Appendix G: Order Handling IRS Section Report Example

G1.   PARTICIPANTS (EXPERIENCE, INTERVIEWERS)

G1.1   Experience

Frantz M, RM (Relationship Manager)

Olga P, RM

Carl M, PM

Tom H, ED (Execution Desk)

Sylvie P, MO (Middle Office)

G1.2    Interviewers

IRS Reference

PM

Facilitator

Key Figures 20 Relationship Managers distributed by geographical region

200 new clients per year

60 clients closing their accounts

Client call frequency (3–5% daily, 10–20% weekly, 50% monthly, 100% 6 months)

15% (ca. 400) managed portfolios (relatively big)

85% RM controlled portfolios

20 standard portfolios correspond to Benchmark

Bloomberg Security Prices 1 day old

G2.   SECTION SCOPE, PRODUCT, AND PURPOSE

Current interview was conducted in the IRS Section comprising all departments/functions occupied with the execution of an order, for example:

•  PM (Portfolio Manager) performing enhancements to managed portfolios

•  PM monthly preparing list of recommended products

•  RM contacting or being contacted by a client in order to improve the client’s portfolio

•  MO preparing the execution of orders or actually executing fund orders and small FOREX

•  Small FOREX is less than $20,000 USD

•  MO handling cash transactions in and out of portfolios

•  ED making agreements with brokers

•  ED executing all orders and FOREX

G2.1    Main Functions

G2.2    Organizational Relationships

PM, RM, or MO prepares orders with anonymous client information and security information for handling by ED.

ED communicates with brokers and banks in order to purchase or sell securities, funds, currency positions, and options on the best possible terms.

MO communicates with CSAM concerning fund deals.

MO uses Bloomberg exchange rates for small FOREX deals.

ED handles all other FOREX and negotiates more favorable rates directly with banks.

PM uses information from HQ, Bloomberg, and many other sources for the preparation of the monthly Recommended Products List.

PM uses client information from RM in order to establish the best possible portfolio strategy for the client.

RM communicates with the client in order to get a complete understanding of all the decision parameters used by the client. The client attitude is highly dependent on the market situation, the performance of the client’s profile, and the client’s own situation.

G2.3    Product and Purpose

RM establishes a client profile without revealing the identity of the client. Only the RM knows all decision parameters of a client and only a limited set of these parameters are visible in the client master data. The most complete knowledge about the client’s profile (age, citizenship, occupation, country of origin, requirements regarding access to the portfolio values, current risk profile, etc.) is required in order to be able to establish the best possible portfolio profile for the client.

A client’s portfolio can contain any combination of equities, equity equivalents (options), bonds, bond equivalents, cash, currency positions, and precious metals (silver, gold) eventually partly financed with loans.

RM and PM maintain the portfolio combination of securities, etc. in such a way that it complies with the requirements of the client and with the overall risk policy.

Currently the RM and PM recommend and choose primarily securities with bank coverage, which gives the highest probability to fulfill the client’s expectations.

In the longer term, the bank will establish strategies, which target on having a certain percentage of given products in all portfolios. Such products can be Protected Investment Notes (10-year certificate with long/short strategy with capital protection) or Alternative Performance Certificates with long/short strategy without capital protection, for example, selected based on the age of the client.

The general attitude is that what is good for the client is also good for the bank. The bank would never expose a client to unnecessary risk or recommend less optimal behavior by the client in order to optimize short-term profits. Currently this policy is visual in the fact that the cost of a deal to the bank and to the client in terms of commissions and/or curettage is not visible to RM, MO, or ED during order processing. ED can negotiate special commission conditions for major deals, but normally negotiated conditions apply. RM can give clients special conditions, but again normally standard conditions apply.

The overall purpose is clearly to optimize the portfolio performance within the constraints defined by the RM and the client.

RM receives commission based on both requisition and revenue objectives.

G3.   AVAILABLE INFORMATION AND ITS USAGE

G3.1    Prepare Client Profile

RM is the only link to the client.

