/34 Focus: Client Onboarding

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1 /34 Focus: Client Onboarding Round table attendees quoted in this article: Tim Harris, associate director, Alternatives & Derivatives, Hermes Fund Managers Chude Chidi-Ofong, head of operations, Eton Park International LLP Yancy Hoyos, vice-president Credit Investments Group, Credit Suisse Jeremy Smart, chief operating officer for European fixed-income distribution, Morgan Stanley Julia Sutton, global head of customer accounts and onboarding, Royal Bank of Canada Caroline Palmer, vice-president GBS Client Onboarding, Deutsche Bank Stuart McClymont, managing director, global head of market initiatives and business architecture, Deutsche Bank Bill Meenaghan, product manager, Omgeo ALERT the markit magazine Winter 2010

2 Focus: Client Onboarding /35 Representatives from leading financial institutions discuss the operational challenges which arise when buy-side and sell-side firms have to formalise new trading relationships Shock of the new Onboarding the process by which sell-side firms perform Know Your Customer (KYC) checks and open accounts for new funds remains a manual and labour-intensive process prone to delays which can lead to trade failures and ultimately loss of revenue. Markit brought together leading market participants and asked them about the operational challenges that exist when funds are onboarded by their counterparties, barriers to progress and what can be done to make the process easier. Markit: Can you give us an indication of the number of new funds you launch and the kind of information you need to update with your counterparties for regulatory and administrative reasons on a monthly or annual basis? How long does the onboarding process take? Tim Harris: We launch around one or two new funds each month and the onboarding process varies from broker to broker some are very quick and some aren t. When it comes to adding a sub fund to an existing International Swaps and Derivatives Association (ISDA) Master Agreement, then it could take anything from a matter of a few days to two weeks to be onboarded. The more of a pain you are, calling and ing your broker, the quicker things get done. It should be a very streamlined process but often it s not. In my experience, what gets results is knowing who to call. Chude Chidi-Ofong: It should take no longer than two or three days to onboard a new fund. However, the launch of our latest special purpose vehicle (SPV) was delayed for a week due to onboarding problems. Non-standard checks can take a lot of time and hold up the process. Yancy Hoyos: We launch approximately three to four fund structures per year and onboarding with broker-dealers and agent banks can span several days to several weeks. On some occasions, the onboarding process has taken up to seven weeks. Depending on the jurisdiction, KYC and tax documentation will need to be Winter 2010 the markit magazine

3 /36 Focus: Client Onboarding updated on an annual basis. This is the case for tax residence certificates in Spain and Italy, for example. There is also the KYC requirement to have information on the ultimate beneficial counterparties on triparty trade confirms for loan trades and borrower SPVs used for loan debt buybacks. SPVs in general require onerous KYC checks as most onboarding teams will need to drill down to trust levels. Jeremy Smart: We open, on average, about 600 new accounts, including sub accounts, each month. The busiest times are when we onboard a new asset manager. On these occasions, we could have 200 to 250 sub accounts to open. Onboarding is a very time-intensive process and prioritising workload is important. Like every firm, we have priority account lists based on commercial realities. The more revenue we can generate from a particular account, the greater precedence it receives. However, we have adequate resources to open every account when requested. Around one in five accounts we deal with do not fall within a set process due to issues over capacity, legal requirements or terms in the Credit Support Annex (CSA). We have clear escalation procedures and very clear rights of sign-off, which along with prioritisation, helps enormously in opening new and tricky accounts. Julia Sutton: Globally, we take on in the region of 30 legal entities a month. Most of our clients want to trade in multiple jurisdictions so we have a lot of rules to comply with. It is quite time-intensive and we share our clients pain in getting through this process. Royal Bank of Canada will launch a new account opening tool in December that will allow us to manage the multitude of requests we get everyday much better. We have had instances where we receive a request to set up a new account domiciled in New York and then at the end of the process we are told that the client wants to settle in Canada. We then have to start the onboarding Tim Harris, associate director, Alternatives & Derivatives, Hermes Fund Managers process again and comply with a totally different set of regulatory requirements. It is a very time and labour-intensive process but we have to get it right. Caroline Palmer: We could reduce the timeframes and diminish duplication of effort if we had standardised information requirements up front. We need to process information received