Client Lifecycle Management (CLM) is pervasive in capital markets. But as market participants rightly use it to focus on their clients, are they overlooking a key set of partners?

When it comes to financial market infrastructure (FMI) – exchanges, clearing houses and custodians – the answer is often yes. While firms’ clients are benefiting from sophisticated CLM tools, processes and data, their essential FMI partners often receive little attention in the CLM function.

And that could create a host of problems, from misallocated revenue to excessive manual workarounds. But with correct partner categorization and flexible data processing, solutions are possible.

Not all partners are created equal

Challenges arise because FMI relationships have very different requirements to client relationships and are usually managed by different teams. For example, FMI interactions call for a much greater focus on managing nostro/vostro account reconciliations, selecting vendors, performing regulatory due diligence and clearing and settlement at central counterparties. On top of this, handling FMI partners usually falls within the remit of the back office (whereas client relationships are typically dealt with by sales or the middle office).

If these unique features aren’t reflected in the CLM function’s reference data quality standards and database structures, banks risk miscategorizing their FMI relationships – and creating a series of avoidable problems:

• Wasted Know Your Client (KYC) effort. FMI partners need less KYC due diligence than clients—treating them the same leads to wasted effort and throw-away costs.
• Revenue misallocation. Revenue could be mistakenly allocated to the wrong account across the trade lifecycle and not credited to the order-placing entity, leading to incorrect P&L data. And that means disgruntled sales teams/traders who do not accurately accrue their bonus pot.
• Off-boarding by mistake. Compared to client accounts, FMI partner trading activity could make an account look inactive. If misclassified, these apparently inactive FMI accounts can be wrongly off-boarded, creating significant issues for the clearing and settlement of trades.
• Manual workarounds. To mitigate these issues, firms often maintain offline lists of FMI partner accounts. But this is just a sticking plaster – and usually creates costly and inefficient manual rework around reconciliations and exceptions.
• Missed innovation opportunities. Without an ability to accurately reflect their FMI relationships, firms are missing opportunities to unlock value through analytics – whether that’s in the better allocation of capital, collateral to clearing houses, or prime brokers based on credit risk. Consider also the potential market insights across custodians and geographies, and better understanding of stock ownership and placements.

The solution? It’s all about the data

So how can firms fix their CLM approach to FMI partners? There are two key steps to get started. First, reference data models should allow for the correct categorization of each counterparty. An entity-level record should be able to handle multiple “sub-roles” (client, clearing house, custodian etc.).

Second, data and data processing should be made flexible by role. So, for instance, a client role will need full KYC data, whereas a central counterparty role will only need settlement instructions. This enables more straight through processing throughout the stack with correct data flowing from a single “golden” source of truth.

By correctly separating out FMI roles from client roles, banks can apply the right treatment to their FMI-related activities. That means no off-boarding FMI partners by mistake (and thus preventing clients from trading). It means proper allocation of revenue allocation with a full picture of all the entities involved in a transaction. And it means avoiding the wasted effort of unnecessary due diligence.

All good news. But in fact, correctly categorized reference data could help banks go even further and unlock hidden insights about their counterparts. And that opens up the possibility of exploring new and innovative solutions for clients and partners.

Ultimately it comes back to reference data. Get that right, and firms can elevate the investment banking experience for their clients, for their FMIs and for their employees.

Much could therefore be achieved with further collaboration between FMIs and investment banks to move the dial in formalizing reference data standards for their unique characteristics.