Trading Services I Spotlight
These complex client relationships pose significant challenges to financial institutions. Without a single, comprehensive view of their clients, such institutions are exposed to regulatory, operational, credit and reputational risk. With links between clients belonging to the same legal group not correctly identified, it may be impossible to accurately calculate counterparty risk. It is difficult, as well, to determine the profitability of a specific client. A barely profitable level of activity with one business unit may be offset many times over by a robust relationship with another unit of the same client. The lack of a single client view can lead to lost opportunities, as well. The financial institution that is unable to look at the complete structure of the client may miss chances for cross-selling or up-selling. Feeding more accurate and comprehensive client data into intelligent CRM systems
will be adopted throughout Europe. In addition, Basel III will require information on client segmentation to help calculate liquidity and capital requirements. For example, legal entities will need to clarify if they are a clearing member for a CCP (Central Counterparty).
While there is broad agreement among regulators and financial institutions as to the need for a standardized LEI, the institutions themselves will need to change their approach to client data management and to the client on-boarding process to incorporate the move to an LEI. By doing so, institutions will be in a better position to monitor and manage systemic risk in a comprehensive, efficient manner.
Understanding Client Relationships
When large financial institutions refer to their “clients”,
they are rarely talking about one individual or even one
business entity. The modern client relationship is often
multi-faceted, encompassing different business units and
different geographies. Inconsistent views of hierarchies
and duplicate entries across different systems may lead
to confusion; two departments within the same financial
institution may not know if they are dealing with the
same client. Business conducted with or on behalf of the
client may fall under the regulatory supervision of many
different authorities.
Moving to the LEI
We expect that the LEI will define ownership as greater than 50 percent; if there is no owner with greater than 50 percent ownership, then the legal entity itself will be considered the parent company. We anticipate detailed discussion regarding joint ventures, parent companies and beneficial owners, as effective exposure management and monitoring will depend upon proper recognition of these relationships. Once the final structure of the LEI is agreed upon, each organization using it will have to undertake a large-scale data cleanup. Each institution will need to map each of its current clients and/or counterparties to the newly assigned LEI. There will be at least two ways to do this: 1. entities which want to conduct business could be required to provide an LEI going forward, or 2. the financial institutions themselves will have to undertake an internal exercise to provide this mapping.
The issue of data quality
Financial institutions can use the opportunity provided by the LEI shift to improve overall client data quality. Currently, the use of multiple databases in different departments within the same company can lead to uncertainty. Are the entities in different systems the same? Should they be grouped together or merged? If there are duplicative entries, which one is correct? In addition to the problems caused by multiple databases, it is quite common to find out of date information, which can result in inaccurate reporting. This can affect exposure and risk calculations and lead to higher costs down the road. Incorrect or poorly organized data can also have a profound impact on the finance function. Poor data quality makes it difficult to establish a client’s true profitability and can affect overall company strategies. The treasury group may find it hard to determine where funds sit and what the organization’s real exposure is at any given time. The financial institution, which needs to know who they are trading with so that they can identify exposures with counterparties and, if necessary, move money to and from different accounts, may be unable to identify the correct legal identity or the ultimate owner of the client or counterparty.
Effective risk management is also highly dependent upon the quality of client data. For example, risk calculations are based upon client data such as industry and organizational structure. An entity’s credit risk determines the credit charges applied to any business done with the entity; if the correct information is not available, credit risk charges may be too high or too low. Similarly, within credit risk functions, exposure to single clients, groups of clients, industries and geographies is typically monitored to limit the bank’s exposure to a single risk category while facilitating regulatory reporting. Risk management needs a clear understanding of the hierarchy of the entity – along with the industry, segments and geographical locations it encompasses – to make the right decisions
regarding concentration of risk. Clean, accurate and up-to-date client data helps financial institutions set prices that are in line with the real credit risk associate with an entity. Determining the real credit risk depends upon a complete understanding of the legal structure of a particular entity and guarantees or obligations to its subsidiaries. With this knowledge, financial institutions can reduce excessive risk they may have taken on while minimizing the need for high default credit charges to entities with
Most if not all institutions will need to change their
client on-boarding processes to accommodate the
LEI, especially since the technical design of the LEI
solution will require global implementation and
support. Basel III proposes three credit rating agencies
– S&P, Moody’s and Fitch – as the three vendors
providing official legal information on each entity.
The owners of the LEI structure would be DTCC and
Swift. It is important to note, however, that the LEI
would not be an indication of creditworthiness in
itself, only a way of identifying a legal entity.
missing information. Additionally, collateral and pricing calculations are dependent on the credit terms extended to clients. Where these calculations have been impaired by inaccurate client data it is possible to be left uncompetitive in the face of more sophisticated peers. The ability to determine a client entity’s segmentation, subsidiaries and structure is also essential for calculating correct capital ratios. For example, under Basel III, CCPs are assigned risk weightings that are different from those assigned to other organizations. Failure to properly identify such organizations could have dramatic effect on a financial institution’s capital ratio, requiring the organization to hold additional capital. External data vendors, such as
Bloomberg or Avox, can be used to outsource the maintenance of client data, ensuring that data is up-to-date and accurate and allowing for better utilization of the financial institution’s own resources. Existing data can be uploaded from all systems, cleaned and analyzed to remove duplicates. For each entity, a specific identifier is created, and, if an external identifier is not available, a robust process can be used to add it to the database and keep it both current and accurate.