efficiently, as we gather requirements for a multitude of departments internally, including, but not limited to, our credit and legal departments. There is a lot of co-ordination needed internally. When we receive an onboarding request from a client, we make sure we have the relevant constituent documentation and understand their product requirements and whether legal agreements are needed. We also work with the clients to ensure downstream matters are considered, such as setting up the requisite ISDA Master Confirmation Agreements (MCAs) or configuring our trade matching systems. Markit: What pressures are the industry facing due to the changing regulatory environment? Jeremy Smart: There is no global standard for opening accounts. National regulators are today less happy to rely on their counterparts in other jurisdictions. So, if you work in London, you still need to meet and comply with Financial Services Authority regulatory requirements, even if you have satisfied US Securities and Exchange Commission or Hong Kong Monetary Authority requirements. This is very reasonable but it clearly adds a layer of complexity to onboarding accounts as most client entities operate across multiple jurisdictions. As we move to a centralised counterparty (CCP) structure for over-the-counter (OTC) derivatives, it is clear that we will have to re-negotiate ISDAs for everybody. This is going to be another documentation challenge. We may also have to change the entities we use to book our transactions, which will have a direct impact on how we onboard accounts. Stuart McClymont: We as an industry still do not have a standard and efficient counterparty onboarding and static data infrastructure. This leads to wide variances in the time it takes to onboard funds and set up client static data. One reason for this large gap could be the regional differences in content and requirements. We need to normalise these regional differences and establish global standards. At the same time we need to also standardise the steps in the process, the messaging format and communication mediums to deliver a robust, scalable and efficient infrastructure. We can then achieve a more timely process, which, is necessary given the regulatory pressures on other areas of the trade lifecycle process. Markit: Why have we not had the developments in infrastructure that are needed? Chude Chidi-Ofong, head of operations, Eton Park International LLP the markit magazine Winter 2010

4 Focus: Client Onboarding /37 Stuart McClymont: Reference data are the DNA of trade processing and impacts almost every part of our processes. It is therefore hard to change and there is often no single owner both accountable and responsible for it. There are so many providers, consumers, and even consumers who are themselves providers, that understanding where and how to make changes is very complicated. It is therefore very difficult to budget, prioritise and get traction to improve reference data. Julia Sutton: There is no standard around counterparty static data currently and the quality of your static data depends on who runs it. Once we resolve that, it will be easier to address latency and other issues. Good static data start with how you onboard a client and what information you collect from the client. If you do it right the first time, you are on the right track. Markit: How do delays in onboarding affect opportunity, risk and relationships? Tim Harris: If a client wants to put on or change the risk strategy of a particular portfolio in a very short time, we will go with brokers that can process those changes quickly and efficiently. You know which brokers miss things and those that have streamlined the onboarding process and can act quickly when we launch new sub-accounts or funds. There are brokers who get more than their fair share of the trade and activity because they do this well. Markit: How do you communicate successfully with a broker-dealer? Is there a particular model that works? Tim Harris: It really does just depend on the people and there is no particular model or one perfect solution that works across the board. Sometimes it is difficult to find the right contacts or know who to contact. We tend to go back to the front office to get things There isn t a set model that works every time as different banks have various grades of KYC requirements for different fund or equity structures. moving, which is probably not the right way of doing things. Yancy Hoyos: There isn t a set model that works every time as different banks have various grades of KYC requirements for different fund or equity structures. The approach that has worked the best is to set up a core set of KYC documents which most banks require at fund inception and communicate actively with counterparties on tailored requests. From this process one can also derive which are the more onerous jurisdictions for KYC approval as well as which institutions have more rigorous and extensive KYC processes. This can help us assess which accounts will require a lot of work to onboard and should therefore be at the top of our priority list. Julia Sutton: The key is finding the right people at your counterparty who can help process your request. It could all be done quite quickly if you know with whom to discuss onboarding and documentation requirements. We