With its new offering called Entity Exchange, Bloomberg is trying to take a bite out the market share — especially among hedge fund managers — of the existing utilities for automating know-your-customer requirements. Its strategy: give the buy side more control.
Regulators require financial firms to know just who they are doing business with before they can sign on with them. Given that regulators also want more rigorous oversight of the KYC process, banks, broker-dealers and prime-brokers are becoming extra cautious. Given the financial, regulatory and reputation risk, they can’t afford to let a fraudster or criminal slip into their business as a trading partner or customer.
In establishing a new trading relationship with a bank or broker-dealer, an asset manager must provide information about itself, such as its business structure, names of its owners and C-level executives and even its trading strategy. The questions asked by sell-side firm might differ depending on the new trading partner and the business line.
Hedge fund managers — one of Bloomberg’s primary targets — sometimes have a hard time meeting onboarding requirements because of their diverse range of strategies, asset classes and fund structures. The information challenge is made more difficult by the number of counterparties involved. A private study conducted by research firm Aite Group and commissioned by Bloomberg found that 70 percent of hedge fund managers have at least 30 counterparties. The largest hedge fund managers might have a dedicated department to handle all the the paperwork while the smaller ones are more likely to place the burden on their chief compliance officer who is often already overwhelmed in dealing with multiple regulatory requirements.
Entity Exchange isn’t the only player in town. It joins incumbents kyc.com and Clarient Entity Hub in trying to reduce the time it takes for asset managers to sign up with new trading partners and the operational risk of sending the wrong information to the wrong counterparty. kyc.com is operated by a joint venture of Markit and Genpact while the year-old Clarient Entity Hub is operated by Clarient Global LLC, a Depository Trust & Clearing Corp. company founded with some of the world’s largest institutions. DTCC is the US market infrastructure for clearing and settling US securities transactions.
What differentiates Bloomberg’s Entity Exchange from its rivals isn’t obvious at first glance. All three automate the transfer of information required for onboarding from buy-side firms to their sell-side counterparties. However, Bloomberg insists that its Entity Exchange is more focused on the needs of hedge fund managers to provide each sell-side firm with only the information the buy-side wants it to see in a more secure fashion. The information package can be customized on a case-by-case basis.
“The data gathering and exchange process to fulfill KYC requirements is still in the dark ages from a technology perspective. That is why asset managers approached us about building a product that sought to address their needs,” says Dan Matthies, head of Bloomberg Client Data Services who oversees Entity Exchange. “While facilitating the document exchange process helps banks and broker-dealers meet KYC requirements, there is a lot of data in those documents. Bloomberg extracts and validates the data so that it an be organized into a profile. Doing so allows hedge fund managers to provide specific information to each trading partner.”
Entity Exchange gives asset managers this control through a permission-based workflow supported by the same authentication technology provided to Bloomberg Professional service subscribers. Entity Exchange will also provide an audit trail for compliance purposes.
Neither kyc.com nor Clarient would comment on the Bloomberg initiative, but their marketing materials suggest that they rely on a standard set of data points. The standardized approach was created with input from both sell-side and buy-side firms, but fund management firms tell FinOps Report that buy-side carried the most clout. They point out that both kyc.con and Clarient were developed with backing from large banks and broker-dealers. The kyc.com initiative was started by Citi, Deutsche Bank, HSBC, Morgan Stanley and UBS. Clarient Entity Hub has Barclays, BNY Mellon, Credit Suisse, Goldman Sachs, JPMorgan Chase and State Street as its founding banks.
Both Clarient Entity Hub and kyc.com already have good-sized followings. Of the 115 firms that have signed up to use the year-old Clarient Entity Hub, about half are traditional asset managers and hedge funds. Among the recent signups listed by Clarient are Schroders and Mesirow Financial. The older kyc.com boasts about 1,500 firms, including fund managers, corporations and banks as users with Pimco cited as a new user. FinOps could not obtain fee information from the three providers with which to make an apples-to-apples comparative analysis of the services and prices.
Although initially focused on KYC requirements for trading partners, Bloomberg sees the Entity Exchange utility as potentially useful in other document-sharing processes such as those required for meeting the Foreign Account Tax Compliance Act or creditworthiness. Broker-dealers and banks are obliged to check the creditworthiness of their hedge fund clients on an ongoing basis. The financial information they obtain from hedge fund managers is used to determine what credit lines can be extended.
Given Bloomberg’s track record in winning over asset managers to its order management platform AIM and other services, it has an obvious initial market for Entity Exchange. “Users of Bloomberg terminals, technology and other services will likely be the most interested in Entity Exchange,” says Virginie O’Shea, director of research for Aite Group in London. “Smaller-sized traditional and hedge fund managers with less appetite to deal with multiple vendors may consider adding the service rather than establishing a new vendor relationship.”
So far about 85 fund managers and broker-dealers have signed up to use Entity Exchange, says Matthies who would not provide any names. In Bloomberg’s press statement in late May announcing the new service, Fortress Investment Group in New York was cited as praising its benefits, but officials at Fortress did not respond to calls seeking comment.
What do hedge fund managers say? At this point, they might be attracted to the control offered by Entity Exchange, but they are also concerned about the problem of sharing documents with with sell-side users of the other two existing utilities. Five East coast fund managers contacted by FinOps brought up the issue that, even if they preferred the Bloomberg service, they would still have to use kyc.com and Clarient if any of their sell-side counterparties insisted. “We would obviously have to take the trading partners’ preference into consideration,” said one.
Since there is no apparent plan to enable the three services to interact — as in the post-trade matching space where the SEC is forcing cooperation among Omgeo, SS&C and Bloomberg — the bottom line is that some fund managers may have to work with all three. Unless Bloomberg can attract more sell-side firms to work with the platform, it will stay in third place.