RM develops client information in communication with the client. The RM acquires and collects the material, which identifies and describes the client, and which defines the client margins (commission on transactions and interest difference from central bank rate on current accounts). A client can have very specific commission conditions, which are marked with a code on the client checklist.

CSU uses the paper-based client checklist information from RM for input into client files, which are protected from access.

RM maintains personal client information in a paper-based client file. LCD approves the client information and the client account opening.

Client information relating to portfolio handling (deals, corporate actions) is the agreement on margins (tariffs) applied to the different transactions. This information is used in the system to calculate and book commission for contribution calculation in accounting.

RM e-mails changes to client static data to MO.

RM can make a pledge agreement with a client, which allows PB to sell securities in order to ensure that the client’s pledge value is not exceeded in situations with declining portfolio position values (client credibility).

G3.2    Evaluate Securities Markets

PM surveys the securities markets using analysis and recommendations from HQ and other available sources. Security price information is updated by BO (Back Office) Static Data automatically from Telekurs (BO corrects Telekurs transfer errors manually). These errors are caused by securities traded on more than one stock exchange in more than one currency.

G3.3    Prepare Recommended Products

PM produces a list of recommended securities monthly to the RM.

G3.4    Prepare and Evaluate Portfolio Strategy

PM maintains standard portfolio profiles corresponding to different portfolio strategies relating to the client risk profile. There is a portfolio strategy for each supported currency ($, €, SFR) and some strategies have mixed currencies.

PM maintains managed portfolios risk profile and portfolio strategy. RM handles the client risk profile concerning the portfolios controlled by the client. PM can support the initial establishment of a portfolio.

G3.5    Evaluate Portfolio Performance

PM ongoing evaluates that their managed portfolios perform according to the established strategy by controlling that the combination of portfolio positions comply with the strategy.

In cases of portfolio non-compliance with the strategy, positions are changed by selling and purchasing positions.

G3.6    Transfer Cash In/Out of Portfolios

RM controls all cash delivered by a client to his portfolio. The client must prove that the cash is legally obtained according to the control rules concerning white washing. It is practically impossible to get cash approved according to these rules. Normally only registered bank checks or transfers from a client-owned bank account are accepted. LCD must approve in-payments directly from clients.

Cash is normally received by SWIFT in BO, who prints the SWIFT message and sends it to MO for booking.

MO books the accepted cash on the client portfolio against NOSTRO. MO validates outgoing payments, which are booked by Cashiers Desk. Cash is normally sent by SWIFT in BO.

BO handles payments concerned with settlement.

RM (or PM concerning managed portfolios) handles client’s requirements for cash payments (transfers). BO (SWIFT) does the physical transfer or, in rare cases, the Cashiers Desk does it.

G3.7    FOREX

ED performs major FOREX deals (>200,000) and will often negotiate special exchange rate with counterpart (most often a bank).

MO performs smaller FOREX deals using Bloomberg standard exchange rates.

SEM is used for FOREX.

G3.8    Cash Deposits

RM, PM, and MO initiate cash deposits (on behalf of clients):

•  Manual deposits are not renewed automatically.

•  Automatic deposits are moved to a new period automatically.

MO books the deposit on the client portfolio. MO sends a list of manual deposits to the RM every day.

ED makes the deposits per currency defining rate, period, currency, and margin every day.

G3.9    Prepare Security Order

RM prepares all types of security orders except for funds. All RM communication with the client is recorded on tape.

MO prepares all types of security orders received in writing from a client and fund orders.

PM prepares all types of orders concerning managed portfolios. Purchase and Sale Security Order types comprise:

•  Equity and equity equivalents

•  Bonds and bond equivalents

•  Derivatives

The static security data in SD is the primary source for security information, but the information system does not comprise complete information. Telekurs transmitted list with end of day prices from the day before are available to RM, MO, and PM.

SD only contains limited client information and no portfolio information. No one has access to complete client information because much client information is hidden in personal paper-based files.

RM and PM use primarily Bloomberg updated prices (these are 1 day old) or they get spot prices directly from the used broker or depositary. RM and PM do not have online access to real time security prices, but they do have access to Bloomberg dealable prices, which brokers are willing to deal at.

