The Buy Side Slowly Moves Toward Utilities, Managed Services

Today it was announced that Pimco was deploying kyc.com—a joint venture between Markit and Genpact—to bolster its onboarding and due diligence operations. It was an interesting release largely because it was a major buy-side institution making the announcement.

The sell side has been quick to embrace the benefits of centralized services for KYC needs, mainly because of necessity as billions of dollars in fines have been levied against some of the largest banks in the world.

My friend and former colleague Tim Bourgaize Murray laid out the challenges faced by banks when it comes to answering KYC demands—which have only grown since their introduction nearly 20 years ago—when he did a deep dive into the subject back in late 2014.

The desire on the sell side was to have assistance from a utility and/or managed-service offering, while the issue of liability has forced banks to also build out their own internal platforms to handle the final five yards because, after all, it's the bank's clients and the bank's final judgment that matter the most ... and the bank's reputation and wallet are what's at stake.

Most sources Tim interviewed at the time said the competition among utilities and third parties was "still wide open, and that a handful of utility and managed-services offerings can coexist with different inherent strengths and natural target market segments."

To the Buy Side

Large buy-side institutions like Pimco, which manages $1.5 trillion, have increasingly felt the regulatory squeeze when it comes to onboarding, even as KYC-related consequences are still minimal for buy-siders. According to consultancy Aite Group, asset managers with over $20 billion under management require at least four full-time employees dedicated to counterparty administration. While that's certainly not back-breaking for a large institution, regulatory mandates such as Mifid II, Securities Financing Transactions Regulation (SFTR), Fatca, and the G20's margin rules are only going to increase the buy-side's regulatory burden.

I asked Markit's Darren Thomas—who heads Counterparty Manager, which includes kyc.com, Markit's Tax Utility, and its Request for Amendment offering, all of which Pimco has deployed—about the changing needs of the buy side when it comes to KYC requirements.

He says the landscape has been "confusing" for a large segment of the buy side as there are a number of offerings in the space. "There is confusion among the buy side based on the different offerings in the market," he says. "It's a bit like Samsung or an Android compared to Apple and iOS. There is a perception that they are the same thing when they're not. Yes, both have app stores and new functionality, but the service and experiences are different. Some firms—be it buy side or sell side—are taking a wait-and-see approach so they can gravitate toward the best network. They want to get it right in the beginning because like a phone purchase, the cost of switching is an added cost."

Another reason for the buy side's reticence is that they have established relationships with their counterparties "and there is a concern that adding a trusted third party may deteriorate the relationship and make it more difficult for the buy side to influence the reasonability of data requests from the banks," Thomas adds.

And finally, the buy side has been inundated with new mandatory clearing requirements, trade reporting rules and transparency requests. As a result, the buy side has "regulatory fatigue" and more pressing needs are being addressed.

It will be up to the utilities and managed-services providers to document their value when it comes to onboarding and due diligence, but the opening to get to the buy side is there. While there aren't great consequences for the buy side when it comes to KYC, these things are connected. The general theme is that improved data governance can help to reduce costs, whether for KYC or for onboarding or for general regulatory reporting.

Reading the tea leaves, the regulatory environment won't get any easier any time soon. And Pimco is likely just at the front of the line as more buy-side institutions move toward third parties and utilities in a manner similar to the sell side.