Buy-side compliance spending to continue rising

NEW YORK – Asset and hedge fund managers expect their compliance IT budgets to keep expanding in line with pressure from multiple regulatory and institutional pressures.

According to a new report by financial technology consultancy Celent Communications, Compliance: Trials and Tribulations in Asset Management, buy-side firms put top priority on portfolio trading compliance and email and instant messaging capture and archival efforts, and less focus on issues such as Sarbanes-Oxley compliance, broker surveillance and data warehousing.

The report surveyed 11 asset and hedge fund firms on compliance IT budget commitments, compliance staffing, prioritisation of compliance-related initiatives, and compliance challenges and wish lists.

A clear majority of respondents – 91% – reported increases in their compliance budgets over the past year, and 64% of firms further expect additional compliance spending increases.

In terms of the most pressing compliance-related initiatives over the next 12 to 18 months, 80% of survey participants cited portfolio trade compliance as their key focus, followed by email and instant messaging capture and archival (70%), document archival (60%) and behaviour detection programmes (50%).

Denise Valentine, Celent analyst and author of the report, notes that while managers can often utilise existing accounting and trading systems to meet some compliance requirements, a likely reason for a majority of survey participants citing trade compliance as a priority is system upgrades.

"Even in the trading realm, money managers can look to their accounting or trading systems to give them trade compliance," Valentine says. "In the survey, it was interesting that they were ranking trade compliance so high. I think what's going on here is upgrading – managers are involved in buying new versions of Charles River or Macgregor or Linedata, and that's probably why they're still focusing on the same topic."

According to the report, asset managers have come to rely more so on 'point solutions' – systems devised to address specific regulatory or business requirements – rather than enterprise-wide compliance platforms.

Point solutions have definite drawbacks: targeted at particular compliance issues, they have limited applicability, requiring managers to implement additional products for different compliance initiatives.

But, as Valentine explains, taking the enterprise compliance route entails significant cost and implementation efforts. "Enterprise compliance systems tend to be overkill for what asset managers need to get done, and are very expensive with enormously long implementations," she explains. "They require you to process-map your organisation, and it's a very intense endeavour."

The analyst says many managers are able to meet some compliance requirements using portfolio and trading systems they already have in place, and opt for point solutions in areas such as email and instant message (IM) archiving, which they've never had to deal with before.

"Managers are finding that they can cope to a great extent with what they've got, except in certain discrete situations such as email and IM archiving, which they've never had to do before," Valentine reports. "So they'll go out and buy a point solution for that, but not so much a best-of-breed product. They certainly want the best product they can buy, but that connotation normally has a different reference point – it has to do with building blocks of a total picture you have of your organisation, like best-of-breed accounting or trading," she continues.

"A point solution means you have a discrete need, and this product fills that need."