The New Hybrid Reality: Why Converging Market Roles Require Regulatory Reform

by David Bellaiche, head of Murex’s buy-side business line

In my last article, I argued that the real transformation in capital markets today is the rise of hybrid financial institutions.

These actors blend investment, intermediation and structuring within a single balance sheet. The convergence between banking and non-banking is dissolving clear lines that once defined our industry: investors on one side and intermediaries on the other; the buy-side and the sell-side.

But if the business model has converged, one thing has not yet: regulation.

A binary framework for a hybrid world

Financial supervision remains anchored in categories that no longer reflect market realities.

Banks are regulated under Basel III, with capital requirements addressing trading and liquidity risks. Asset managers operate under retail investor protection frameworks such as UCITS and AIFMD in Europe, and their U.S. counterparts like the Investment Company Act of 1940, which aim to protect everyday investors by imposing transparency and fiduciary standards on fund managers. Insurance companies are subject to Risk-Based Capital (RBC) oversight, where frameworks like Solvency II, in Europe, require insurers to hold capital proportional to their risk profiles.

While each regulatory regime is coherent within its own domain, taken together, they form a patchwork designed for a world where financial functions were more distinct.

In today’s hybrid landscape, this patchwork creates gaps, overlaps and distortions. And that mismatch between regulatory design and institutional reality might itself become the next systemic risk.

Where the blind spots lie

Consider the case of an asset manager managing repos positions in its portfolios. In practice, this activity generates liquidity and counterparty exposures economically similar to those of a bank treasury liquidity desk. However, the regulatory lens applied remains that of an investor rather than an intermediary. While the clearing mandate helps standardize some aspects of operational risk, it doesn’t shift the fundamental regulatory perspective: frameworks for liquidity, leverage and systemic monitoring still differ significantly. In a liquidity crunch, these desks could amplify market shocks without being subject to the same intraday liquidity oversight that banks face.

Or take private credit. According to a 2024 IMF report, the global market has reached USD 2.1 trillion in assets and committed capital, with a concentration of 75 percent in the U.S. The large asset managers that now dominate leveraged finance through direct lending are, in effect, credit intermediaries on behalf of their clients: retail investors and corporates, institutional investors, pension funds and others. However, these managers do not hold capital buffers calibrated to absorb lending shocks in comparison with banks which operate under stabilizing regulatory frameworks, however imperfect, developed over decades.

Warnings from regulators, rating agencies and banking leaders are growing about the systemic risk posed by private credit at its current scale. Limited regulatory oversight combined with loose underwriting standards, opaque valuations and high leverage is a recipe for a wave of defaults that could ripple through the U.S. market and spill over into global financial systems.

Does this dynamic sound familiar?

Life insurers and pension funds provide another example of regulatory blind spots. Their derivatives portfolios—used to hedge annuity guarantees and other long-dated liabilities—can rival dealer trading books in complexity. Yet Solvency II assesses risk based on end-of-day positions and long-term solvency metrics, overlooking intraday hedging adjustments and short-term market sensitivities. This leaves dynamic risks—like the cost of rebalancing under stress or exposure to delta-gamma-vega shifts—partially unmeasured, potentially underestimating volatility in times of market disruption.

Converging institutions, converging crises

Convergence also changes how contagion spreads. In a hybrid financial world, shocks don’t respect traditional boundaries. One example:

• A repo liquidity squeeze at an asset manager can trigger collateral calls,

• Which stress insurers’ derivative hedges,

• Which force banks to rebalance treasuries,

• Which spills into sovereign debt markets.

The lines that used to contain risk have blurred. Convergence doesn’t just blend business models. It blends crises.

The hidden risk of regulatory inertia

We should ask ourselves: What if regulation doesn’t converge fast enough?

If hybrids continue to grow while supervisors cling to binary frameworks, risks will accumulate in the shadows.

Think back:

• In 2008, risk migrates into shadow banking outside capital rules.

