen a dramatic increase in our client base in the buy side in the last 20 months. That mirrors the evolution of regulation and the expectation of how a trade is monitored. The technology has evolved to match that at the same time," said O' Brien.

Landscape Changes

Regtech was on full display among the vendor stands at the IDX Conference on June 8. "Undoubtedly, vendors benefit from the amount and the pace of regulation and also the lack of harmonization," says Lynch. "There is a very exciting thing happening right now for vendors in this space. The level of collaboration we're seeing across the industry is unprecedented. The amount of cost that has to be extracted is huge and everyone realizes that the 'build-it-yourself' model is not going to get you anywhere."

Justin Llewellyn-Jones, global head of derivatives at Fidessa, provided a good example of that. For him, the game is going to be played in the field of Tier 1 banks. "These banks have big IT teams that build technology. The problem they face is the maintenance of keeping up with the regulations. As a vendor, I can make a change and split the cost of the change in regulations across brokers. A bank that builds its own technology will get no leverage as it has to absorb the full cost of that change. And if you get a regulatory change every three months, you just can't afford it," explains Llewellyn-Jones. "Banks are not fintech firms. They're going to have to decide whether they will continue building their own technology or find someone else to do it for them. And I believe that they will choose the latter. They'll keep what differentiates them and they will leave the rest to vendors."

Still, since regulations drive the industry now, the transformation that has already started within the industry will affect everyone. Theories vary about who the winners are. For instance, Llewellyn-Jones predicts that start-ups in the fintech space will be the first to fall under the pressure of having to keep up with the constant demands and changes in their services and products. "Start-ups in the fintech space will be impacted more compared to the large vendors," says Llewellyn-Jones. "That is because big vendors have the scale to absorb the costs of maintenance."

Because of that, many firms are likely going to seek alliances within the sector—a survival strategy in a highly competitive sector. "There will be a period where lots of firms will appear and there will be aggregations with people collaborating," says Risk Focus' Lynch. "Everyone sees that no one can be the expert on every single field. The old model of trying to own the entire domain doesn't work. Architectures are more open and everyone sees that they can't depend on one single vendor to solve their problem," he adds.

After all, today's market fragmentation is not exactly the ideal landscape in which to promote a business model, since the cost burden has multiplied and client demands have increased. "There is fragmentation in the market as people come along and spot opportunities, saying we need a product that tackles that regulation. However, depending on the area of the products, you'll see more and more collaboration. Either way, regulations have become more encompassing, less fragmented, covering more counterparties," says Deutsche Börse's McLaren. 

 
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