are working on getting sales to include our group as part of their conversations whenever they book a trade with a client. Chude Chidi-Ofong: We also find it difficult as buy-side firms to identify who in a sell-side firm is responsible for opening our accounts. There is no clear definitive line on whose responsibility it is to send us documentation. Julia Sutton: We are saying that sales own the relationship with the client and we, as documentation and onboarding specialists, have responsibility for the integrity of the data. We have found it much quicker and more efficient if we have those roles and responsibilities in place. Jeremy Smart: Ultimately as a salesperson, it is my responsibility to onboard the account, take ownership and drive that process. We are responsible for revenue generation and that means trading with as many accounts and with as little risk as possible. Having said that, it makes complete sense to have a centralised team that gathers the right documentation and information and undertakes the operational onboarding. Julia Sutton: That does not exist in most places, which is the problem. Stuart McClymont: The accountability for the relationship with the client is with sales. If, as part of that relationship building process, we can very early on request and source the appropriate data, get them set up centrally and filtered through the organisation, trades can be processed efficiently further down the line. Markit: What thoughts do you have about how we move towards documentation standardisation? Yancy Hoyos, vice-president Credit Investments Group, Credit Suisse Winter 2010 the markit magazine

5 /38 Focus: Client Onboarding Julia Sutton: We are centralising the SSI process globally. We have around 120,000 legal entities and about 300,000 sub accounts and there are several hundred to a thousand changes to that set of settlement instructions every week. Unless you automate it, it becomes a huge overhead. Jeremy Smart, chief operating officer for European fixed-income distribution, Morgan Stanley Julia Sutton: There is a core set of documents that is required by everyone, regardless of regional or internal differences. Yancy Hoyos: Minimum standardisation is key as a first step. In the loan market, it will be very helpful to have a repository of administrative details with up-to-date contact information. Knowing with whom to initiate the KYC process can save time in the vetting process for both sides. The second step would be to have a market-wide minimum standardised KYC requirement list per jurisdiction (starting with the UK) and for each portfolio structure (i.e. separate accounts, CDOs, hedge funds and SPVs) in general. Caroline Palmer: It comes down to transparency and capture of onboarding requests as well. We need to improve the management of the onboarding process and information flow by decreasing reliance on and paperbased interaction. Chude Chidi-Ofong: I would like consistency across the sell-side. I do not want to trade converts with one bank and fulfil its data requests, then also trade credit with the same bank which then asks me for different KYC documents. This does happen from time to time. Markit: Do the same people that handle Standard Settlement Instructions (SSIs) also manage account reference data or is it a different process? Caroline Palmer: It would be great to see the twinning of onboarding requests with the SSIs because a lot of the time we cannot process onboarding requests until we get the updated SSIs. Once ISDA agreements and the CSAs are finalised, we look to set up client accounts and we need SSIs readily available. Bill Meenaghan: One reason why accounts are not opened is that although investment managers add them to Omgeo ALERT, brokers tend to wait until the first trade before they take in data for the SSIs. That is not very efficient. It does not make sense to trade first and then start to set up retrieve SSIs as well as initiate the KYC process. We are currently working on updating legal entity data for the investment managers at the access code (fund) level and for broker-dealers at the model level and have a partnership with Avox where the legal entity data will be taken in, confirmed with the investment managers and broker-dealers, verified by Avox and then re-certified every year. Omgeo ALERT will carry certain legal entity data fields and this will go live early in the third quarter next year. Subscribers will be able to receive Julia Sutton, global head of customer accounts and onboarding, Royal Bank of Canada Caroline Palmer, vice-president GBS Client Onboarding, Deutsche Bank updated legal entity data including identifiers. Stuart McClymont: By doing this we potentially run the risk of exacerbating the problem. For every additional independent provider of counterparty static data, we move further away from a standard golden industry data set. Each different provider of counterparty static data and counterparty identifiers has built independent infrastructure over the years. Generally, most of these products have been built to deliver against a particular asset class, sector, or type of counterparty data, creating their own format, content, communication and messaging mediums. As an industry, we need to take a step back and design a solution that consolidates and standardises this data to create a single golden industry source. Julia Sutton: Regardless of which counterparty static data provider a particular firm may settle on, having standards for static data including name and address should not be open to debate. We need to speak the same language across these core data. Stuart McClymont: The current US legislation around OTC derivative reform are proposing unique counterparty identifiers across asset classes so they can consolidate counterparty reporting across differing asset class repositories. Without this standardisation and use of unique counterparty identifiers globally, all regulators across the globe will find it very difficult to consolidate reporting. the markit magazine Winter 2010

