Elkhorn grey on blue

 Practitioners at the heart of the securities industry

Cash and Stock:  Opportunity, Obligation or Risk?

Network Management (external provider management)

Required for fee reconciliations, performance measurement, relationship management, strategic optimisation of account usage, etc

Required to ensure all necessary documentation is in place and kept up to date and all operational requirements are met

Internal Books and Records

Required for business processing, including Collateral and Treasury management

Required for reporting, including Client Asset usage and protection and reporting

Account Ownership and Usage Control

Required for demonstrable systems and controls

Reconciliation Control rules

Required for mapping external providers against books and records and Network Management records

Required for exclusions/exemptions

Failure to demonstrate that the firm is in control with the right information being presented to senior management

Failure to ensure day to day protection of client money and client assets

The need to repeat remediation exercises

Duplication and/or inconsistency between projects initiated by different departments

Failure to build the business knowledge needed to challenge and develop controls, especially where operations functions are outsourced or off-shored

Controls include completeness checks and exclusions are authorised

The same, agreed account population is used across the firm

The underlying data used to perform controls is correct

Exceptions are actively reviewed, documented and interpreted to understand and address causes

How effective are your Nostro/Depot account population controls?

 

The industry is changing rapidly.  Regulators' requirements continue to expand and penalties for non-compliance soar.  Capital is a precious commodity and needs to be carefully managed.

 

Recent focus has been on Client Money and Client Asset protection (CASS in the UK) and Collateral Management.  Whilst more effective Collateral and Treasury management will deliver major business benefits, it is the threat of significant fines for CASS breaches and the resulting reputational damage that will be the primary driver for most firms (1).

 

To manage these demands, financial services firms must understand their nostro/depot account populations - including whose assets they hold, why they exist, what requirements and opportunities they create, where they are recorded, and how they are controlled.

 

Business Challenge

 

Maintaining the nostro/depot control environment is challenging.  Regulators demand certainty that assets are in the right accounts at the right time but post-trade operating models are complex.  Business lines can cross and separate and most issues arise from the same underlying causes (change, non-standard processing, and a lack of business knowledge to challenge controls).

 

Post-trade business owners are likely to be organised by function and can have limited, or no visibility, and little understanding of upstream/downstream flows and associated reporting.  Controls are essential to ensure accounts and the assets in them have been properly segregated and are used appropriately:  this is especially important where processing has been off-shored or outsourced.

 

Many firms will have more than one internal view of their nostro/depot account population and these must be kept consistent.  Typical requirements include:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Firms are also likely to face the challenge of different control models or exceptions to the standard models.  Variables include different external account types (eg, CSD/Correspondent Bank/Custodian), business lines, legal entities, regions, and systems.

 

Consequences of End-to-End Control Gaps

 

Regulatory consequences can result from inconsistencies between the actual account population and the ones used for account ownership, reconciliation control, and regulatory reporting (FCA reporting includes CMAR, PB, CASS RP) (2):

  • Failure to demonstrate that the firm is in control with the right information being presented to senior management

  • Failure to ensure day-to-day protection of client money and client assets

 

Optimising Collateral/Treasury management needs certainty over the accounts:  whose assets they are and what they can be used for

 

Other consequences include:

  • The need to repeat remediation exercises

  • Duplication and/or inconsistency between projects initiated by different departments

  • Failure to build the business knowledge needed to challenge and develop controls, especially where Operations functions are outsourced or off-shored

 

Control Challenge and Review

 

Controls need to be constantly reviewed to remain effective.  This means more than just reviewing existing controls, it means understanding and evaluating end-to-end processes, and in particular the gaps between functions and departments to check that:

  • Controls include completeness checks and exclusions are authorised

  • The same, agreed account population is used across the firm

  • The underlying data used to perform controls is correct

  • Exceptions are actively reviewed, documented and interpreted to understand and address causes

 

About Elkhorn Consulting Ltd

 

Our goal is to help you regulate from within:

  • We are industry experts who  understand the products, how they are processed, their accounting and the systems used to process them

  • We work with your existing control functions to challenge and assess the accuracy and completeness of your controls

  • We will work with you to ensure the necessary levels of control and understanding are embedded in your firm

 

We offer a structured approach for reviewing Nostro/Depot account controls.  This includes a framework to use as an internal benchmark to monitor controls.

 

 

(1)  The Financial Conduct Authority (FCA) has published its methodology for calculating CASS fines.  The baseline level 3 fine (eg, a non-wilful control issue) for a firm with £50 million client money and £300 million of client assets is £2.2 million

(2)  CMAR = Client Money and Asset Return, PB = Prime Brokerage, CASS RP = Resolution Pack    

                                                                                                                                                   

                                                                                                                                                  (c)  Elkhorn Consulting Limited 2014

Network Management (external provider management)

  • Required for fee reconciliations, performance measurement, relationship management, strategic optimisation of account usage, etc

  • Required to ensure all necessary documentation is in place and kept up to date and all operational requirements are met

 

Internal Books and Records

  • Required for business processing, including Collateral and Treasury management

  • Required for reporting, including Client Asset usage and protection and reporting

 

Account Ownership and Usage Control

  • Required for demonstrable systems and controls

 

Reconciliation Control rules

  • Required for mapping external providers against books and records and Network Management records

  • Required for exclusions/exemptions