In the last few years, the financial markets have undergone dramatic change. While some of this is down to natural evolution, much of the change can be directly attributed to new rules introduced in the wake of the 2007 crisis. Regulators, legislators and central bank governors have been determined to avert another bubble bursting or an unexpected event that could threaten markets. Lawmakers have targeted key financial practices for reform, radically altering the expectations and behavior of industry participants. The combination of the Dodd-Frank Act, European Markets Infrastructure Regulation (EMIR), MiFID ll and Basel lll signify the biggest regulatory change in decades. These reforms have resulted in major change to how financial products are traded, settled, collateralized and reported, resulting in deep and ongoing structural changes to the markets. There is no doubt that these new rules are directly impacting buy-side firms — be they asset managers, hedge funds, insurance companies or pension funds. But while the changes have certainly brought challenges, they have also brought opportunities. Firms that can proactively evaluate structural and operational dislocations in the marketplace and tailor business models to leverage the opportunities while addressing the challenges will be in the best position to stand apart from their competitors. Revised business models call for revisions to supporting processes and systems. Buy-side firms should look to re-architect their processes and technology infrastructure, with a goal to strengthen risk control and oversight, enhance transparency and improve efficiency of front-to-back office control functions. The credit crisis, and the regulatory response it spawned have fundamentally reshaped financial markets for buy-side firms. But while the changes have brought about challenges, they have also ushered in opportunities. The key to success will be the speed with which firms are able to understand the changing marketplace and adapt their business models to align with the changes.

1. www.quantifisolutions.com
WHITEPAPER
BUY-SIDE SYSTEM REQUIREMENTS
By Avadhut Naik, Head of Solutions, Quantifi and
Sol Steinberg, Founding Principal, OTC Partners

2. Post-Crisis Reform Radically
Reshapes Financial Markets
In the last few years, the financial markets have
undergone dramatic change. While some of this is
down to natural evolution, much of the change can
be directly attributed to new rules introduced in the
wake of the 2007 crisis. Regulators, legislators and
central bank governors have been determined to
avert another bubble bursting or an unexpected
event that could threaten markets.
Lawmakers have targeted key financial practices
for reform, radically altering the expectations and
behavior of industry participants. The combination
of the Dodd-Frank Act, European Markets
Infrastructure Regulation (EMIR), MiFID ll and Basel
lll signify the biggest regulatory change in decades.
These reforms have resulted in major change to how
financial products are traded, settled, collateralized
and reported, resulting in deep and ongoing
structural changes to the markets.
Impact on Buy-Side Firms
There is no doubt that these new rules are directly
impacting buy-side firms - be they asset managers, hedge
funds, insurance companies or pension funds. But while
the changes have certainly brought challenges, they have
also brought opportunities. Firms that can proactively
evaluate structural and operational dislocations in the
marketplace and tailor business models to leverage the
opportunities while addressing the challenges will be in
the best position to stand apart from their competitors.
Revised business models call for revisions to supporting
processes and systems. Buy-side firms should look to
re-architect their processes and technology infrastructure
with a goal to strengthen risk control and oversight,
enhance transparency and improve efficiency of front-to-
back office control functions.
Sell-Side Exits Bring New Buy-Side
Business Opportunities
While the market reforms have impacted all players, it
is the sell-side (liquidity creators) institutions that have
borne the regulatory brunt much more than buy-side
(consumers) institutions, thanks to the central position
they hold in the global financial system. The worldwide
reach of the sell-side, their size and interconnectedness
to other institutions make their survival critical to the
survival of the entire system, hence regulations are
designed to protect the financial markets from the
systemic risk stemming from these institutions.
One set of regulations is focused outright on preventing
banks from engaging in high-risk businesses. The Volcker
Rule bans proprietary trading and prohibits a banking
entity from owning interest in a hedge fund or private
equity fund that might engage in proprietary trading.