• In 2020, liquidity spirals in U.S. Treasuries showed how non-banks could destabilize even the most liquid markets in the world.

• In 2022, The U.K. Gilt crisis exposed how leveraged liability-driven investment strategies at U.K. pension funds triggered a fire-sale of government bonds, forcing Bank of England intervention to stabilize markets.

• In 2023-24, private credit and cross-border collateral optimization are already stretching regulatory perimeters.

If regulation remains siloed, the next systemic shock could emerge not from leverage or derivatives themselves, but from the misalignment between what firms are and what rules assume they are.

From fragmented regulation to activity-based regulation

Regulatory supervision of financial markets remains fragmented. Banks report to national central banks, asset managers to securities regulators and insurers to solvency authorities.

In Europe, this means oversight is split across the ECB, ESMA and EIOPA. But hybrid financial institutions often span all three sectors—banking, asset management and insurance—without a single supervisor having full visibility.

Fragmented oversight risks leaving gaps in systemic risk monitoring and market transparency, making coordinated intervention harder precisely when it’s most needed.

This isn’t just a question of efficiency; it raises a deeper concern: In times of crisis, who takes the lead?

If convergence is real, then supervision cannot remain binary.

Reports published by The Financial Stability Board (FS) (2023), IOSCO (International Organization of Securities Commissions) (2023) and European Regulators (ESMA, EIOPA, ECB, ESRB) (2025) are raising the alarm and advocating for activity-based regulation.

In this model, it matters less whether you are labeled “bank” or “asset manager.” What matters is what you do:

• If you hold significant repo positions, you should be subject to liquidity and collateral rules.

• If you intermediate credit, capital and counterparty requirements should apply.

• If you structure exposures, disclosure and transparency rules must be equivalent.

This would not only limit blind spots. It would also reduce arbitrage and align oversight with the real functions institutions perform.

The strategic challenge for institutions

To implement effective activity-based supervision, European authorities must address several structural challenges like cross-sector coordination, shared data infrastructure and governance in times of crisis.

Restructuring this supervisory architecture will take time. Institutions cannot wait for regulators to solve this. They must prepare for a world where multiple supervisory lenses apply at once.

That means:

• Generating both bank-grade risk and capital analytics, as well as asset manager-style portfolio disclosures

• Running stress scenarios that satisfy Basel supervisors and solvency authorities simultaneously

• Building systems that flex across regulatory logics, not lock them into outdated categories

Hybrid actors should view regulation as a strategic enabler—not a constraint. By anticipating activity based regulatory convergence across sell-side and buy-side actors, they can position themselves as sector leaders, equipped with faster risk intelligence, more resilient governance and greater credibility with supervisors and market participants.

Technology that anticipates convergence is a strategic advantage.

Buy-side institutions engaged in hybrid activities should equip themselves with solutions that:

• Span front to back without locking into a fixed business model.

• Support trading, structuring, investing and treasury in a unified environment with a single source of data.

• Deliver consistent analytics across frameworks like Basel stress tests and Solvency II look-throughs.

• Consolidate liquidity, collateral and risk into one institutional view.

• Demonstrate regulators and market participants with a clear understanding of their hybrid nature.

In a world where regulation often lags behind business innovation, capital markets technology platforms that break down silos between the sell-side and traditional buy-side are increasingly valuable. By taking proactive steps toward self-regulation, firms gain resilience and a competitive edge.

A call to anticipation

Convergence is part of the operating system of modern financial markets. However, a growing number of buy-side financial institutions operate hybrid activities without a unified risk framework or coherent regulatory oversight. The real systemic risk is not just in leverage, derivatives or liquidity. It lies in the gap between hybrid reality and binary supervisory oversight.

Closing this regulatory gap is no longer a theoretical debate. I join many industry and regulatory leaders in calling for action. The only question is: Will we fix the problem before the next crisis forces us to?