RM, PM, and MO book their security order in SD, which generates a window with the order at ED. Basically the transaction and price is not 100% safe before the order has been validated, reconciled, and approved in BO prior to final settlement, which is also done by BO.

RM, MO, PM, or ED cannot see the full contribution from an order before it has been booked and approved in BO.

G3.8.1    New Securities in SD

In cases where the security is not in SD, the order is executed with a preliminary (provisional) value number (static security data have two alternative keys: internal number and ISIN code, where the ISIN code is the link to external information from, e.g., Bloomberg and Telekurs).

In all circumstances, the order is written out on paper by ED (or MO for fund orders) and e-mailed to BO, where it is validated, where detailed information is added in IBSY, and where it is finally approved and settled.

G3.8.2    Derivatives

Derivatives such as OTC are used primarily to protect the value of portfolio positions and to increase the income from these positions. Commission on derivatives is much lower than on other security transactions.

Buying and selling derivatives follow the same workflow as other securities. The deviation from normal shares is that derivatives represent those and that the derivatives value depends on the development of the share price. Furthermore, the execution conditions are different for European (can only be executed on the due date) and American (can be executed on any date before or on due date). Derivatives come in 2 types:

•  Exchange options (stock prices available)

•  Over the counter (OTC) issued through ING

BO handles execution of derivatives automatically. This is not visible in the portfolio.

Under normal circumstances derivatives are not executed. It is especially seldom that clients choose to execute a derivative, but it can happen under conditions with fast rising or falling share prices. In order to be more reactive to execution opportunities and threats, a new list showing development in underlying share prices is currently under internal development. RM informs the client about execution of client portfolio derivatives based on information from BO. If a client asks RM to execute a derivative, BO performs the actual procedure after RM request.

Derivative Executions are time-consuming and there are examples where underlying shares have been traded when they have been used for execution.

G3.8.3    Limited Orders

Limited orders are time-constrained and price-constrained sales or purchase orders. Limited orders are automatically deleted after deadline.

G3.9    Execute Security Order

The ED who expedites the order from RM, MO, or PM tells this to the other ED by yelling (in order to avoid that other ED starts expediting the same order).

MO executes orders from HQ and funds.

ED reports the agreed security price and other conditions back to the RM by e-mail or phone (normally within a few minutes).

The RM can then confirm the price to the client. The RM checks the cash position of the client in IBSY. Sometimes actually received cash has not been booked in time and is therefore not visible to the RM. Lombard is not visible on the client portfolio.

G3.10    Execute Fund Order

Fund orders are prepared and executed by MO.

G3.11    Execute Security Transfer (Close Account)

MO handles the preparation of security transfers out of portfolios when accounts are closed or caused by, for example, corporate actions or simple collection of same security on same depository on a portfolio.

When account closings are involved, MO must have access to the original instruction.

The transfer is documented on paper, which is sent to BO for the physical handling of the transfer (SWIFT). Afterward, MO verifies that BO acted as required.

G3.12    Deliver Ad Hoc Portfolio Reports to Client

MO produces ad hoc portfolio reports to clients.

G4    REQUIRED INFORMATION, CURRENTLY NOT AVAILABLE

G4.1    Prepare Client Profile

Client conditions (margins) are showed only by codes, which are not easily memorized. Code translation is only available on Excel spreadsheet.

Complete client relationship documentation is not available in an easy accessible form for RM although all client RM communication is recorded.

Documentation used or produced in connection with client relationship incidents are not logged with reference to this incident.

G4.2    Evaluate Securities Markets

G4.3    Prepare Recommended Products

G4.4    Prepare Portfolio Strategy

G4.5    Evaluate Portfolio Strategy

G4.6    Evaluate Portfolio Performance

Only limited time series data is available for performance statistic calculation (e.g., it is impossible to separate the different movement types [value gains, capital change, dividends/interests] on portfolios without using artificial pricing in connection with free transfers and corporate actions such as dividends paid with shares).

G4.7    Transfer Cash In/Out of Portfolios

Cash is normally received by SWIFT in BO, who prints the SWIFT message and sends it to MO for booking. This procedure is time-consuming and can result in wrong cash availability on a portfolio, which can prevent an agreed deal from being approved.

