Mobilising resources to match core business requirements is the new competitive challenge, and devolving this function to external desks brings concrete solutions to strategic questions.
Regulations here and overseas require that investment managers take all "reasonable" steps to ensure the best possible results for clients. As a result, policies governing best execution and the best selection of brokers and counterparties need to be extremely detailed, providing proof that measures taken are indeed "sufficient".
The infrastructure of markets as we know them today is going to change dramatically, particularly as the "pre-trade transparency" obligation for new asset classes comes into play (bond, forex and derivative markets). Investment managers will need to adapt to the emergence of new stock exchange categories (Organised Trading Facilities) and new trading platforms (buy-side to buy-side, all to all, etc).
The impact on dealing functions
Given these changes, asset managers must adapt their trading life cycle processes. To meet their regulatory best selection/best execution obligations, they will need to review their reporting processes and organisation.
Investment managers need to improve their capacity to provide adequate reporting as to the quality of execution and must be able to justify their controls with concrete and objective methodologies, notably when it comes to the appraisal of broker and counterparty performance.
Meeting best selection/best execution criteria requires sophisticated and expensive infrastructures and platforms. In addition, the upfront investment to the annual cost of operating a station is substantial. As a result, certain large buy-side operators are outsourcing their dealing activities to external providers.
The benefits of outsourcing
In this new environment, outsourcing the dealing desk is a way for investment firms to clearly delineate their role. By bringing in a third-party provider to streamline the operational management of regulatory constraints (best selection/execution, reporting, benchmarking of orders, traceability of transactions, broker appraisal, etc.), they are able to better concentrate on providing management services.
The successful outsourcing of a dealing function also means privileged and efficient access to market intermediaries – via specialist dealers, optimised connectivity, access to trading platforms, in-depth understanding of sell-side players – and therefore to liquidity.
The reduction in operating costs is another benefit, related to economy of scale for the service provider as well as the substitution of fixed costs with variable costs.
Lastly, outsourcing means that investment managers can cut back on their own operating risk, giving them the added flexibility they need to rapidly expand their activities to new asset classes and new regions.
Natalie Floate is head of trading at BNP Paribas Securities Services.
