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A sea of questionnaires
A sea of questionnaires
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A sea of questionnaires

07/02/2018

Alan Cameron

Alan Cameron

Head of Brokers Market Strategy, BNP Paribas Securities Services & Chair of the AFME Due Diligence Questionnaire Task Force

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It's a win-win for AFME’s standardised due diligence questionnaire

Financial institutions such as global custodians, investment banks and brokers are now required to show their regulators that they are duly diligent when safe-keeping their clients’ assets. To do so, most financial institutions send their custodians a due diligence questionnaire (DDQ) to investigate the risks that may endanger such assets. Although the information required by each financial institution is similar, each has individually developed its own DDQ for completion by their custodians. Additional questions were often added, sometimes to do with service levels, legal or commercial terms.

Eventually the whole custody chain became submerged in a sea of DDQs. Those sending them became frustrated that responses were often late and inaccurate whilst those completing them found the scope of the DDQs unclear and the questions poorly structured.

AFME to the rescue

The industry’s frustration with DDQs was expressed at the Network Managers forum in Dubrovnik in 2015. Most of the institutions sending and replying to DDQs are members of the Association of Financial Markets in Europe (AFME). In response to their members’ request, AFME formed a taskforce to look into this matter. Most of the world’s major financial institutions joined this taskforce which ultimately decided to compose an industry standard DDQ that could be sent to ‘direct’ or ‘sub-custodians’.

The objectives for the AFME DDQ were clear

  • It would be market (not client) specific – each receiving custodian should have to complete it only once
  • The DDQ should cover at least 80% of the questions that a sender wants to ask
  • The DDQ would be freely available to all, from 2017

 The taskforce met regularly throughout 2016 and the AFME DDQ was available on the AFME website from December 2016.

What is covered by the AFME DDQ?

The AFME DDQ is comprehensive and has five sections:

  • Credentials: About the organisation providing the service
  • Asset safety and custody: Covering (a) regulations, laws and practices (b) accounts (c) Central Securities Depositories (CSDs) control and reconciliation and (d) physical holdings
  • Risk mitigation: The largest section covering (a) controls and audit (b) IT, disaster recovery and cyber security (c) business continuity (d) financial crime prevention and (e) data protection
  • Systems: Including (a) reporting (b) plans and (c) protection
  • Core services: Broken down into (a) settlements (b) asset servicing and taxation (c) stock lending and (d) client services

Although every effort has been made to keep the DDQ as short as possible, it is still a large document with more than 300 questions. However, many questions are close-ended and can be answered by ‘yes’ or ‘no’ and the DDQ often looks for changes that have occurred in the last 12 months rather than seeking a full description of a subject.

Progress so far

The DDQ has been in use for over a year now. “AFME is extremely encouraged by the take-up of the harmonised questionnaire,” commented Stephen Burton, Managing Director, Post Trade at AFME. “Most leading global custodians and investment banks are using it.’ An updated 2018 version is now available with an additional section extending the scope of the DDQ to include global custodians and international central securities depositories (ICSDs).

Most users appear happy with the DDQ. “We have been pleased to contribute to and benefit from this initiative” commented Beatriz Molina, Global Head of Network Management at BNY Mellon. “Receiving focused responses to standardised questions will allow us to streamline our processes on sub-custodian risk monitoring”.

However, there are still some banks not using the DDQ and we are keen to get them to do so. It is free and available to all on AFME’s website. Users are asked to not change the questions or the order. If more information is needed then they should add additional questions.

Early evidence suggests that more than 80% of the DDQ questions of banks are covered in the AFME questionnaire. At a time when our industry hunts for any remaining efficiency opportunity, adopting the new standard is a win-win approach.

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