This was published 9 years ago
Banks pool efforts to know their customer and avoid crisis
By Shaun Drummond
Global banks are working together to cut the costs of keeping tabs on who their clients are and who they are trading with in an effort to avoid another credit crunch.
Paula Arthus, chief executive of Omgeo, a global company owned by the US market post-trade utility, the Depository Trust and Clearing Corporation (DTCC), said banks are working together to store data to avoid another credit crunch like the one that followed the global financial crisis and collapse of Lehman Brothers in September 2008.
"Regulatory regimes are very focused on greater transparency and surveillance since the GFC," Ms Arthus said. "One of the fundamental issues is to have a very precise identification of counterparties, which the Lehman bankruptcy showed was critical."
The collapse of Lehman Brothers led to 75 separate bankruptcies of Lehman entities around the world and hit thousands of other financial institutions that were exposed to the company, in many cases via over-the-counter derivatives trades that the institutions themselves did not know they had made.
On Wednesday the DTCC and its global bank owners came out with Clarient, a central database of client information that banks can check when signing up a new customer. This is an extension of so-called "legal entity identifiers" introduced in the United States under the Dodd-Frank act and in Europe under EMIR (European Market Infrastructure Regulations) to automate the identification of companies.
Five banks – Barclays, JPMorgan, Goldman Sachs, Credit Suisse and State Street – are the first to contribute data to Clarient. The DTCC itself will also use the repository and other financial institutions are expected to begin using it soon.
Later in 2015 this will be combined with DTCC's Client Reference Data and Enrichment service. This collects counterparty information on derivative trade reporting under EMIR's requirements.
Ms Arthus couldn't put a figure on how much the banks are saving by working together, but said it was "several orders of magnitude" less than if they had each set up similar systems by themselves.
Licensed by ASIC
The G20 countries' mandate to centrally report over-the-counter hedge positions after Lehman's collapse has led to DTCC's global expansion. The DTCC was set up 40 years ago by US-based global banks to record exchange-traded equity and fixed-income trades. It now performs many of the functions of the ASX for the vast number of exchanges there, including clearing of equity trades.
A decade ago reporting of trades in the now infamous credit default swaps derivatives was added. The crisis data on foreign exchange, interest rate and commodities derivatives was included as credit default swaps were the only ones authorities found they had reliable data on to gauge bank exposures during the GFC.
In September 2014, the DTCC was the first to be licensed as a so-called trade repository for OTC derivatives by the Australian Securities and Investments Commission.
The DTCC will store Australian derivatives trade data in one of its global data centres in Singapore. To avoid duplication of repositories and trade data on global trades, ASIC signed a memorandum of understanding with the Monetary Authority of Singapore for it to oversee the facility on its behalf.
Ms Arthus said any banks will be able to sign up to use Clarient and it would be relevant to Australia's banks as they update their own systems to comply with new anti-money laundering and counter-terrorism financing rules that come into force on January 1.
A spokeswoman for the Australian Bankers' Association said it was too early to comment on local banks' plans.
The Australian Transaction Reports and Analysis Centre said: "We note that although banks may use commercial databases to assist them meet the customer due diligence requirements of the AML-CTF [Anti-Money Laundering and Counter-Terrorism Financing] Act and rules, the obligations for reporting and other requirements under the AML-CTF Act remain on the banks, not the commercial providers of the databases."