Back to the Future

Having spent this week at Sifma in New York, and the last 36 hours essentially time travelling across the Atlantic, there's a lot to sort through. Most of my thoughts from various discussions were summarized in a piece filed yesterday, but given the benefit of hindsight, and a red-eye flight sandwiched between three screaming kids, it's worth going over a couple of points again.

Cap-Ad
From the perspective of banks, regulation is a massive driver for everything from cost and spend through to operational efficiency. But it's not the Markets in Financial Instruments Directive, the Dodd-Frank Act or the European Markets Infrastructure Regulation that gains the most grumbles, but Basel III.

It's understandable. Even banks with so-called fortress balance sheets are being required to radically rethink their strategies in terms of capital adequacy requirements, and the inventory of financial instruments that they hold. Coupled with other incoming regulation, it can be a poisonous combination to maintain a holistic perspective on. I heard many people talking, with no undue level of dramatic overtone, about the death of the sell-side institution. With capital adequacy, and shifts in market structure with swaps reform and other areas, it's certain things are radically changing.

Calling evolution ‘death', though, harkens back to the worst in sensational journalistic agitprop. Anyone who's spent a little time in the entertainment industry will be used to this. Rock music has been proclaimed dead so many times that it's a wonder the coroner even bothers responding any more, likewise with modern film, consumer technology, sports and any other area you can think of.

Where We're Going, We Don't Need Roads
It's all a bit over the top, and hardly beneficial to sober analysis of industry trends. The sell side is not dying. Changing, perhaps, and morphing into something that it hasn't been traditionally, certainly, but that's been ongoing since time immemorial. It's only because this is being mandated rather than doing so organically that it generates such a tremendous amount of expostulation.

I heard many people talking, with no undue level of dramatic overtone, about the death of the sell-side institution. With capital adequacy, and shifts in market structure with swaps reform and other areas, it's certain things are radically changing.

It doesn't help, as we've said many times before, that regulators are being so irresponsibly directionless with rulemaking. But some are trying - the transcript of the Commodity Futures Trading Commission's (CFTC) Technology Advisory Committee meeting, posted several days ago, provided interesting and valuable discussion on the direction of nomenclature for rulemaking. But, as one person said rather delicately to me, regulators need to "shit or get off the pot."

CFTC Commissioner Scott O'Malia attempted to address this in his speech to the conference, saying that the regulators simply weren't prepared enough to handle the sheer level of regulatory rulemaking. They have, he said, jumped from issuing three rules per year to handling 40-50. There is, naturally, some sympathy with this, and the CFTC has been the most conversant regarding industry sentiment.

You Want A Pepsi, Pal, You're Going To Pay For It
Given everything that has been happening, it feels like we're about to head into a period of more immediate, than postponed, changed. These discussions can continue endlessly, but sentiment is shifting, plans are being executed and there are roadmaps and steps towards reform. The sell side, from what I gathered, is in a state of flux, and the buy side is proceeding with its usual detached calm. The future form of capital markets may not be easy to predict, but many at Sifma this year seemed to believe that it won't remain a mystery for a great deal longer.