Blog, MiFID II:Articles

The Internationalization of Regulation

International Regulations

Part One: What It Means for US-based Asset Managers

Business Today is Global – But Regulations Are Still Local

When it comes to doing business, country borders no longer serve as the restrictive boundaries they once did – financial regulations, however, tell an entirely different story… A story of differing rules and requirements for each country that is very slowly evolving to find ways to better address the internationalization of financial firms.

In this two-part series, we will take a closer look at what this ‘internationalization of regulations’ means for US and UK-based asset managers.

US-based with Global Aspirations

It’s no secret that many asset management firms that once focused solely on the US are now stretching their reach overseas as they seek to become global organizations.

In a recent speech at the Investor Regulation Conference in London, SEC Chief of Staff, Andrew Donahue stated, “the number of investment advisers registered with the Commission that have their principal office and place of business outside the U.S. has increased nearly 150% over the last 13 years, while the amount of corresponding regulatory assets under management of those foreign advisers has more than quadrupled during that time to $8.7 trillion .”

This type of international growth requires global cooperation amongst regulators across borders, to ensure proper compliance rules are in place for the benefit of investors and funds alike.

International Regulations – A Reality or A Dream?

A few key things remain consistent regardless of regional boundaries. Regulators across the globe are placing increased focus on the following types of risk:

  • systemic risk
  • liquidity risk
  • leverage risk
  • operational risk
  • cybersecurity
  • fraud

Donahue remarked on this in his speech, stating, “Although the progress in, and benefits from, international engagement are significant, more still needs to be done. Our increasingly complex and integrated markets demand no less. This need is particularly prevalent with respect to regulatory risks that transcend borders.”

While these concerns indeed transcend borders, there are different and often competing priorities depending on the region. One example of this is how European regulators are ahead of their US counterparts when it comes to a focus on creating regulations targeting alternative investment managers under AIFMD. In contrast, the US is ahead of Europe when it comes to the country’s focus on Money Market funds and Fixed Income swaps.

There is a sea change occurring today as regulators are looking beyond their backyard to see what other countries are focusing on in an effort to align priorities to minimize systemic risk globally.

What Does This Mean for US-based Asset Managers?

As regulators take pages and chapters out of each other’s books and we see an emerging international regulatory framework, asset managers will need to be nimble and able to adapt to changes both within and outside of their own borders.

US-based asset managers that market or manage funds in Europe are not always aware that they need to comply with regional regulatory requirements, putting them squarely in the purview of regional officials.

Let’s say for example that a US-based firm manages funds in Sweden. They often do not realize that they need to comply with Swedish regulations and report on their AIFs to the Swedish regulator. That is until they receive a letter from the regulator asking them why the hundreds of data points required for Annex IV reporting have not been submitted.

This is not just headache to pull together the necessary data and documentation but there is a language hurdle at play as well. A compliance partner with regional expertise that can leverage technology to compile the data points and translate the proper documentation into the right language plays a key role in solving the concerns of both the regulator and the firm in question.

Though this is just one example, with MiFID II coming into play in 2018, US-based asset managers that conduct business in Europe will need to be nimble and able to adapt to this changing sea of regulations across every border in which they operate.

What’s Next?

As regulators around the globe focus on better compliance monitoring and investor protection, there is no doubt that the next step will involve regulators reviewing the systems that asset managers use to meet relevant regulatory requirements.

US-based firms need to be ready to prove that they have all relevant regulations covered within every country in which they operate. Donohue remarked in his speech on the importance of, “lay[ing] the foundation for a modernized regulatory regime.”

The modernization of regulatory regimes has been a trend in Europe dating back to 2008 even if it’s only become a more recent trend in the US. Between the modernization of regulatory regimes and a greater global focus on pre-trade compliance and oversight of technology, it is clear that the next wave of regulatory focus will be on the systems used to meet emerging regulations and reforms. US-based asset managers need a modern, cloud-based solution that acts as an expert in regional regulations – translating what cross-border regulations mean and how a firm can meet all relevant requirements.