10 Things Every Trader Needs to Know About the Changing Regulatory Landscape

The biggest change in more than 75 years is about to hit the buy side in the form of the Dodd-Frank Wall Street Reform Act. Here's what you need to know to prevent the new regulations from causing you trouble.

6) ...And Upgrade Compliance

And while you're building out the risk management function, you'll need to upgrade compliance processes. You may have started your hedge fund to get away from the bureaucratic burdens of compliance at big firms, but the sheriff is back in town.

"Someone trading the interest rate swaps market wasn't subjected to any regs previously," Owens points out. "Now they face issues such as trade and customer suitability reporting."

According to Beacon Consulting's Beaulieu, turning to an outsourced administrator is one solution with compliance at its heart. "The buy-side firms have multiple platforms. They need to continually monitor them, so they can use an outsourced admin to tie it all together," he suggests.

Among the firms offering such middle-office solutions are State Street Bank and BNY Mellon. They allow hedge funds to scale back and focus on what they know best.

7) Get Used to Multiple People Looking Over Your Shoulder

"The days of, 'Yeah, we bought this, but don't worry about it' are done," says Beaulieu. "There will be people downstream analyzing these things. They're going to be doing proactive analysis. The traders will have to come back with definitive answers on these trades. Now they'll be challenged on these risks.

"It's going to put them in a better spot--to dig deeper into the securities that they're buying," Beaulieu adds.

And, of course, that's just internally--before you even have to deal with multiple regulators in the U.S. and Europe, where more laws like the Markets in Financial Instruments Directive, or MiFID, will be forthcoming (and likely different from U.S. regulations).

8) You Can't Pass This Buck

Although smaller firms will turn to vendors to help them out with monitoring and reporting trades to various regulators, they will not be able to share responsibility. Ultimately, funds will be held accountable by the regulators, so you need to take your vendor relationships very seriously.

"As buy-side firms take control of their activities, the pressure to make sure the overall trading activity is taking place properly will be more on the shoulders of the buy-side traders themselves," says Aite's Lee. "There will be more regulatory scrutiny over how tools are used, so buy-side responsibilities will only increase."

The buy-side, he continues, "can be more proactive in making sure its service providers are behaving as they should. There will be more pressure for buy-side firms to be more active than before to make sure they get information out of their brokers."

Beacon's Beaulieu believes it's best to address issues up-front, before the contract is signed. "We do a lot of work before you outsource to come up with a clear partnership of who's responsible for what, how are you going to support this model and who's going to own the relationship," he insists.

9) Keep Your Ears to the Ground

As noted earlier, many of the details of Dodd-Frank are still being worked out. "Buy-side firms need to keep their ears to the ground," says Woodbine's Samelson. "There are changes in market structure going on. We're talking about a fast-moving, fragmented market, and people don't look at all the nuances, which can impact the overall efficiency of your execution."

If you work in a larger organization, now would be a good time to read through all those emails that compliance--or your outsourced vendor--has been sending your way but you have ignored. And if you're part of a smaller firm, make sure to talk to everyone within your organization about how proposed rules might impact your trading. "Get the internal communications right so you can get compliance right," says Tabb Group's McPartland.

10) Speak Up

You still have a chance to impact the regulations that are coming your way. "If you're really passionate about a proposed rule, go to the SEC or the CFTC directly," advises McPartland. "They want to have those conversations. They're thirsty for info so they can get it right."

Write a comment letter or set up a meeting. You don't have to rely on industry bodies such as SIFMA or the Investment Company Institute to make an impact. You can make a difference.

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