This has a potential negative impact on liquidity and the
loss of a significant source of revenue. However, buy-side
firms that understand the Volcker Rule, and can design
new ‘Volcker compliant’ vehicles will be well positioned
to minimize its impact.
Another set of regulations is focused on imposing higher
regulatory capital charges on banks, especially for high-
risk products. At a macro level, Basel III mandates that
banks should progressively reach a minimum solvency
ratio of 7 percent by 2019. At a more granular level, the
capital required to hold certain high-risk products is
prohibitively high.
One of the consequences of the regulatory focus on
sell-side institutions is the breakdown in the clear
demarcation of functions between the sell-side and
buy-side institutions. Sell-side firms are withdrawing
from businesses they traditionally dominated. Buy-side
institutions like hedge funds, large asset managers and
private equity firms are stepping into this vacuum left by
banks exiting these businesses.
By their very nature, strategies in these businesses and the
asset classes involved require a more sophisticated set of
models and analytics than what is supported by legacy
buy-side model libraries and risk management systems.

3. Quest for Higher Yield Driving
Demand for Buy-Side Analytics
The quest for higher yield in a low interest environment
is another reason for hedge funds and asset managers
to seek out alternative investments that promise higher
returns. For example, the buy-side is showing a renewed
interest in structured credit products as the low risk
tranches of these products are offering a higher risk
weighted return in the current environment. Naturally,
these investments involve a higher amount of risk, which
needs to be actively monitored and managed.
This has also resulted in a demand on the buy-side for
best-of-breed analytics and next-generation technology
frameworks to support more complex products,
capabilities they have traditionally lacked.
A Clear Mandate: OTC Derivatives
Must Be Cleared Through CCPs
Regulation has also hit the OTC derivatives market.
Most market participants are now required to clear
standard derivatives using centralized (clearing)
counterparties (CCPs). Clearing derivative contracts over
CCPs involves the posting of initial and variation margin.
Buy-side firms which previously have not invested
in sophisticated collateral management, collateral
optimization and margin calculation capabilities are now
having to do so.
In addition, there is the proposed requirement, whose
implementation deadline regulators have extended by
9 months, that counterparties of a non-cleared bilateral
trade must also exchange initial and variation margins.
While these regulations are targeted at reducing the
systemic risk in the financial system, they have the side
effect of increasing transaction costs for derivatives,
since collateral required for satisfying additional margin
requirements has to be funded.
To be consistently profitable, firms will need to carefully
choose execution platforms based on an independent
comparison of costs of funding margins over the
life of trades. These regulation-imposed changes in
• Basel III mandated that banks should progressively reach a minimum solvency ratio of 7
percent by 2019. Prior to Basel III, the minimum requirement was 2 percent, although most
banks held more in reserve than that. A 2009 Basel III impacts study estimated that large banks
actually had an average solvency rate of 11.1 percent, but definitions of regulatory capital and
risk weighted assets have changed since then. Using the current definitions, the 2009 study
would have found large banks had an average solvency ratio of 5.7 percent, meaning banks in
the 2009 study would have been short 600 billion Euros under Basel III rules.
• As a consequence of Basel III, banks will likely experience increased pressure on their return
on equity due to higher capital and liquidity costs. Banks are expected to feel pressure on
margins across all segments and they will likely look for operational efficiencies and make
tactical or strategic changes. Changes might include adjusting lending rates, shifting to higher
value clients, or focusing on less risky segments of the portfolio.
Higher Capital Charge on Risky Assets - Basel III
“
”
The credit crisis, and the regulatory
response it spawned have
fundamentally reshaped financial
markets. While the changes have
brought about challenges, they
have also ushered in opportunities.

4. market practices call for more sophisticated analytics
as well as better operational capabilities. Sophisticated
models ensure profitability by factoring in all the costs
of executing trades including value adjustments for
counterparty risk, costs of funding margins (initial and
variation) as well as costs of capital. Better operational
capabilities ensure consistent analysis across the
organization (Front Office through Back Office) in a
timely fashion.