G4.8    FOREX

G4.9    Cash Deposits

G4.10  Prepare Security Order

The RM or ED cannot see the calculation of the contribution from a given deal before the deal has been booked and approved (in BO).

The RM has no access to Lombard from the client portfolio, which means that the RM cannot control the client cash position completely.

RM does not get information about deletions of limited orders. RM should be triggered in order to be able to ask the client whether a prolongation or renewal is required.

G4.11    Execute Security Order

The Stock Exchange information in securities static data is not reliable, which can result in selection of a wrong depositary, which is very costly to correct.

A security should have only one depository account for the same portfolio.

G4.12  Execute Fund Order

G4.13  Execute Security Transfer (Close Account)

MO has no access to known planned corporate actions while closing an account and transferring its positions.

G4.14    Deliver Ad Hoc Portfolio Reports to Client

The delivered portfolio evaluation from MO is often not correct and does not correspond to what the RM can see.

G5.   VALUE OF REQUIRED INFORMATION

The RM access to timely and reliable information about security prices and client cash position gives the RM much better opportunities to react fast to client transactions requirements.

Timely information about derivatives execution risk gives a better understanding of the client portfolio risk situation and makes it possible to react fast on execution risks and opportunities.

Consistent, complete, and valid information on portfolios and about securities makes it possible to react faster and more precise on the market development in order to optimize the portfolio performance.

G6.   INFORMATION FLOW

To Order Handling (departments)1	From Department/External
Client Order (RM, MO)	Client
Account Closing	RM, LCD
Order Approval	BO
Security	BO
CASH TRANSACTION	Client
CASH DEPOSIT (RM, MO)	Client
loan request (RM)	Client
Client (RM)	Client
Account Opening	LCD
Order Confirmation (ED)	Broker
Maintained by Order Handling (departments)
Client (RM)
Standard Portfolio (PM)
CASH DEPOSIT (ED)
Client Order (RM, MO)	ED
Client Order (ED)	BO
ORDER CONFIRMATION	Client
CASH DEPOSIT (RM)	Client
MANUAL CASH DEPOSIT (MO)	RM
Loan Request (RM)	MO
Client (RM)	CSU, LCD
Account Opening Request (RM)	LCD
Order Confirmation (ED)	BO, RM

G7.   SUGGESTED ENHANCEMENTS TO (IT) SYSTEMS

Client information should be complete on IT especially for RM, while protected from other access.

All client communication should be logged and available to RM, as well as communication between client and PM or BO, when this is relevant.

The minimum fee on security transactions is not automatically guaranteed. The e-mail information to RM is not smart. RM needs complete cash position and portfolio evaluation for a client at any time.

The reconciliation of cash transactions (especially received checks) takes too long, which gives unreliable cash position information from the portfolio. RM has no access to transaction details, but MO does.

MO can see a corporate action, but the corporate action is not related to the underlying security, which should be the case.

Derivatives must be handled correctly in IT in order to avoid deals on underlying positions in execution situations.

USWHT must be handled correctly in IT avoiding incorrect bookings and tax deductions in connection with corporate actions and deals.

G8.   SUGGESTED INTEGRATION OF SYSTEMS

RM needs faster access to realistic or guaranteed security prices in order to be able to respond immediately to client demands.

DS should be integrated with IT for full cash position on portfolios.

SD and IT should be better integrated with well-defined common data avoiding unnecessary double maintenance of the same information and errors.

Corporate actions must be visible on portfolios as soon as they are reported to BO and registered in order to avoid erroneous transactions on involved securities.

G9.   EXPECTED BENEFITS FROM ENHANCEMENTS

Better portfolio performance (PM, RM, MO).

More satisfied clients based on faster access to reliable portfolio information such as full visibility of transaction status and planned corporate actions (RM, MO).

Better contribution from overall business activity based on better foundation for portfolio maintenance (PM, RM).

G10.   SUGGESTIONS FOR (NEW) IT SOLUTIONS

New corporate action solution integrated with IT.

DS solution integrated with IT.