Addressing regulatory
requirements
New regulatory initiatives make it absolutely essential for financial institutions to establish and maintain an accurate understanding of counterparty exposures. While capital ratios can be more efficiently managed if counterparty exposure is properly evaluated, institutions could also be at risk from an anti-money laundering
investments held offshore. FATCA will require financial institutions from any jurisdiction to disclose information to the U.S. government pertaining to U.S. clients holding $50,000 or more of investments. To accomplish this, all U.S. and non-U.S. financial institutions will be required to classify clients as either U.S. or non-U.S.; as either an individual or as an entity; and as either financial or non-financial. The Internal Revenue Service’s definition of a “U.S. person” is complex and will place additional pressure on institutions to observe Know Your Client (KYC) directives and to ensure that client data is correct. Penalties for non-compliance are strict, with a 30 percent withholding tax on all U.S. transactions made by the client. Failing financial institutions would be liable for any tax not withheld, plus interest and potential fines. Within Europe, the European Market Infrastructure Regulation (EMIR) is at the draft legislative proposal stage and covers OTC derivatives, central counterparties and trade repositories with the intention of increasing transparency while reducing counterparty credit and operational risk. The operational objectives of EMIR include obtaining comprehensive information on OTC derivative positions, increasing use of central counterparty (CCP) clearing, improving bilateral clearing practices and increasing standardization of OTC derivatives contract.
Client onboarding and
client data management
In many cases, the client onboarding process provides an excellent opportunity to obtain and organize
To make sure that there are not multiple entry points for keying in the LEI, the LEI field within the KYC database should feed into legal, credit, collateral and operations systems for the purposes of consistency and transparency. The architecture of the KYC system may require reworking so that LEIs connect to each other and properly reflect their hierarchy throughout the system. When a new client comes on board, systems must be in place to run a check through the LEI vendors (S&P, Moody’s and Fitch) to obtain official legal information. It is not yet clear how governance of the LEI will be handled. The most likely approach is that the owners of the LEI structure (DTCC and Swift) will be responsible for LEI governance as well. We anticipate that any entity dealing with securitized products in the U.S. – or with a U.S. entity – will apply for an LEI. This will be assigned on a legal entity basis; large organizations will need to apply for multiple identities. During registration, the entity will be responsible for providing basic information, and also for providing notice of any changes to its status.
Preparing for change
• Financial institutions with a good view of their client data can calculate their risk and exposure more
accurately and use this information to price accordingly, finding the right spot between pricing too low (and taking on excessive risk) and pricing competitively.
• All firms will have to implement the LEI, but those financial institutions with strong client data will spend less on implementation. The real test, however, will be in how firms leverage the information to build a comprehensive view of current clients, their product usage and requirements. • In the data cleaning process, nearly
all financial institutions will uncover some surprises as duplications are found and exposures are consolidated. Some exposures will be larger or smaller than anticipated, and trades will be necessary to neutralize these unexpected exposures. Firms that understand their client data and therefore exposures in advance of “X day” – after which all institutions will be on a more or less equal footing – will have a competitive advantage over firms that do not.
Accenture believes that new rules and requirements
for client data provide financial institutions with
an opportunity to increase operational efficiency
and improve cross-selling and up-selling programs
while meeting regulatory demands. Among the
advantages of better client data management:
How Accenture can help
Accenture can also help with:
• Risk and Opportunity Assessment –
Working with you to identify the areas of your business most likely to benefit from LEI adoption.
• Data Clean up – Providing proven
strategies for cleaning up data before “X day”, helping confirm that exposures are managed smoothly, and that there are no shocks once LEIs are adopted and true hierarchies and interrelationships are mapped.
• Adoption of New Processes – Developing strategies and methods for using data and opening up the flow of information around the organization.
• Adoption of New Systems –
Leveraging deep experience to confirm that integration of the new system takes place seamlessly, painlessly and on schedule.
• Establishing and maintaining competitive advantage – As financial institutions move to using the same data, the ability to respond quickest to credit or market events may deliver competitive advantage; Accenture can introduce established methodologies
The move to LEIs presents financial institutions with an important opportunity to upgrade client data management. Accenture can help financial services firms develop a strategic client data model, using it to govern the capture of more accurate data. This should allow for a clearer understanding of clients’ needs, improving client relationships, strengthening risk management, making better credit decisions and allocating capital more efficiently.
The introduction of LEIs and other related regulatory
changes poses a significant operational challenge
for financial institutions. Accenture, using proven
methodologies, can help analyze how data is currently
collected, systems are employed to organize and store
data and how the data is used and who uses it.
This allows for creation of a high-level plan for
enhanced use of client data.
About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 244,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become
high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.
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To learn more about how Accenture can help your firm achieve competitive advantage through client data
management, please contact: Heather Adams
Global Client Data Management Lead Accenture Trading Services
[email protected] Owen Jelf
Accenture Trading Services [email protected] Paul Obrocki
Global Data Management Lead Accenture Capital Markets [email protected] Wei Min Chin
Data Management Lead, Asia/Pacific Accenture Capital Markets
[email protected] Ian Howie
Data Management Lead, UK Accenture Capital Markets [email protected]