Improved Front-to-Back Office
Technology Transforms Margin
Challenges into Opportunities
In a world where collateral requirements are reaching
prohibitive levels, it is paramount for buy-side firms
to be able to anticipate, source, deliver and reconcile
funding requirements in real-time. Capital is too much
of a precious resource to be wasted away on over-
estimated margin calls. To avoid squandering capital,
some of the leading buy-side firms are implementing
new improved front-to-back technology to gain a
significant edge over the competition. Risk analytics,
collateral optimization and faster trading processes
are giving these firms a distinct advantage. In addition,
there is a middle majority of firms well aware of the
looming threat of lagging behind that are actively
implementing similar capabilities in their systems - but
in a less organized and less systematic way.
The more the buy-side can accurately comprehend risk,
the better it will be at maximizing capital - potentially
taking the unused portion and funding more profitable
trades. In the past, managing margin requirements was
a reactive task, performed at the end of the trading
cycle, and done within administrative and back office
operations, usually manually. Today, the buy-side is
turning to new technology to give them a complete,
front-to-back view of their global collateral assets to
allow them to assess multiple sourcing and funding
options in real time.
• In July of 2012, the Commodity Futures Trading Commission proposed its first clearing mandate for
swaps under Dodd-Frank. The first swaps proposed for mandated clearing included four classes of
interest rate swaps and two classes of index credit default swaps.
• In 2013, five years after the financial crisis, the OTC swaps market saw the introduction of trade
reporting and mandatory clearing. Deadlines for mandatory clearing for dealers and clients were
successfully met, without any noticeable drop in volumes or migration of swaps trading to futures.
Both CME and LCH SwapClear processed large volumes of swaps transactions through automated
daily processing, for which parties involved posted initial margin and variation margin.
• The move to central clearing of swaps is a phased-in transformation. Following the first phase, which
mandated central clearing for dealers, major swaps participants and active funds, a second phase
added hedge funds, asset managers and regional banks. Central clearing of swaps represented
a big shift for the buy-side community, as many asset managers did not post initial margin in the
bilateral world, so they had to prepare their infrastructure to handle both the process change and the
calculations required for margin obligations.
• Second phase participants - the buy-side - have been given a reprieve before they must comply with
reforms. Under concerns from market participants over how countries were implementing the rules,
regulators extended the timeline for both initial margin and variation margin by nine months and added
a phase-in period for variation margin. Initial margin must be phased in from September 1 2016 to
September 1 2020, while variation margin must be phased in from September 1 2016 to March 1 2017.
Central Clearing of OTC Derivatives

5. Technology Trends That Can
Provide a Competitive Edge
• Move towards single technology solution, for
analytics, trade capture and enterprise risk control,
with coupling between front, middle and back office
functions
• Straight-through-Processing that starts from trade
execution all the way through to central clearing
• Independent margin calculation and swaps portfolio
pricing tools
• Reconciliation tools that can account for margin
call discrepancies, either at the CCP or clearing
intermediary level or both
• Transaction Cost Analysis (TCA) tools that can
incorporate data from the trading process as well as
integrating back office data into the trading process
Given a collateral-centric swaps workflow involves
numerous challenges and encompasses ever-changing
technology demands, the leading investment managers
are examining integrated front-to-back systems that can
provide a complete solution for all of their analytics,
trading and risk requirements, both for today and in the
future. In addition, a sizable number of firms are using
the platforms that their clearing brokers provide and
that integrate seamlessly with their middle and back
office functions. This allows them to report aggregate
risk exposure in addition to developing P&L accounting
systems in a Straight-through-Processing (STP) workflow
that copies the entire front-to-back process. Working
alongside are the necessary risk analytics systems and
Transaction Cost Analysis (TCA) tools.
The goal is to optimize and streamline the entire
workflow, to ensure greater trade transparency and
enterprise-wide reporting. Each function largely
depends on the other: the pre-trade function relies on
asset and ancillary services; trading depends on pre-
trade functionality; the back office depends on STP
from the middle office.
