Sub-custodian Risk Monitoring: - Financial Services Research

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Sub-custodian riskand to communicate any significant changesthat may be taking place in their serviceenvironment. “As part of this strategy, wemaintain a schedule of on-site visits, as wellas videoconferencing, telephone calls andweb-based reporting, that will ensure timelyinformation flow from each of our agentbanks,” he says.Expanding on this point, Rand volunteersthat in the network management worldthere tends to be a glamorised perceptionof due diligence which involves a networkon-site visits, notes Rand, is the ability to talkdirectly to key personnel within the regulatoryauthorities and financial infrastructure.These discussions help BBH staff to builda clear picture regarding how pendingchanges at market level are destined toimpact the foreign investor.Continuous risk assessmentRichard Barker, Senior Manager NetworkServices, Network Management at RBCDexia Investor Services, tells FSR that hisorganisation has introduced a series ofWe do not claim that the account operator model provides better protection for client assets ininstances of insolvency. We are not certain that it does. But what the account operator model doesoffer is the means to manage continuity in the event of a default at the agent bank. This providesus with a higher level of control over our account information and the possibility that we can getalternative operational arrangements up and running at short notice should our agent bank fall intodifficulties.manager stepping onto an aeroplane andcrossing continents to conduct on-site visitswith each agent several times per year.However, this may not be an accurate representationof what good practice involves. “Inour mind, due diligence is something thathappens every day,” he says. “When we doconduct on-site due diligence, much of ouranalysis is a verification of the due diligencethat we have been conducting, on a dailybasis, throughout the year. We have a widerange of tools available to us at our desksthat enable us to conduct frequent anddetailed risk assessment. When preparingvideo-conferencing and conference calls withour local agents, we prepare these evaluationswith the same rigour as we do whentravelling to market to conduct an on-sitereview. This will include an extensive reviewof service level agreements, any pressinglegal and compliance issues, and ongoingchanges at market level that may impact ourability to process transactions or to safekeepclient assets.” More generally, BBH maintainsclose contact with a sub-custodian’s seniormanagement in order to retain clear understandingof their strategic thinking and thedirection in which they are taking the company.Much of the value gained from makingadjustments to its risk monitoring strategy inresponse to the financial trauma witnessedglobally over the past three years. Approximatelytwo years ago, it established a NetworkManagement Working Group, chairedby Tim Wood, Head of Network Management.This committee meets every secondweek and is attended by representativesfrom eight different divisions within the bankwhose responsibilities overlap with networkmanagement, including operations, clientservice, sales and relationship management,credit, legal, compliance and risk. This committeehas a duty of care around transparencyand good governance for the organisation– and all key decisions affecting thefuture strategy of the network managementteam are evaluated by this central decisionmakingbody. RBC Dexia Investor Serviceshas also introduced a sub-custodian riskreport, which is produced weekly and tracksand records 26 different sets of metrics anddata highlighting various warning triggerpoints. This serves to provide advance noticethat a sub-custodian may no longer meetRBC Dexia’s minimum appointment criteria.In September 2009, RBC Dexia took adecision to review the geographical struc-Financial Services Research Q4 2010 41
Sub-custodian riskture and organisational coverage of itsnetwork management department. It nowhas network staff situated in four centresof excellence globally, located in Toronto,London, Luxembourg and Singapore. This arrangementprovides global network supportfor RBC Dexia’s business 24 hours per day,ensuring that network staff remain close tosub-custodians, to local market infrastructureand to clients. This allows the network managementteam to react promptly to any riskconcerns that may develop at market level.Overarching these provisions, RBC Dexianetwork management department has amethodology in place that it has labelledContinuous Risk Assessment (CRA). “Thekey word in this title is continuous,” explainsRichard Barker. “Sub-custodian risk monitoringis something that we do on a regularand ongoing basis.” The CRA model isapplied across the 88 markets in which RBCDexia supports and safeguards client assetsFrom a sub-custodian standpoint, ColinBrooks, Global Head of Sub-Custody andClearing at HSBC Securities Services, haswitnessed an enhanced focus on subcustodianrisk monitoring in many guises.“This is apparent when we receive adue diligence visit, or we are required tocomplete a due diligence questionnaire oran RFP,” he says. “In each case, we havenoted a rise in the level of detail requiredby these risk assessments. Our clients areseeking additional detail around how wereconcile trade and holdings informationwith clearing houses and depositories. Theyare seeking detailed information regardingour financial stability; and the businesscontinuity planning arrangements that wehave in place. And, they are requestingcomprehensive information regarding howassets are held in the local market, how titleis transferred and whether they will retainaccess to those assets if a sub-custodian orinfrastructure entity passes into insolvency.”In our mind, due diligence is something that happens every day. When we do conduct on-site duediligence, much of our analysis is a verification of the due diligence that we have been conducting,on a daily basis, throughout the year.42 Financial Services Research Q4 2010and across approximately 130 sub-custodianrelationships. “The CRA model is undertakenin many ways, including remote and on sitedue diligence,” he adds. “One of the cardinalrules around which our asset protectionmethodology is built is that it is obligatoryfor all providers to accept and agree with theCRA process.” The CRA model has six mainsegments – namely legal, sub-custodian relationships,market information, operations,financial and risk management – and underlyingthese six headline categories there areapproximately 30 different risk criteria thatare monitored on a continuing basis.In line with this methodology, RBC Dexiahas taken the decision to expand its surveillanceand to eventually bring all cash relationshipsand prime brokerage relationshipsunder the CRA model. As a result, thesebusiness relationships will be monitored onan ongoing basis according to the samerisk assessment methodology applied for itssecurities services and funds businesses.Not only has the depth of questioning increasedwithin these risk reviews, but HSBChas noted greater intensity in the followup process. “In times past, often it was thecase that we would receive a due diligencequestionnaire or RFP, we would respond tothose questions, and typically this would satisfythe requirements of the risk evaluation,”says Brooks. “Now, the depth of analysisand follow up has moved to a higher level.Clients are analysing our responses morecarefully and they will come back to us fordetailed follow up driven by questions fromthe broad range of experts represented onthe organisation’s risk committee.”Broker-dealer customers have long beenrigorous in compiling a real-time view of theexposure that they have to their counterparts.This will include prompt and comprehensivereporting relating to failed tradesand unmatched positions – thereby enablingthem to maintain an accurate picture oftheir cash positions on an intra-day basis.
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Sub-custodian Risk Monitoring: - Financial Services Research

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