DTCC Connection

Jun 21, 2016 • DTCC Connection

Effective Data Management: Key to Protecting HK’s Financial Center Status

By Donna Milrod, Managing Director and Head of DTCC Solutions

As one of the globe’s key financial centers, Hong Kong continues to face the threat of money launderers and other criminals targeting its financial institutions.

In fact, reports of suspicious financial transactions to the city’s Joint Financial Intelligence Unit have steadily risen over recent years, topping 42,500 cases last year alone. This is up from 23,000 cases in 2012 (see Figure 1).

Figure 1: Suspicious Transaction Report Received

Effective Data Management: Key to Protecting HK’s Financial Center Status

















Source: Joint Financial Intelligence Unit, Hong Kong Government 2016*

* Editor’s note: as at April 30, 2016

Eight years on from the global financial crisis, many regulations, such as Know Your Customer (KYC), Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), Organized and Serious Crimes Ordinance (OSCO), and the United Nations (Anti-Terrorism Measures) Ordinance (UNATM), have focused on trying to prevent crimes like identity theft, fraud, money laundering and terrorist financing. The overarching goal of the new mandates is to increase transparency across the financial markets in order to lower risk for all industry participants.

While the aims of these new rules are clearly beneficial for the industry, underlying investors and society in general, they have also led to an increase in operational complexity and compliance costs for financial institutions operating in Asia today due to the need for these institutions to collect and manage large amounts of data. Many firms are finding it challenging to effectively cope with this fast-changing risk management landscape, especially because Asia consists of a series of fragmented markets where institutions often manage data in silos as a result of the evolution of their systems and local regulations.

In this environment, data management is top of mind for most financial institutions across the region. A survey by Aite Group in late 2014, commissioned by The Depository Trust & Clearing Corporation (DTCC), found that C-level executives at these firms are concerned about the increase in financial penalties for non-compliance with KYC requirements and sanctions. This is not surprising – record-breaking fines have been levied against companies for non-compliance.

For investment managers, hedge funds and corporates, the lack of standardization caused by individual banks and broker-dealers independently interpreting these regulations and implementing slightly different policies results in duplicative, inconsistent and time-consuming processes that ultimately delay trade readiness.

Today, most firms worldwide leverage a mix of manual processes, home-grown solutions and vendor systems to manage key client data. In many cases, they do not have a single location that provides all of their counterparties with the required legal entity data and documentation needed throughout the life cycle of a trade, such as KYC/AML documents, third-party forms, account agreements, trade documents, regulatory forms and tax forms.

Donna Milrod, Managing Director and Head of DTCC Solutions
Donna Milrod, Managing Director and Head of DTCC Solutions

A More Efficient and Cost-Effective Approach

There is growing recognition among institutions that client on-boarding and client reference data do not offer a competitive advantage because most of this required information is largely the same for all firms.

This has led to the increasing acceptance and adoption of the utilization of client data and documentation. Industry-owned and governed data and documentation utilities provide a centralized, secure platform to access, manage and store critical data in a single location. Utilities streamline communications between market participants and their clients, creating a more efficient process.

Research from Aite on entity data management showed 88% of firms are considering a utility model to simplify and standardize the client onboarding and lifecycle management process to replace the fragmented, error-prone and manual processes that are prevalent in client entity data management today.

Unlike siloed data collection, a utility provides the highest level of control, standardization, accuracy and data privacy for client data and documents, including on-boarding, KYC and data required throughout the client life cycle. Utilities also provide single interfaces for users to contribute their data and documentation into one portal for both on-boarding and ongoing client data maintenance. Additionally, it minimizes the number of times an underlying client needs to submit their information, since they can permission multiple sell-side firms to access their data and documents from a central location.

By bringing greater efficiency to these processes, firms can improve satisfaction and business relationships, accelerating a client’s ability to trade and helping to facilitate regulatory compliance. In short, the utility concept takes friction out of the system.

The generation and collection of data will continue to present challenges to all financial institutions, how they overcome them will determine their competitiveness in the market. A centralized utility will enable institutions to dedicate their resources and staff to their core and profit-generating businesses while bringing on new markets, products and clients safely and seamlessly.

What is clear is that more efficient and transparent management of data and documentation will help to safeguard Hong Kong’s reputation as an international financial center by better managing various forms of risk. Industry-owned and governed data utilities are a key part of meeting this challenge.

This article first appeared in Fintech Innovation on June 17, 2016.

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