Regulations Create Client Onboarding Headaches for Swap Dealers

Terry Flanagan

New requirements under the Dodd-Frank Act require swap dealers to obtain more information about their clients before entering into a transaction.

The new requirements as mandated by the Dodd-Frank business conduct rules, which will be effective from January, expand and complicate the onboarding process. The rules have been established to define how a swap dealer must onboard a new counterparty.

Many organizations have legacy issues related to onboarding, such as existing regulatory requirements—Patriot Act, Know Your Customer and Anti-Money Laundering—people and paper-intensive processes, competitive pressure to onboard rapidly and data silos.

Henry Hilska, director of strategy practice, Virtusa

Henry Hilska, director of strategy practice, Virtusa

“The addition of these requirements to meet the Dodd-Frank mandate will certainly exacerbate the legacy issues,” said Henry Hilska, director of strategy practice, at Virtusa, a Massachusetts-based IT consulting firm.

The Dodd-Frank Act, which promises sweeping reforms to Wall Street, has created a set of external business conduct rules that must be completed prior to entering into a transaction with a counterparty.

The rules require that the swap dealer obtains and verifies the principal name and nature of the business of a new counterparty, perform a suitability check and determine the eligibility and legal status of the counterparty.

“Dodd-Frank mandates that the swap dealer is familiar with the counterparty, understands their investment goals, determines that the product in question is suitable for that counterparty and their goals, and has identified the eligibility and legal status of the counterparty,” said Hilska. “In addition to gathering the responses from the counterparty during the onboarding process, the swap dealer must obtain affirmation of the responses in writing.”

The regulations on account opening make no distinction between those swap dealers that self-clear or have an affiliated futures commission merchant, and those that do not, which is also known as ‘fully-disclosed’.

“Though most swap dealers remain self-clearing, the regulators have made no exceptions for fully-disclosed organizations,” said Hilska.

The Foreign Account Tax Compliance Act, or Fatca, a 2010 U.S. law that targets tax dodgers using foreign accounts, will also impact on the operations, processes and systems related to onboarding.

“The onboarding process will be required to identify whether a client is liable to pay taxes in the U.S. under the Fatca regulations,” Hilska said. “It will require that client onboarding, payment and reporting systems are enhanced to deliver the information that is mandated by the IRS [Internal Revenue Service].”

Account opening is also a major pain point among financial advisors at U.S. broker-dealers, according to a report by Boston-based consultancy Aite Group.

Fully-disclosed broker-dealers have less mature account opening processes compared with self-clearing broker-dealers, particularly in the areas of workflow automation.

According to Aite, more than 60% of advisors that work at self-clearing firms surveyed say that their brokerage account opening solution tracks and enables account and product approvals workflow, while fewer than 45% of advisors with fully-disclosed firm indicate that their solution provides this capability, according to Aite Group.

The onboarding process can apply to applications as well as people, as with the newly-launched Bloomberg App Portal from financial data vendor Bloomberg, which gives Bloomberg subscribers access to a range of specialty applications that are developed by software companies, financial institutions, academics and other third parties.

The Bloomberg App Portal enables Bloomberg subscribers to enhance their user experience by adding specialty features and tools that complement those available on the Bloomberg Professional service.

The Bloomberg App Portal team, a division of Bloomberg’s Enterprise Products and Solutions business, follows a formal application review and selection protocol.

Once selected, application developers receive technical and business support from the Bloomberg team as part of an onboarding and software quality assurance process.

“Software developers with a great idea, but limited global reach, can work with Bloomberg to get in front of financial professionals around the world virtually overnight,” said Stanley Young, chief executive of Bloomberg’s enterprise products and solutions business, in a statement. “Our intention is to complement Bloomberg’s existing functionality with third-party applications that enable our clients to achieve success.”

Currently, there are more than 45 applications available on the Bloomberg App Portal across a variety of categories including, data analysis, news and research, portfolio management and risk analysis, valuation and pricing, data visualization and technical analysis.

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