Oversight Pointers: Fund managers will soon have practical guidance for best practices in overseeing outsourced operations contracts with custodian bank, fund administrators and other post-trade service providers.
The ISITC, trade group representing operations specialists from over 100 buy and sell-side firms, is publishing a white paper with its recommendations in the fall. The guidelines, ISITC officials say, will include skill sets necessary for executives responsible for the monitoring work as well as the related documentation to prove their have done their jobs correctly.
How fund managers monitor their outsourcing providers is considered by regulators to be a critical aspect of controlling operational risk. The UK’s Financial Conduct Authority and the US Securities and Exchange Commission have called on financial firms to do a better job overseeing their outsourcing agreements.
ISITC’s recommendations will be based on research on how member firms oversee their third-party service providers, with the exception of technology vendors. The guidelines will include benchmarks to help fund managers evaluate whether their monitoring efforts currently lean toward one of two extremes: either relying too heavily on the quantitative metrics provided by service providers or repeating the exact same post-trade operations work in-house.
Pay-Back Time: Recompense may be on the menu for pension plans and other buy-side firms that were found to be overpaying the world’s largest custodian bank,for foreign exchange transactions. Settling an investigation by several US regulatory agencies, BNY Mellon has agreed to pay a US$714 million fine and terminate a number of employees.
About US$167.5 million of the fine will go to the state of New York to compensate victims, say state officials. The remainder will go to other federal agencies, such as the Department of Labor and the Securities and Exchange Commission, and to settle class action lawsuits.
The bank was accused of defrauding customers by misrepresenting just how it made money from executing their foreign exchange transactions. Custodian banks typically execute forex deals on behalf of fund managers to allow interest, dividends and proceeds to be paid in the home currency of the client. In that role, they are supposed to explain how the banks earn their money and at what price they executed the trades.
Apparently, BNY Mellon didn’t explain clearly enough and instead of giving its customers the “best rates” when executing forex trades, it gave them the worst or close to worst rates. It pocketed the difference for about ten years.
In admitting guilt, BNY Mellon says it wants to put the matter behind it and has agreed to terminate its head of product management David Nichols and an undisclosed number of other executives involved in the scandal. Nichols has admitted knowing that BNY Mellon did not fully disclose its pricing methodology to customers.
Collateral Boost: Bank and broker-dealer members of ICE Clear Europe, the European clearinghouse subsidiary of derivatives exchange ICE, can now take advantage of assets they have in international securities depository Clearstream to collateralize swaps transactions at ICE Clear Europe.
The benefit, say ICE Clear Europe and Clearstream, is access to more high-quality collaterat at a time when collateral is in short supply. The collateral will be shifted to ICE Clear Europe through Clearstream’s Global Liquidity Hub.
ICE Clear Europe is the ninth clearinghouse offering their members access to their assets at Clearstream. The others are BME Clear, CME Clearing Europe, Dubai Clearing Corporation, Eurex Clearing, EuroCCP, LCH.Clearnet, Oslo Clearing and X-Clear.
Helping Hand: Fund managers, broker-dealers and banks using Lombard Risk’s COLLINE platform to handle initial margin requirements for cleared swap and securities finance transaction can now do so for bilateral deals as well.
This enhancement to the platform follows the upgrade in October 2014 when Lombard Risk enabled users to define their own collateral optimization rules, generate real-time scenario analysis to manage collateral inventory, and speed up collateral substitution.
In calculating initial margin, COLLINE automates a typically manual process. The Basel Committee has just extended the deadline for when firms must start posting initial margin for bilateral swap deals to September 2016 from December 2015.
Lombard Risk’s platform centralizes collateral management from multiple applications and business silos. In addition to swaps, COLLINE handles repurchase agreements, securities lending deals, futures contracts and exchange-traded funds.
Freedom at Last: Alternative fund managers relying on TMF Custom House Group as their administrator will now be dealing with a newly named entity to handle their operational needs.
In a management-led buyout, Custom House Group has made its split with parent TMF Group official. Custom House Fund Services, as the business will now be known, will be owned by its chief executive Mark Hedderman and its director James Osbourne.
TMF, which will retain Custom House Group’s Luxembourg business, purchased the 49 percent of the Dublin-headquartered administrator it didn’t own in February 2014. At that time, TMF said that the deal was a unique and strategic proposition. It will now hold an undisclosed minority stake in the spin-off business.
Neither Custom House nor TMF have elaborated on the reasons for their divorce. The newfound freedom, say Custom House officials, will allow the firm to enhance its online reporting capabilities for fund managers, add staff, and provide more regulatory reporting services. Last year, the fund administrator launched separate reporting services to help fund managers meet the requirements of FATCA and AIFMD.
Custom House has been eager to promote its expansion in Asia-Pacific, a new back-office technology platform and the consolidation of its operations in Sofia, Bulgaria from three locations — Chicago, London and Singapore. Most of the US$30 billion in assets under administration at Custom House are in offshore domiciled funds.