21 September 2015

Transparency in Securities Transactions and Custody Chains

A review of transparency in securities transaction and custody chains with a focus on the benefits and costs of securities accounting systems finds that omnibus and segregated account systems as well as hybrid systems that bridge the two offer benefits to their respective users as well as disadvantages. While there has been increased United States (US) regulatory scrutiny of the omnibus account in terms of the potential for it to be subject to misuse by persons subjects to sanctions or individuals wishing to access the US securities markets in an illicit manner, issues with effective cross-border operation of the segregated account in an intermediated chain and economies of scale mitigate against their wider use in capital markets. In either case, it has not been demonstrated conclusively that absent robust anti-money laundering (AML) and sanctions screening on the part of financial institutions either the omnibus account or segregated account or a hybrid version thereof is no longer fit for purpose.

Without regard to what type of account structure is being used to comply with know your customer (KYC), the industry is very conscious of the need to ascertain as much customer information as is possible on transactions while respecting data protection and privacy rules and to effectuate somehow the ability to “know your customer’s customer”, although with respect to this latter point more progress needs to be made. In conjunction with this review, a May 2015 survey of the ISSA membership (32% response rate) undertaken by Coventry University reveals that there is significant interest in the issue of transparency in securities transactions and custody chains. For details of the survey results see Appendix A.

by Sina Yekini, Stuart Weinstein

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