CASE STUDY

CASS Governance Implementation for a Global Universal Bank

“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

PrefaceThis 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

Cognizant led a multi-disciplinary team to develop a robust, tailored and scalable solution framework to manage and safeguard client assets.

2 | CASS GOVERNANCE IMPLEMENTATION FOR A GLOBAL UNIVERSAL BANK

BackgroundIn response to the financial crisis of 2007-09 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.

SynopsisThe 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.

3CASS GOVERNANCE IMPLEMENTATION FOR A GLOBAL UNIVERSAL BANK |

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 ChallengesWhen 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 FrameworkWe 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.

4 | CASS GOVERNANCE IMPLEMENTATION FOR A GLOBAL UNIVERSAL BANK

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

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 SolutionCASS 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, non-

functional, and technical requirements.

Subsequently, we mapped project

implementation and management processes to

develop a scalable and tailored CASS solution

framework.

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 www.cognizant.com or follow us @Cognizant.

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