The ideal workflow creates a closed loop on risk and
valuation data, as well as strategic information relating
to TCA. Funding can only be optimized, latency
reduced, trade costs cut, and Best Execution mandates
be met when this high level of workflow visibility and
seamless connectivity is achieved.
Systems Rethink
Market and regulatory changes are forcing firms to
re-think their business operating models. Increased
complexity and uncertainty have motivated forward-
looking firms to avoid stop-gap measures and replace
legacy systems with a new generation of holistic
trading and risk management software that supports
front, middle and back office requirements across all
assets. Business models cannot be altered in isolation.
Supporting processes and systems also need to be
aligned with the evolving business models.
Over the past few years there have been considerable
improvements in the technology available to deploy and
integrate financial software, boost usability and speed of
processing, and improve flexibility, be it the increase in
computation power, simplicity of data management, the
advent of cloud computing, or more powerful APIs for
easier integration. Any systems rethink needs to be done
with a view to benefit from these improvements. The
technology should be designed to improve front office,
risk and financial control functions by ensuring consistent
risk management analytics and reporting are shared
across all business environments.
Key Considerations for Buy-Side
Systems
In today’s fast paced environment buy-side firms require
technology that can work faster, perform better and
scale with their business. The rapid pace of innovation in
technology presents a whole new range of possibilities
for how this technology can be leveraged. Buy-side
firms that make good choices and manage their
technology will be in a significantly better position in
terms of operating costs, their ability to measure and
manage risk, and to understand profitability across the
“
”
Leading investment managers
are examining integrated front-
to-back systems that can provide
a complete solution for all of
their analytics, trading and risk.

6. organisation. Any major redesign of systems should be
based on a thorough analysis of the firm’s immediate and
future strategy as well as leveraging the best technology
available.
Cross-asset and multi-strategy support
Opportunities created by banks exiting markets for asset
classes deemed risky by the regulators and quest for
higher returns in a low interest environment are forcing
buy-side firms to actively consider a broad range of
strategies and asset classes. Sophisticated firms need
to have the flexibility to implement multiple strategies
across different asset classes. To achieve this, the
systems they use need to be geared to support multiple
strategies spanning multiple asset classes.
Integrated analytics, trading and risk platform
across a heterogeneous portfolio
Traditionally, in buy-side institutions front office
and middle office users have leaned towards using
specialized systems that suit their functions but do not
necessarily integrate well with each other. Portfolio
managers and traders in the front office have used tools
providing strong analytics and pre-trade analysis to
make portfolio composition and trading decisions.
Middle office and operations teams have preferred
systems that are light on analytics but offer a secure,
auditable and versioned platform for portfolio and risk
management functions.
In the developing environment, lower yields coupled
Quest for Yield
Advances in TechnologyRegulations
Redesigned Systems
Should...
• Dodd Frank (Volker rule)
• Basel III
• Dodd Frank (Clearing
Mandate)
• Increased computing power
• Cloud platforms
• Distributed databases
• In-memory analytics
• Support for mobile device
• Support multiple strategies
across a broad range of assets
• Facilitate operational efficiency
• Be integrated across
heterogeneous portfolios
• Enforce prudent risk
management and control
• Investors seeking higher yield in
a low risk environment
The diagram below outlines some of the key drivers behind buy-side firms demanding best-of-
breed analytics coupled with new technology.

7. with higher transaction costs are squeezing returns.
Pre-trade analysis has to consider the cost of funding
collateral required to post margins and the cost
of funding regulatory capital when evaluating the
profitability of a strategy. This calls for a very high level
of integration between front office and middle office
systems across all asset classes.
Robust risk management and control
Pre-crisis risk management was primarily focused on
market risk. Yet, even that did not adequately take
into consideration extreme scenarios, fat-tails etc. The
ensuing regulation requires more stringent market risk
management with greater focus on stress-testing of
extreme scenarios. Equal emphasis has also been placed
on other risks like counterparty credit, liquidity and
operational risks. Any systems being considered should
have capabilities to measure, monitor and manage these
risks at an enterprise level across multi-asset portfolios.
