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The challenge of regulation: Cathy Gibson
It’s no secret that regulation is having an impact on the buy-side trading desk across all asset classes. But in fixed income, regulation is also accompanied by other factors including the current negative interest rate environment, ongoing quantitative easing in Europe and the consequent pressure on liquidity. These factors strongly imply that the buy-side is going to have to start thinking outside the box, according to Cathy Gibson, head of fixed income trading at Deutsche Asset Management UK
Gibson, who joined Deutsche Asset Management in September 2015, has been able to witness the industry evolve over the last decade, having previously held senior roles in Pioneer Investments, and Bank of Ireland. At Deutsche, the company has centralised its trading structure and increased focus on global trading platforms – a change that is part and parcel of the changing environment the buy-side finds itself in. At the same time, resources have been poured into the compliance team. But the next step may be to evolve the products and services the company offers.
“Given the rising costs and low yield environment we’re going to have to be a lot cleverer in the products we offer – we will need to use more multi-asset solutions and more electronic trading products,” Gibson told the Buy-side Perspectives. “For example, instead of pure fixed income it will be maybe fixed income with an FX strategy or ETF strategy. Diversifying with different asset types, rather than just fixed income or just equities. This can been see in the growth of unconstrained and total return products.”
Just as the company’s services are changing, so too is the role of the buy-side trader within it. While the execution-only role may be coming to an end, the role of the buy-side trader as a part of the overall investment process may be more important than ever, Gibson added. The impact on the way the trader spends her or his time will also be significant in several ways. “Increasingly traders are going to have to put more and more of their resources into understanding regulation not just from an execution point of view but also from an investment point of view,” she said.
However, at the same time it won’t necessarily be easy to reconcile the evolving liquidity situation in fixed income with the need to identify valuable trading opportunities and the need to execute those ideas effectively and in line with regulatory expectations. The only solution may be for the traders to ensure that they are working as closely as they can with the portfolio manager as part of a wider shared effort within the company, requiring effective internal communication and engagement across teams. Even then, traders will have to work smarter.
“Liquidity has changed and unfortunately spending a week researching a relative value idea and then bringing it to a trading desk has a reduced chance of working because bonds are not trading where the screens are and the likelihood of it being able to execute is reduced,” said Gibson. “Trading needs to be part of the initial conversations, they need to know what the strategy is and by working together there is increased chance the strategy will be implement at the lowest possible cost to the fund.”
“Working with portfolio manager is the key to successful trading – we do need to be able to work together,” she added. “We’re also looking at prices before portfolio managers so communication needs to be constant and there needs to be a relationship of partnership. That’s very much the way things are set up here, we are constantly talking to each other, and looking for the best and most cost effective way to enter into or exit a position.”
Some trading teams have increasingly turned to multi-asset trading as a tool to achieve alpha and boost efficiency. The more radical elements within this trend sometimes have individual traders trading across multiple asset classes. However, Deutsche Asset Management has taken a fairly cautious approach that emphasises the need for specialisation, within a context where it is understood that broadening knowledge to nearby relevant asset classes may be beneficial.
“I don’t really see a time when you’re going to have fixed income traders jumping between equity and fixed income, I do think trading requires some specialisation,” said Gibson. “But within the FI asset types, having the ability to trade rates, bonds and FX is a bonus.”
Aside from shifting market conditions, relationships and expectations, one of the major challenges facing the buy-side today is the European Commission’s MiFID II legislation, the delegated acts of which were released earlier this month. While MiFID II is usually seen as part of a wider drive towards pan-European harmonisation, there are those who point out that there could be some unintended consequences, and even some serious complications. Because MiFID is a directive, it still has to be transposed into national law by each individual country in the European Union. In a worst-case scenario, that could mean differences in interpretation result in different sets of rules in each of the 28 member states.
“The national regulators don’t intend to collaborate in implementing this MiFID II regulation into national law, and therefore there’s not going to be one approach,” said Gibson. “So not only do we have to deal with the single most challenging piece of legislation the industry has faced, the fact that it’s going to be taken up by each state autonomously and interpreted differently means that in the worst case scenario we’re going to have to figure out how to implement it across borders. Our concern would be that whatever we will put in place may not be deemed to be sufficient to meet that regulation. We feel the regulator could give more direction on how we could implement MiFID II and that’s the bit we are struggling with.”
In addition, the rising cost of new regulation could have other side-effects, including consolidation in the market – a result that seems unlikely to be in line with what the European Commission had originally intended. For example, Gibson highlights the unbundling of payments for research and execution – a move that was intended to drive up transparency and benefit the investor. One of the effects of this is that in theory, a much smaller asset manager now pays the same for services as a giant fund worth billions.
There are tentative signs that the industry may be moving towards a more collaborative approach, as new initiatives emerge for trading based on a utility model where applicable, such as in areas that do not necessarily provide a direct competitive edge. But it remains to be seen what the final impact of regulation and market structure change will be. Perhaps the future holds further examples of buy-side cooperation and shared initiatives that will ultimately benefit the end investor.
“On the trading desk we need more collaboration between buy-side firms and between buy and sell side,” said Gibson. “There are a lot more initiatives where everyone is discussing the same challenges. We all have one objective and we all want to be compliant at a national and international level.”
"We’re going to have to be a lot cleverer in the products we offer – we will need to use more multi-asset solutions and more electronic trading products"
"We feel the regulator could give more direction on how we could implement MiFID II and that’s the bit we are struggling with.”
Head of Global Buy-side Research