DerivSource’s Bob Currie shares the highlights on the recent Asset Management Derivatives Insight Report from Acuiti which sets out key trends that will define performance for buy-side firms and guide strategic priorities into 2025.
Compliance costs added substantially to the derivative trading costs of asset management firms during 2024 and accounted for the most significant increase in respondents’ aggregate cost base, according to findings of the Acuiti Asset Management Derivatives Insight Report for Q1 2025.
Among a wide body of global regulatory changes, a wave of derivatives reporting rewrites and refits has forced firms to review and upgrade their transaction reporting, reconciliation and assurance testing procedures. This has included the European Market Infrastructure Regulation (EMIR) Refit, which was enacted in the EU and UK respectively in April and September 2024.
In the Asia-Pacific region, the revised Japan Financial Services Agency (JFSA) reporting rules also came into effect in April 2024, with the Australian Securities and Investment Commission (ASIC) and Monetary Authority of Singapore (MAS) Rewrites following in October 2024. The Hong Kong Monetary Association (HKMA) implementation is scheduled for September 2025.
Compiled by Acuiti Management Intelligence, the report examines key trends defining business performance for buy-side firms and the primary factors that will guide their strategic priorities for 2025.
The report draws on data from the Acuiti Asset Management Expert Network, a group of senior executives from global asset management firms that have specialist expertise in derivatives.
In exploring the growth outlook for the asset management industry, respondents indicated that they will drive profitability during 2025 through adopting new investment strategies (50% of respondents) and expanding into new asset classes (33%). To support this, some respondent firms will prioritise technology upgrades (32%) and ratchet up the levels of capital that they allocate to established strategies (25%).
The report argues that there is evidence of a shift towards automation in the Q1 2025, reflected in the relatively low number of firms looking to hire additional traders or portfolio managers (9%). Instead, firms are focusing on applying technology, particularly through dedicated investment in automation and artificial intelligence. Close to half of respondent firms indicated that they had increased their expenditure on front-office and post-trade technology during 2024.
Reflecting on their aggregate costs of trading, just under half of respondent buy-side firms said that their cost base had increased during 2024, driven particularly by rising compliance costs and by inflationary pressures. Nearly 66% of firms indicated that their compliance overheads had risen over the 12 months.
Market data represented another area of rising cost, with 72% respondents indicating that their market data fees had risen during 2024, driven by the growing demand for faster, more accurate data to support trading decisions.
When asked to highlight the largest challenges that they face to growth, asset managers pointed to downward pressures on fees – identified by 50% of respondents – along with competition from other buy-side firms (43%) and difficulties faced in sourcing new talent (35%).
Reflecting on the potential implications of President Trump’s second term, almost three-quarters of buy-side respondents believe that the new administration’s policies will be inflationary, with 30% predicting that these will be highly inflationary. Respondents also suggest that these estimates may be on the low side, with 74% of firms indicating that the current inflation figures generated in the major jurisdictions underestimate the true rate of inflation prevailing in the market.
In the derivatives clearing space, respondents expressed a preference for using multiple clearing agents to meet their clearing requirements, believing that this provides stronger protection against counterparty risk and concentration risk. Only 5% of respondent buy-side firms indicated that they currently consolidate their clearing flow through a single sell-side clearing firm. In contrast, 27% of respondents indicated that they currently have 4-5 clearing relationships and 30% have more than 5.
This appears to be the direction of travel for the foreseeable future, with more than two-thirds of firms indicating that they do not intend to change their number of clearing relationships – and 30% stating that they will potentially increase their number of sell-side clearing links.
In selecting a derivatives clearing firm, cost was the primary determinant for 83% of firms. Quality of technology and operational infrastructure (57%) and a firm’s creditworthiness (51%) were also primary considerations.
Given the liquidity pressures faced by some buy-side firms in meeting their derivatives margining requirements in times of high market volatility, it is noteworthy that opportunities for cross-margining were highlighted as a priority in clearing agent selection by just 24% of respondent firms.
Looking explicitly at clearing for credit default swaps (CDS), the report highlights rising competition in CDS clearing between ICE and LCH. 78% of respondents indicated that they currently use ICE for clearing CDS, compared to 56% currently using LCH.
These CCP clearing arrangements appear to be relatively stable, with three-quarters of respondents noting that they have no current plans to change their current arrangements. For the remainder, 25% indicated that they may open a CDS clearing relationship at LCH; while no responding firms reported plans to open new accounts at ICE.
Published on a quarterly basis, we wait with interest to monitor how these trends will evolve as we move into the second quarter of 2025. In each quarterly report, network members suggest questions and topics that will appear in the report, typically driven by the current dynamics of the derivatives markets and broader macroeconomic drivers will define performance and strategy for buy-side firms.
