The impact of regulation on staffing in the commodities markets

Two weeks ago we put together a piece on the most overt and visible staffing trend to result from the increase in regulation; compliance officers. However, it is not just a demand for compliance officers that has been met by the industry – there are far more opaque impacts on operating models and human resource requirements that have resulted from the raft of legislation emerging from both sides of the Atlantic.

In addition to the compliance function, other departments that have been hugely impacted by regulation are the Middle and back office teams – individuals who are responsible for the post execution handling and processing of trades. Ultimately, the bulk of policy that has been instrumental in the wake of the financial crisis has resulted in a redesign of the process in which trades are booked, margined, settled and cleared over the course of the trade lifecycle.

The individuals working in the middle and back office therefore have arguably the greatest exposure to the day-to-day effects of regulation, and as the lifecycle comes under more and more scrutiny, so the calibre of operational staff has had to rise. Today’s middle and back office staff now command far greater salaries than they have done in the past, and the most talented professionals are sought after.

We have also seen an increase in commodity firms clearing directly on the exchanges, and that immediately creates a need for someone within the firm to manage the relationships with the exchanges and handle the operational tasks associated with this, either by way of upskilling or bringing in external talent. There remains a shortage of high-calibre talent in this space.

And this brings us to the principal beneficiary of regulatory change; exchanges and trading venues. Market infrastructure firms have hugely benefitted from regulation, not only because they have seen an increase in the volume of business as OTC flows gradually migrate on to their platforms, but also thanks to the creation of trade repositories such as ICE Vault. Naturally an increase in product offering and new business lines will lead to the creation of new positions as they will require individuals to project manage their design, sales professionals to market their new services and operational staff to ensure these services run smoothly.

The benefit to trading venues and electronic markets cannot be referenced without highlighting the detriment this has been to one of the mainstays of the derivative markets; the voice broker. Whilst the digitalisation of derivative markets has long been in play prior to the financial crisis, the increased demand for transparency has certainly vindicated the regulators desire to move activity on to electronic platforms. The rise in DMA and electronic offerings by financial institutions still require sales staff but there has been an audible concern by voice brokers in the decline of volume and there have been a number of brokers over the years who have changed career path or have moved in to functional and non-commercial roles.

There are equally sizeable effects to be seen in technology as tech firms have also been major beneficiaries of regulation. With every policy iteration to alter the functioning of derivative markets, technology vendors have responded and stepped up to provide a ‘solution’, modifying their software or offering new products that incorporate anything from reporting to automated alerts in the event of suspected market manipulation. Automation is a key theme in general, with packages aiming to automate the post trade process, a popular solution among the hedge fund community who often outsource the middle and back office to a third party service.

Commodities firms have for some time been spending huge sums of money on software packages offered by companies such as Allegro and Openlink, and are now also paying extensively for business analysts to implement regulatory change projects that incorporate modifications in to these platforms. Technology firms and their consulting partners are now covering the whole operational suite, and are looking for operational and regulatory expertise as they seek insights in to what will be useful for their customers. Again, it is the individuals with the combination of operational and compliance knowhow that can command the greatest interest among tech and consulting employers.

Finally, there are the other effects of regulatory change that are much more broadly felt, in terms of the changes to the suite of products and services that firms can trade or offer, which for obvious reasons impact staffing. Much has been written about the scale back of banking institutions’ involvement in the commodities markets, but the shakeout looks set to push beyond financial institutions. Businesses are taking the decision as to whether or not they wish to be MiFID II firms, and whichever way those discussions play out will have a critical impact on staffing decisions going forward.