After hearing first-hand about the European regulatory environment on a recent trip to the other side of the pond, Anthony was left chanting, "USA! USA! USA!"
I’m an American. I live in Brooklyn. I work just off Wall Street. In my arrogant, hegemonic view, everything is done better in the US of A, even when it’s not. The one area in which I begrudgingly concede defeat is that of financial regulation. It always seems like the US is either too lax (pre-crisis) or too harsh (post-crisis). Finding the middle ground has been elusive. But, then again, I have only spoken to US firms, which have a dog in this fight and are predisposed to fits of a hissy nature.
Then I flew over to London last month to attend Buy-Side Technology’s European Summit. All I heard across the pond were the horrors of Mifid II, Solvency II, Ucits IV and Basel III, among other regulations with a Roman-numeral affix. People even threw regulations at me that I’d never heard of: Facta, RDR, AIFM Directive and something called Client Money.
I had known that Europe was struggling with the unintended consequences of regulation, just like in the US—I just didn’t realize that it was moving toward this seemingly dire situation. This is what happens when you focus too much on the technology and forget to monitor the regulatory implications—technology begets regulation; regulation begets technology.
“When regulators try to tackle something, technology costs are not the first on the priority list, but on the buy side, it’s a lot higher up,” says Peter Rose, portfolio manager at C-View, who spoke during a panel discussion.
And it’s not as if European firms can just ignore the thousand-plus pages of the Dodd–Frank Act, and the proposed Volcker Rule, while both sides of the Atlantic are debating T+2 in one way or another—with Europe leading the charge.
I thought that after the meltdown of 2008, we were all going to work as a team. Isn’t that what the G-20, European Union, SEC, FSA, CFTC, FSB and all the other acronymic bodies telling us? Wasn’t a unified policy the way forward? Weren’t we supposed to be avoiding regulatory arbitrage? To quote the great US football coach Vince Lombardi: “What the hell’s going on out here?”
At the Buy-Side European Summit, representatives from major European buy-side firms griped about the blanket of regulation they are facing.
I thought Dodd–Frank was a headache, but several people I spoke with were under the impression that Dodd–Frank would lose some of its teeth as it goes through the implementation processes with the SEC and CFTC. One panel, made up of representatives from HSBC Global Asset Management, BlackRock, Hermes Fund Managers and Northern Trust, expressed great concern about Solvency II. There were those who were worried that the additional capital adequacy rule proposals would mean less balance-sheet capital available, which could affect liquidity and a number of players in the market. And everyone bristled at a “token tax” on all financial transactions.
Vincent Mooijer, investment manager and head of equities trading at Dutch buy-side giant PGGM, was worried about proposals that would require firms to be transparent when it comes to working large bock trades and show their indications of interest (IoI) to other participants. “That gives people too much information about what I am going to do, and they can take advantage of that,” he says. “This will not help a pension fund or asset manager achieve best execution. I think that the transparency that they proposed in Mifid I already caused dark pools and fragmentation of liquidity, and now they want to make everything more transparent—I think it’s going to backfire.”
This may be a bit like howling at the moon, but for the foreseeable future, the regulatory environment will continue to change and exert pressure on financial services firms. As Claes-Henrik Claesson, managing director of Claesson Capital, put it: “Regulatory changes will never end—there will be more regulatory changes and more rapid ones in the future.”
So my message to my loyal buy-side readers back in the States is this: Stop fretting so much because things could be worse—you could be a Europe-based firm.