6 Focus: Client Onboarding /39 Chude Chidi-Ofong: How is the potential Markit Document Exchange (MDE) and Omgeo ALERT tie-up going to work? Would you potentially have the bank maintain MDE with the correct static data and then we just link it into Omgeo ALERT? Markit: Bringing our two communities on to a combined set of interfaces will help achieve critical mass. Further, combining Omgeo ALERT s dataset with our own will enable us to pair different identifiers used by different market participants. If we can let the end clients manage their own data, the resulting data will be of a higher quality. This obviously works only under the condition that everyone is on board and updates their data regularly. Bill Meenaghan: We have nearly 500,000 access codes (funds) in Omgeo ALERT and hopefully the tie-up with MDE will improve the number of accounts we cover. The combined platform will have a critical mass of users. There is a lot of benefit to the industry if the big investment managers buy into the idea of populating their documents and static data in MDE and having connections to Omgeo ALERT s settlement instruction management interface. We will implement a process to ensure that the fund codes used in Omgeo ALERT will be transferred to MDE so that users and broker-dealers will be able to reference the same fund identifier when retrieving documentation. Markit: Are there any other key trade processes or infrastructures where the industry should be more closely aligned? Stuart McClymont: Clearing trades intra day in real time means that we need to get the industry trade processing infrastructure operating in a way that is both timely and efficient. The counterparty data flowing through these systems must therefore be accurate. It is critical that industry trade processing tools are fed this standardised golden counterparty data automatically. Chude Chidi-Ofong: The biggest immediate hurdle is the legal documentation. We have spent the last four years trying to put in place managed compliance agreements for MCAs for equity derivatives with everyone in every single region to streamline the process of trading equities. We have found there have been divergences among banks and their willingness to do that. We need a greater willingness on the sell-side to have standard documentation, particularly in equity derivatives. European equity options are one of the simplest products you can look at, but try to do something in Asia outside Japan and it is a complete nightmare. Stuart McClymont: Only per cent of equity derivatives can be confirmed electronically on electronic confirmation platforms today compared to 98 per cent for credit derivatives and over 80 per cent for rates derivatives. These high percentages and the reduction in risk, increased control and overall efficiency that came with them, was a result of the industry coming together under ISDA to standardise the process, the messaging format, standard and the communication infrastructure and tackling the issue globally. Jeremy Smart: It is all about standardisation around processing, because otherwise there are different standards Stuart McClymont, managing director, global head of market initiatives and business architecture, Deutsche Bank Bill Meenaghan, product manager, Omgeo ALERT across each individual product and across each individual client. Simply moving one transaction from one broker to another is extremely difficult. Throw CCPs into the mix and you are talking about even more complex data and documentation requirements having to be standardised across potentially a dozen CCPs. What worries me is that we are moving to a world of less standardisation rather than more. We may be moving towards standardised documents within individual jurisdictions and also within individual products but probably not within our global OTC world. Stuart McClymont: Globalisation has very rarely been part of conversations across the industry over the last 18 months. Unless we take a global approach to counterparty static data, we will only continue to breed fragmentation and move further away from standards. Markit: To summarise, we require greater standardisation and clearer communication. It also seems that the buy-side and sell-side have different perspectives on the process. There are a few challenges, such as the importance of counterparty static data that are not always that clear to people on the other side. But, from our discussion, it seems that the entire industry could benefit from debating and trying to develop standards to address these issues. Winter 2010 the markit magazine