The muddy waters of regulation
Friday 20 January 2012 - by Matt Gibbs
Regulation has been evolving at a shocking rate. Last year, the industry needed to cope with the evolution of Ucits IV, bans on short selling, remuneration, governance and Dodd Frank.
The first step is setting up internal controls. Checks and balances must be clearly laid out, implemented and documented with named responsibilities.
Looking at system capabilities and audit trails is second on the list. Ensure systems relative to those corresponding controls are technically up-to-date and provide the ability to monitor, manage and report on exposure.
Both Mifid II and Dodd Frank have extensive changes that promise an overhaul to the OTC markets and fulfil this commitment by expanding the use of central clearing.
Increasing the scope of CCPs to all asset types will highlight the risks being undertaken by participants and enable regulation to be more proactive rather than reactive but in Europe; where multiple CCPs exist, concern is growing that this will drive up the cost of participation in these markets. This creates broad implications around systems infrastructure.
The final thing that firms should focus on is auditing and reporting. Organisations need to ask themselves if they can aggregate their exposure and prove their internal operational and systems controls.
They also need to report to a myriad of clients, auditors and regulators. With new regulations like Mifid, the audit and reporting requirements will only increase in the coming months.
Although the water is clearing in places, it remains murky in others. Unfortunately this does little to add confidence, so firms need to be proactive and take the necessary actions for compliance.
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Will markets in 2012 have a tougher time than 2011?