21 Jan The changing face of broking
Regulatory reform and competition from electronic platforms are incentivising commodity brokers to look beyond their traditional transaction models.
A seismic shift is taking place in commodity trading. Tight pressures for regulatory compliance are both posing challenges and offering opportunities for the broking industry. In recent years, the derivatives market has experienced significant regulatory reform. Regulators, such as the European Securities and Markets Authority (ESMA), have sought to provide greater transparency and improve market conduct in previously opaque OTC commodity markets. As market participants have been subject to this increasingly wide range of regulation, the lack of formalised systems and compliance measures across the inter-dealer broking sector has contributed to an increase in disciplinary notices and fines. The real costs of these fines are amplified when taking into account the resource burden of forensic level investigations by exchanges and regulators, and as a result, the market is reaching out for technological solutions.
Many commodity transactions take place directly on exchanges where regulatory requirements are fulfilled. But it is the previously opaque, privately negotiated off-exchange transactions that have been the subject of increased regulatory guidelines. Participants involved in the execution of block trades must report trade details to the relevant exchange within a fixed time frame and maintain a complete record of all transactions or face fines and lengthy investigations. With potentially many hundreds of transactions to deal with each day, manual compliance can be arduous and the risk of penalties high.
Thanks to advances in digital technology, regulatory compliance no longer needs to be painful. Market participants such as brokerage firms and hedge funds today can use BLOC-X, the first electronic trading software for OTC oil block futures, for inter-dealer transactions to help them reduce risk, increase transparency, and promote market integrity without disrupting their existing market structure.
Accurate and timely trade execution is imperative to staying regulatory compliant. Speed, efficiency, and auditability are critical pillars in the operational workflow for commodity brokers and their support teams. Time-stamped record-keeping, available out-of-the-box with BLOC-X, is an essential component for demonstrating regulatory compliance and protecting an organization during an investigation.
New opportunities to grow broker market share
The headwinds for brokers are not limited to regulatory issues. As more trade volume shifts to electronic platforms, formulating a digital strategy to compete with the likes of Intercontinental Exchange (ICE) is crucial to maintain and grow market share. Some are investing heavily in their own platforms which will offer clients an alternative to traditional chat and voice channels, yet carry long lead times.
Alternatively, as an independent cloud based software provider, BLOC-X offers brokers immediate access to a platform that offers an electronic alternative to traditional trading negotiations. Alongside the compliance benefits, brokers can benefit from more efficient workflow and access to wider distribution channels for tradable markets. Brokers can manage trade orders on behalf of clients by posting markets on screen themselves, effectively blending digital and traditional workflows. Soon, brokers and traders will be able to post time bounded market orders which roll automatically into an indicative status, reflecting the volatile nature of underlying markets whilst improving trade visibility.
The inter-dealer broking industry is facing a significant transition into the digital era. Regulatory hurdles are higher, traditional workflows are evolving and a comprehensive screen offering is now essential to future competitiveness. BLOC-X offers brokers the opportunity to expand their business model, reach new clients and grow market share whilst improving their compliance footprint.
To request a free trial of BLOC-X, start here.