Operational efficiency
In an environment where opportunities are limited
and transaction costs high, operational efficiency
becomes key to the success of any organization.
Systems that facilitate optimum action in a timely
manner by integration, flexible workflows, and ease of
communication will be key to competitive advantage.
Business intelligence and transparent reporting
infrastructure
Data warehouses and reporting engines that facilitate
aggregation and analysis of data and analytics is key to
any systems infrastructure. Reporting engines need to
be able to aggregate data across all asset classes and
present an integrated view of risk and P&L. Reporting
capabilities need to be flexible to serve the needs of
portfolio, risk managers, investors and regulators. Ideally
the system should also allow for integration with a third
party business intelligence or data visualization tools
available.
Delivered on state of the art technology platform
Market participants are turning to a new generation
of technology to allow them to meet increasingly
demanding business requirements while improving
flexibility and reducing costs. Distributed NoSQL
databases provide a scalable and cost-effective
alternative to expensive relational databases for data
intensive workloads. Cloud platforms such as Amazon
AWS and Microsoft Azure offer many advantages
(e.g. flexible provisioning, competitive pricing, built-
in redundancy) for solutions that support cloud
deployment. Modern multi-core, vector-enabled CPU’s
are much more powerful than the previous generation,
however pricing and risk libraries must be designed
to take advantage of these new features. The low
cost of memory has enabled new in-memory analytic
technologies to be developed that support analysis of
massive data sets in near real-time. Mobile (touch-based)
device support is increasingly a requirement but requires
the adoption of new development frameworks and
design patterns.
Low total cost of ownership (TCO)
Sufficient consideration needs to be given to the
total cost of ownership of the system. Any analysis of
costs has to take into consideration licensing costs,
implementation costs, operating and support costs, as
well as disaster recovery costs.
Conclusion
The credit crisis and the regulatory response it spawned
have fundamentally reshaped financial markets for
buy-side firms, however, while the changes have
brought about challenges, they have also ushered in
opportunities. The key to success will be the speed
with which firms are able to understand the changing
marketplace and adapt their business models to align
with these changes.
Changing business models need to be supported by
corresponding changes to business processes and
systems. The next generation of buy-side systems will
need to:
1. Support multiple strategies across broad range of
assets
2. Be integrated across heterogeneous portfolios
3. Enforce prudent risk management and control
4. Facilitate operational efficiency
5. Provide timely business intelligence and transparent
reporting infrastructure
6. Be delivered on state of the art technology platform
7. Deliver all this for a low total cost of ownership

8. About Quantifi
Quantifi is a specialist provider of analytics, trading, and risk management
solutions. Our award-winning suite of integrated pre and post-trade solutions
allows market participants to better value, trade and risk manage their
exposures and responds more effectively to changing market conditions.
Quantifi is trusted by the world’s most sophisticated financial institutions
including five of the six largest global banks, two of the three largest asset
managers, leading hedge funds, insurance companies, pension funds, and
other financial institutions across 16 countries.
EMEA + 44 (0) 20 7248 3593
Americas + 1 (212) 784 6815
Asia Pacific + 61 (02) 9221 0133
enquire@quantifisolutions.com
www.quantifisolutions.com
About OTC Partners
OTC Partners is a boutique market intelligence advisory firm that
specializes in research and content development. We focus on value
adds for partners, such as commercial development, segment analysis,
business development, and research for the OTC derivative market.
If you are worried about Market Structure, Thought Leadership,
Valuations, Fintech Commercialization, White Papers or Executive
Programs then we are the place to start - we are in the nexus of risk
takers and market makers that specialize in the OTC derivative market.
OTC Partners thinks about these issues everyday and we can help
stimulate and focus your needs with our partners.
Our mission is to move the capital markets forward, through regulatory
changes, into a bright future.
Located in New York, with a presence in Europe and Asia.