CASS Governance Implementation for a Global Universal Bank

Transcription

1 CASE STUDY CASS Governance Implementation for a Global Universal Bank Cognizant led a multi-disciplinary team to develop a robust, tailored and scalable solution framework to manage and safeguard client assets. In an ideal world - where markets worked perfectly and everyone behaved in a selfless way that served the common good then perhaps no regulator at all would be required. But that is not the world in which we live Client Stakeholder Preface This case study looks at the specific compliance challenges encountered during the implementation of the CASS framework for a global universal bank. Cognizant was engaged to tackle these challenges. The case study outlines the programme of work deployed at the bank together with an analysis of the benefits realised. CASE STUDY AT A GLANCE Regulatory imperative to protect client assets in the aftermath of the global financial crisis Client faced multiple control issues in relation to cross-border / inter-entity transactions Phased assessment and implementation approach driving multiple solutions within a single programme framework End-to-end process reengineering, supported by a comprehensive automation of reconciliation platforms Material increase in transaction auto-matching rates, significant reduction in operational risk and attendant losses

2 Background In response to the financial crisis of the Financial Conduct Authority (FCA) introduced significant changes to the rules that govern the conduct of investment firms when handling client money and custody assets. The objectives of the revised rules focused on improving firms systems and controls around segregation, record keeping and reconciliations. As a result, the FCA now requires investment firms to provide clear reporting of how client funds are handled and where client assets are located. A key area of regulatory challenge for investment firms relates to the FCA s rules regarding Client Assets Sourcebook (CASS) compliance, with the FCA due diligence team having identified the following key requirements: Clients to be confident that their assets are being held by firms with robust client asset controls as well as strong risk management. Clients to be assured that their assets are safe and will be returned within a reasonable timeframe in the event of firm failure. The UK market to be regarded as a safe place to conduct business and encourage market entrants. The protection of client money and assets has become a key priority for the FCA. It is therefore vital that investment firms have robust client asset management systems and controls in order to prevent serious financial consequences to customers and counterparties, as well as significant reputational damage to the firm, the FCA and the wider UK marketplace. Synopsis The CASS framework solution supports compliance with the FCA CASS rules and coordinates with non-european Economic Area (EEA) legal entities. The framework ensures that any overlaps between the CASS rules and local client money/asset protection rules are understood, and complied with. The CASS rules apply to all FCA regulated firms in relation to activities conducted in the UK and in other EEA jurisdictions but its scope can extend beyond Europe. 2 CASS GOVERNANCE IMPLEMENTATION FOR A GLOBAL UNIVERSAL BANK

3 The primary objectives of the CASS framework solution can be summarised as: To protect clients of investment firms, should the firm become insolvent. To protect the use of client assets by firms unless clients have specifically agreed to their use. To reduce the risk of loss of client assets due to negligence, inadequate reconciliation procedures or administration errors. Increased operational control with a standardised approach and a single view across the entire organisation. Enhanced operational efficiency through a better investigation of exceptions and a more precise segregation process. Improved reporting and greater analysis for continuous business improvement. To ensure that the appropriate guidance and safeguards are in place to meet the CASS RP 48-hour document retrieval requirement. To allow firms to stay abreast of regulatory changes in relation to the management of client assets. Compliance Challenges When our client, a global universal bank, opened cross-border custody accounts, it did not correctly reflect the investment banking entities that were responsible for the assets in the accounts. The bank was also required to set up appropriate legal arrangements with these companies. In addition, a Correct Account Naming Convention was required to identify appropriate parties and to clearly reflect the name of the entity the assets were held under. These deficiencies breached the FCA s client asset rules that firms should have adequate management, systems and controls (Principle 3) and properly safeguard client assets (Principle 10). In response to these challenges the FCA recommended that the bank undertake the following actions: Ensure that it implements and maintains adequate policies, procedures, monitoring and controls in relation to the opening and naming of external custody accounts. Maintain a complete and accurate record of its role in the custodial chain and external custody accounts. Ensure that account details are captured in the static data and sub-ledgers of each entity accurately, and in a manner consistent with the way in which the assets were held. For safe custody assets held in 95 external accounts with third-party sub-custodians: (i) make adequate arrangements to safeguard clients ownership rights; (ii) ensure adequate protection for the safe custody of assets; (iii) ensure all necessary legal agreements were in place. Adequately review arrangements for the holding and safekeeping of the safe custody assets. Apply restrictions to right of the third-party sub-custodians to claim a lien, and restrict rights of retention or sale over the assets. Conduct internal and external reconciliations in relation to client accounts. Solution Framework We were chosen as the overall partner to implement the CASS solution for the bank. The client s CASS implementation initiative encompassed the following key delivery phases: Discovery: Key activities included requirement gathering, business case creation, setting up of a team to govern the implementation/ communication protocol and define a target timeframe for delivering a fully functional, end-to-end, CASS process. CASS GOVERNANCE IMPLEMENTATION FOR A GLOBAL UNIVERSAL BANK 3

