The biggest regulatory changes since the 1930s are bearing down on the U.S. securities and investment industry and many firms are ill-prepared, says a new study by research firm TowerGroup
From derivatives and hedge funds to capital standards and short selling, the range of issues encompasses almost every line of business and every functional area, says TowerGroup senior research director Dushyant Shahrawat.
Business models will adapt or perish in the new order, which regulators aim to make more transparent, accountable and globally consistent, according to the report released on Thursday.
It is no surprise that after all the risk management failures, regulatory lapses, and systemic problems in the last two years, the U.S. securities and investments business is in for a serious dose of new regulation, Shahrawat said.
Information technology will play a big role for firms in complying with regulators' demands for more disclosure, closer supervision and better asset valuation methods, as well as faster and more centralized clearing and settlement, the report said.
Regulators are focused now on improving disclosure, transparency and valuation of over-the-counter derivatives, structured products and securitized assets, he said.
All this regulatory change facing the institutional securities and investments business will have a profound impact on the technology departments of securities and investment firms, requiring them to make changes to processing, accounting, recordkeeping, and valuation systems, Shahrawat said.
Hedge funds are under scrutiny and likely to face new registration and other regulatory requirements. Some hedge fund firms began preparing for this three years ago when it first appeared that tighter oversight was on the way.
But TowerGroup estimates that eight of 10 firms have yet to start making the required changes. Much of this change will mean hiring more staff in three main areas: IT (information technology) and operations, risk and compliance, and client/regulatory reporting.
Adding back-office staff will mean higher internal operating costs at a time when many hedge funds can ill afford it, with investment returns down and client redemptions up.
Indeed, the regulatory pressure may itself cause some firms to close shop as they deem staying in business uneconomic because of current financial conditions and the additional regulatory expense, Shahrawat said.
Hedge fund registration will mean a sea change for this business, bringing in greater scrutiny, more transparency, and clarity, he said.
(Reporting by Kevin Drawbaugh; Editing by Chizu Nomiyama and Jeffrey Benkoe)