Industry Updates

Algorithmics warns proprietary trading desks face tougher future as standalones

Wednesday, May 25, 2011

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Dr Andrew Aziz Opalesque Industry Update - Algorithmics, a provider of risk solutions, said today that it was receiving increasing numbers of enquiries from proprietary trading desks that are being spun out from their bank owners as a result of the Volker Rule within the Dodd Frank Act. The Volker Rule prohibits banks from proprietary trading while also significantly restricting their ability to invest in a hedge fund or private equity vehicle.

Dr Andrew Aziz, Executive Vice President of Risk Solutions at Algorithmics, commented: “Due to its strong presence on both the buy and sell side, Algorithmics is uniquely placed to appreciate the issues that proprietary trading desks are likely to face as they set up risk processes on their own. These groups have long been accustomed to 100% asset class coverage for valuations and the luxury of significant IT support. As they establish themselves as standalone firms, we anticipate that the adjustment to ‘business as usual’ will be a challenge for many, especially if they want to replicate the level of support infrastructure they have been used to.”

Already the market is beginning to see proprietary trading desks being spun out of major banks and this trend will intensify as the July 2012 deadline imposed by the Dodd Frank Act approaches. This trend is occurring at just the same time as greater risk scrutiny is being demanded of hedge funds in general.

Dr Andrew Aziz continued: “As independent hedge funds, they face a number of challenges. First, they will be subject to more regulatory oversight than they have been used to as the hedge fund industry becomes subject to the new requirements of UCITS IV, AIFMD and Dodd Frank. Second, in addition to providing position-level reports to regulators, they will also face the growing demands of their investors for greater risk transparency. Finally, they will need to attract capital without a track record as independent funds. These are all fundamental requirements for entry into this market. In our view, if new funds can demonstrate that they have put in place best practice risk management then they will be in a stronger position to meet these regulatory and investor requirements and build credibility with potential investors.”

For further insight into the Dodd Frank Act, particularly the Volker Rule, please see the Algorithmics white paper ‘Dodd-Frank Wall Street Reform and Consumer Protection Act: Business Model Implications’: Source

For more information about Algorithmics’ solutions for the hedge fund industry, visit: Source

- FG

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