Don’t be surprised if the regulators opt for over-regulation especially in regulatory reporting to protect the investment banking industry from the lessons learnt during the recession, cautions Mahesh V. Sairam, a former fixed income fund manager, and currently a Senior Consultant with Tata Consultancy Services Ltd, Chennai.

“On the technology front, especially the large investment banks are facing challenges in integrating different technology systems inherited through earlier acquisitions,” he adds, during the course of a recent email interaction with Business Line.

Excerpts from the interview, in which Sairam looks at the expectations, current status, and the year ahead, on the investment banking front.

Expectations.

The markets were expected to have a soft interest rate regime to support the development of money market and improved liquidity in the system. The regulators across the globe have reduced the short and long term interest rates to the record lows as expected.

In fact, in some of the developed countries such as the US and the UK, the rates have been slashed more than expected. In our country, the bank rates were reduced from 7 per cent to 6 per cent, the cash reserve ratios have been reduced from 7.50 per cent to 5 per cent, and the reverse repo rates have been reduced to 3.25 per cent.

Investment banks have expected stringent guidelines on risk management, especially in counterparty, group/ sector investment exposures other than general credit and market risks.

Mark-to-market pricing of illiquid assets was a big challenge. Regulators introduced FIMMDA (Fixed Income Money Market and Derivatives Association of India) valuations and third-party valuations such as CRISIL to help the market in fair price valuations. The introduction of Basel II norms helped banks in undertaking better risk management practices.

Compliance with KYC (know your customer) norms, and the challenges in monitoring AML (anti money laundering) regulations were posing bigger challenges.

The regulatory move of making PAN (permanent account number) as compulsory, and the introduction of Mapin (Market Participants and Investors Number) by SEBI (Securities and Exchange Board of India) helped the banks to perform better compliance standards and reduced the challenges in aggregation of investment data of their customers.

Similarly the introduction of MiFID (Markets in Financial Instruments Directive) in the European Union with the objective of best execution strategies, compliance and reporting norms paved the way to reach global customers with multiple products.

Present state.

The move from regulated, segmented national financial markets to a single global capital market has been gradual. The big drivers of growth in the past ten years have been deregulation, the impact of technology, and the innovation of new concepts such as trading in commodities, carbon and securitisation.

The markets have undergone unprecedented changes in the last few years and business models are constantly under pressure to reinvent themselves as new technology, regulations, and customer requirements combine together to reinvent the industry. Over the past 10 years, we’ve seen transformative power in how investments in IT (information technology) innovations foster economic growth.

Is the recession over? Some say that it is V-shaped and some predict it is W-shaped. But, what determined the length and severity of the recession is the way the Governments responded to restore confidence among consumers, companies, investors, and lenders.

The major challenge today for both buy-side and sell-side institutions is how to meet their client’s expectations especially on client reporting. The market participants have learnt a lesson from this difficult period, and are considering how to re-establish the confidence and how to make use of the technology at its best.

A few years ago many were outsourcing client reporting function; this has now reversed itself and more investment banks have preferred to retain this function and are enhancing their in-house capabilities.

There is more emphasis on pre-trade analytics today because of the increase in electronic trading which has introduced more technology into the decision making and execution process.

Today, users expect pre-trade analytics to do a lot more than just identify problem stocks. They want the analytics to support portfolio optimisation, rebalancing, credit risk analysis, interest rate analysis, cash flow forecasting, compliance monitoring, and more.

What bankers should be looking at the moment with their risk management procedures is not just looking at past conditions to predict the future, as this has not proved reliable.

All financial firms have to some extent now realised the importance of meeting tougher liquidity standards. Stress and scenario testing, especially for liquidity risk has become now both a regulatory obligation as well a key fund management tool.

Going forward in 2010.

The behaviour of interest rates is a central issue in the current economic outlook. The current low level of long-term interest rates is contributing to a very favourable global financial environment.

Despite the increase in inflation during recent weeks across the globe, interest rates remain low for this stage of the business cycle. The stronger-than-expected recoveries are likely to point to a rise in interest rates in the first quarter of 2010 to curb potential inflationary pressures; and the strengthening consumption and improving exports will herald an up-tick in inflation next year.

There won’t be any surprise if the regulators opt for over-regulation especially in regulatory reporting to protect the industry from the lessons learnt during the recession.

On the technology front, especially the large investment banks are facing challenges on integrating different technology systems inherited through earlier acquisitions. Many of them have already decided or in the process of deciding to integrate all such systems to make them work together and standardise some processes under a common platform.

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