4 Assessment: We studied the CASS requirements in detail to evaluate their applicability to the client s business model and to quantify the potential impact of the identified changes. Execution: The key to successfully executing CASS implementation was the cross border and cross-functional coordination of different streams of work engaged in impact assessment, planning and gap analysis. Substantiation: The implementation encompassed quality assurance, definition of the programme framework structure, validation of policies, procedures, documentation and creation of user roles/responsibilities. We approached the bank s CASS challenge by organising business requirements into common themes for implementation. The themes encompassed diverse functional requirements which were aligned to distinct programme tranches and phases, resulting in a range of tailored solutions. Among the themes that created implementation challenges were data management, reconciliation, record keeping and retrieval, documentation, concurrent integrations and third party product features. Some of the key solution components which Cognizant co-developed with the bank to meet the CASS requirements can be summarised as follows: One-click CASS: Increased regulatory overheads, together with a greater operational scale and scope, meant that it had become significantly harder to maintain the use of manual processes to support the segregation of client money and assets. End-to-end processes were time consuming, expensive, and prone to human error, which led to regular compliance failures. The objectives of one click CASS were to introduce accountability and transparency to every aspect of the process. Key deliverables included i) internally audited CASS RP documents which contained the latest client money reconciliations; ii) a list of custodians where custody assets are held, made available for the auditors on a real time and on demand basis. Throughout the lifecycle, transactions are monitored through user interfaces to enable views monthly accrual calculations, aggregated cash and stock balances at a business entity and account level. Reconciliation Solution: Key reconciliation challenges were addressed by i) validating transactions against messages and the enrichment of harmonised data; ii) determining the segregation of client money and assets automatically through business rules and iii) the seamless allocation of transactions and annotations between departments to prevent cash/stock shortfalls. Through a market-leading third-party reconciliation product, we reengineered legacy reconciliation solutions, significantly improving controls over client assets by introducing greater standardisation into reconciliation processes. Under the new system the number of items automatically matched increased from 77% to 95%, resulting in significantly fewer manual interventions and exceptional resolutions. This was supported by a comprehensive downstream communication of balances to a centralised hub where CASS aggregations and segregations at the entity level were calculated. Robust integration of systems and processes around the CASS architecture helped to seamlessly traverse cash and stock transactions to dedicated compliance portals. The system controlled workflows, business rules, trigger notifications and dashboards which enabled compliance officers to monitor CASS oversight operations. The Benefits With the successful implementation of a CASS framework solution, our client now has a scalable means of monitoring and reporting on client assets whilst fully complying with all sections of the policy statements prescribed by 4 CASS GOVERNANCE IMPLEMENTATION FOR A GLOBAL UNIVERSAL BANK

5 the FCA. We developed integrated solutions to sustain compliance in a risk-managed way whilst managing communications with the regulators. With deployment completed, the bank has benefitted from the following: One stop shop to retrieve CASS resolution packs which contain sets of documents and records to be furnished to auditors and/or regulators. Early identification and diagnosis of any shortfalls in relation to both client money and assets. Improved senior management oversight and the early mitigation of potential risk exposures. Users of the CASS architecture can rely on cleansed data which is passed through logical CASS-compliant processes to be uploaded on monthly basis. Access to book keeping records and accrual data to dedicated individuals (CF10a-CASS oversight operation function) who are responsible for overseeing operational effectiveness. Strong CASS monitoring processes to help identify changes, which can then be addressed by the CF10a in a timely manner. Creation of auditable supporting documentation and archiving solutions. Use of interactive technology to support accrual returns. CASS workflow and reporting to CF10a, business lines and operations in real time. Defined roles and responsibilities and agreement of service level agreements with sub-functional streams. An increase in auto matching rates, of trades, settlement and payments reconciliations, increasing from 70% to 95%; this has delivered process management by exception, resulting in reduced operational risk. As a result of reconciliation system instances reduced from twenty to eight, the real-time reporting of client/firm asset positions has been further enhanced. This has led to a more streamlined and effective process of CASS reporting. Towards a Successful CASS Solution CASS has evolved into a core regulatory framework, which has impacted all areas of the financial services industry. CASS is now viewed as fundamental to market stability and compliance since this framework is closely monitored by the FCA and other regulatory bodies. As a result, all financial institutions are required to implement robust and transparent CASS solutions To meet this regulatory imperative, we believe that a holistic, end-to-end solution approach is necessary to properly address the breadth and complexity of the CASS framework. A successful CASS solution and implementation approach must therefore accommodate both the scale and complexity of client organisations by encompassing processes, procedures, roles and responsibilities, disparate technologies and blend them seamlessly to meet the CASS regulatory imperative. The solution needs to be sufficiently flexible and configurable to accommodate future changes to both the client s business model and CASS regulations. CASS compliance for our client represented a huge business transformation exercise, with our functional experts and business analysts working closely with the client s business teams from early in the engagement to elicit and develop detailed business requirements. We undertook extensive analysis to properly understand the client s functional, nonfunctional, and technical requirements. Subsequently, we mapped project implementation and management processes to develop a scalable and tailored CASS solution framework.

6 The UK & Ireland Banking and Financial Service Practice is built on a client-first mindset and a proven ability to turn informed thinking into practical, measurable value. This focus is underpinned by deep industry domain expertise across the Retail Banking, Capital Markets and Cards & Payments sectors. Our capabilities range from core technology, to consulting, infrastructure, data management and outsourcing services. Increasingly we are the strategic partner of choice, helping clients navigate the shift to become the digital institutions of the future. Today we work with four of the top five UK banks, nine of the ten top European banks and fifteen of the top twenty North American financial Institutions. For more information visit: infouk@cognizant.com ABOUT COGNIZANT Cognizant (NASDAQ-100: CTSH) is one of the world s leading professionalservices companies, transforming clients business, operating and technology models for the digital era. Our unique industry-based, consultative approach helps clients envision, build and run more innovative and efficient businesses. Headquartered in the U.S., Cognizant is ranked 230 on the Fortune 500 and is consistently listed among the most admired companies in the world. Learn how Cognizant helps clients lead with digital at or follow World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ USA Phone: Fax: Toll Free: European Headquarters 1 Kingdom Street Paddington Central London W2 6BD England Phone: +44 (0) Fax: +44 (0) India Operations Headquarters #5/535 Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, India Phone: +91 (0) Fax: +91 (0) Copyright 2017, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means,electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.