What is the key to success in capital markets onboarding?


In a recent whitepaper by RegTech firm iMeta, the company outlined the chief routes to success in capital markets onboarding. 

Capital markets present a unique set of challenges when it comes to onboarding clients and facilitating seamless transactions. The complexity arises from various factors, including the nature of the products themselves and the intricate web of regulations and systems that govern their trading. To navigate these complexities successfully, financial institutions need to master the art of capital markets onboarding.

A first key area, iMeta highlighted, was the complexity of products and regulation. Capital markets deal with a wide range of financial products, including derivatives that carry additional risk. These products are subject to specific regulations, often requiring firms to meet certain size and business criteria before they can transact them.

This means that small funds or individual traders may face restrictions in trading complex products such as credit default swaps.

Moreover, the onboarding process for structured products, such as leasing an aircraft, involves considering multiple entities beyond the primary client. Special purpose vehicles, arrangers, sponsors, and obligors all need to be evaluated and included in the onboarding process.

Additionally, different trading systems and jurisdictional variations further complicate the process. Certain products may only be traded on specific systems in particular regions, requiring careful consideration of where and how transactions can take place.

Proposed CRD VI rules in Europe may introduce further complications for European entities engaged in capital markets activities, potentially adding to the complexity of onboarding processes.

Another area of focus is tied credit lines and trading systems. Many capital markets products require a tied credit line, meaning that credit becomes a critical factor in the onboarding process. These products are often traded on different trading systems, each with its own jurisdictional limitations.

For instance, a bank’s London entity may facilitate trading in metals, while its French entity may not deal with metals but focuses on derivatives. Such variations in trading systems and jurisdictions create additional hurdles for seamless onboarding and trading.

The mapping of products to trading systems and settlement systems is not always straightforward. Fragmentation and inconsistencies exist across banks and jurisdictions, making it challenging to establish a linear relationship between products, trading systems, and settlement systems.

iMeta also sees complex entity types and legal challenges as a key area. In capital markets, various entity types, such as funds and funds-of-funds, introduce further complexity. As investors engage with a specific fund, their investments may be distributed across multiple products and locations, each subject to different regulations. Legal teams often face significant challenges in dealing with bespoke contract formats, as they are typically detached from the wider onboarding process and resistant to adopting technology-driven solutions.

According to iMeta’s legal survey, the onboarding process comprises two major obstacles: KYC (Know Your Customer) and legal/credit issues. While KYC represents 50% of the problem, the other 50% is attributed to legal and credit complexities, with legal being the primary culprit. Implementing process improvements that involve legal teams can be met with resistance and a lack of accountability, hindering the efficiency of the overall onboarding process.

Fragmented systems and lack of integration also hold a key area of focus. One of the significant challenges in capital markets onboarding is the fragmented nature of existing technology solutions. The initial vision of a comprehensive tool that could streamline the entire onboarding journey has been scaled down to primarily focus on KYC and client onboarding. This leaves out critical functions such as credit, legal, and operations, which are essential for preparing customers to trade effectively.

As a result, financial institutions often find themselves engaging with multiple teams and using outdated systems and manual processes. The account setup process can become lengthy and convoluted, leading to a mismatch between the completion of onboarding and the readiness of products for trading. Additionally, making changes to settlement structures or dealing with more complex products further exacerbates the challenges, requiring additional workarounds and elongating the onboarding process.

To read the full whitepaper click here.

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