The lack of coordination between regulators in Asia, the UK and US on harmonising securities market rules could raise systemic risk and put fund managers in a bind, argue senior buy-side traders.
While the rationale behind much regulation, such as Hong Kong’s new electronic trading rules and the US’s Dodd-Frank act, makes sense, implementation across jurisdictions is challenging, said regional head traders from BlackRock and Fidelity at the annual Fix conference in Hong Kong yesterday.
‘Incremental implementation’ – often with the US and Europe leading, and Asian countries observing and developing their own rules – is resulting in divergent behaviour among clients, they say. Some clients comply with parts of the rules, others with all of them.
Sam Kim, head of BlackRock’s trading and liquidity strategies group for Asia Pacific, says the extra-territorial implications of Dodd-Frank – requiring mandatory reporting, central counterparty clearing and trading of OTC derivatives to be done on electronic swap execution facilities (SEFs) – are problematic.
The funds that BlackRock manages are often domiciled in a European country and managed in the US, with trades executed in Asia. This requires time and resources on the part of managers to determine whether such funds must fulfill mandatory trading and clearing requirements as a “US person”, as defined by Dodd-Frank.
“Due to the global nature of the business, fund managers all have these issues,” says Kim. “As a fiduciary, our responsibility is to engage with regulators to ensure they understand how these regulations are impacting our end clients, such as pension and retail investors.”
In Asia, Singapore and Hong Kong mandate central clearing and reporting of OTC derivatives, but contracts do not have to trade on an SEF.
Meanwhile, recent rules issued earlier this month by the UK’s Financial Conduct Authority (FCA) define how fund managers are permitted to use clients’ dealing commission. This effectively narrows the scope for managers to pass brokers’ research bills onto clients.
Kim says BlackRock set up a team in Princeton, New Jersey earlier this year to manage commissions.
“To maintain impartiality, this group does not report to either fund managers or the trading team,” he notes. “It focuses on monitoring commissions, reconciling trades and managing commission-sharing agreements [CSAs] to ensure payments and compliance with local market rules on CSA usage.”
The CSA system is a payment mechanism that allows investment firms pay research providers out of a CSA credit pool maintained by their execution brokers.
Meanwhile, Matthew Saul, Asia head trader at Fidelity Worldwide Investment, makes a similar point about the importance of working with regulators.
“While regulations can make the market better, it has been challenging in a fragmented regulatory regime, like that in Asia, to get regulatory consistency,” he added, speaking on the same panel. “There is room for regulators to coordinate and make the regional regulatory regime more efficient and effective.”
Saul said the biggest recent regulatory change for Fidelity’s buy-side trading desk is the electronic trading regime that Hong Kong implemented in January. The rules place responsibility on both sell-side brokers and buy-side managers for the electrontic orders they send to the market.