By Peter Newton, Managing Director, Paul Chymiy, Co-Head of US operations and Darren Fortunato, Senior Consultant, at D2 Legal Technology.  

The January 1^st 2020 deadline for the US Stay Rules has passed – so are Global Systemically Important Banks (GSIB) now fully compliant? Have all their covered entities, subsidiaries, affiliates, and their client counterparties that use derivatives, repurchase agreements and certain other types of financial contracts been identified, and in-scope qualified financial contracts (QFC) remediated? Or will the lack of accurate, up to date trading partner information jeopardise and undermine the recovery and resolution objectives of avoiding another “too big to fail” scenario?

Peter Newton, Managing Director, Paul Chymiy, Co-Head of US operations and Darren Fortunato, Senior Consultant, at D2 Legal Technology call on firms to reconsider legal agreement, client data management and buildout existing client onboarding processes with continuous, accurate and shared recording of the complete client trading lifecycle to create a single, trusted source of all client information as a golden source of client data from business status to contact details, affiliates to subsidiaries.

Trading Confidence

As the dust settles on the US QFC Stay Rules, how confident are GSIBs (whose ranks are determined by the Basel Committee on Banking Supervision (BCBS) methodology framework) that all necessary contracts have been captured? Having spent many months trawling through multiple, inconsistent data sources in a bid to identify in-scope QFCs, the lack of robust, accurate and consistent client trading data has become painfully apparent.

The initial tranche of ‘GSIB to GSIB’ QFCs were relatively straightforward to identify, as were the GSIB to financial institution agreements. However, with every line of business recording client trading contracts separately, cataloguing this final round of QFCs, between GSIBs and the remaining trading partners, has presented significant challenges.

From identifying relevant customers to prioritising the key trading partners and interpreting the definition of in-scope QFCs, before even embarking upon the contract remediation process, the lack of consistent information between GSIBs and the remaining trading partners has underlined the extent of the risk.

Unintended Consequences

Despite the doom-mongers, all hell did not break loose on 1^st January 2020: Organisations achieved compliance with their most important customers, at least, and are therefore still able to trade. But edginess remains. Have all trading counterparties been identified? Have some been merged, been acquired, even dissolved? If so, what about all the affiliates of every counterparty? Miss one affiliate, fail to identify and remediate any in-scope QFC, and any trade with that group will result in a reportable violation of the US Stay Rules. Are we about to see fines and other regulatory sanctions rack up in this regard?

Without information one can trust and rely on, without a database covering not only all US GSIBs and their worldwide subsidiaries but also the US branches, agencies and subsidiaries of non-US GSIBs “covered entities”, across the entire business, can any firm be sufficiently confident that every trading partner has been identified? Some of these organisations are very infrequent trading partners; records may be five, ten, even 20 years old. Names have changed, contacts have moved, mergers – even multiple mergers – have occurred. With stale data it is incredibly difficult to identify in scope entities and, should a company’s status have changed – through merger or dissolution, for example – it is then time consuming to obtain the required evidence and documentation from the relevant authorities and bodies across various jurisdictions.

With haphazard recording of trading data across departments, firms are at risk of falling foul of the law of unintended consequences. 97.5% of agreements may have been repapered but, get it wrong, miss a partner, or affiliate, overlook an in-scope QFC and the results could be fatal – a problem with one legacy trading partner could contaminate other parts of the portfolio.

Client Relationship Management

There is no doubt that since the introduction of Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, firms have become far more robust about client onboarding data and processes. But what happens next? Where is the single source of information regarding the ongoing client relationship?

Having taken over a decade from the regulatory imperative to end “too big to fail” to address global stay resolution requirements, it is absolutely essential that banks build on this data resource and create a foundation for future. By focusing on extending the client onboarding experience an enhanced end to end Client Relationship Management lifecycle can be achieved, enabling firms to capture every trading agreement, every affiliate and subsidiary, every business change and every new contact and provide that data in a consistent form to each relevant department and team.

With a consistent, end to end customer relationship management model, firms can achieve a single, central source of trusted, accurate and up to date client data that should underpin not just compliance to global regulations aimed at ending “too big to fail” but also optimise day to day operations and enhance the client onboarding experience.