AFME’s DDQ appears to have resonated with the industry as alterations lessen

Few alterations expected to be incorporated into the 2020 DDQ version in what is likely to be a welcome respite for many sub-custodian providers.

By Charles Gubert

Having undergone a series of painstaking adjustments and amendments over the previous four years, the Association for Financial Markets in Europe (AFME) network manager Due Diligence Questionnaire’s (DDQ) contents appear to have finally bedded down.

Consequentially, few – if any – alterations are expected to be incorporated into the 2020 DDQ version in what is likely to be a welcome respite for many sub-custodian providers.

“In previous years, network managers were keen to make changes to the DDQ, but I have not heard such requests so far this year,” said Alan Cameron, head of market strategy, broker dealers, at BNP Paribas Securities Services and chair of the AFME DDQ Task Force.  

“This is a positive development as I do not think it is necessary to make changes every year to the template. I think it is also reflective of network managers and the responding banks coming to grips with the DDQ and having a better understanding of it.”

Many sub-custodians had complained clients were tagging on a number – sometimes hundreds – of supplementary, proprietary, and frequently duplicative, questions onto the DDQ. A few providers – frustrated at the sheer level of detail that many of the DDQs were asking for – even threatened to charge clients for filling it out, a provocation which many network managers promptly shot down, owing to the saturation in the sub-custody market.  

Cameron said network managers are now adding fewer questions to the DDQ. “Whereas before, different business streams would add questions – about liquidity risk management, for instance – into the DDQ, they are now going through it in detail and reading the questions. Many of these business streams have now realised that the questions they were incorporating into the document have already been covered by AFME,” he said.

However, some very limited changes have been made to the DDQ’s cyber-security section. “We came to the conclusion that network managers simply do not have the expertise and technical proficiencies to ask sub-custodians about their specific cyber-security measures. Such matters are simply best left to specialised teams elsewhere within their organisations. Despite this, cyber-security could be a topic we return to in the next few years,” he said.

Central to the DDQ’s success will be its ability to adjust to market changes, not least technological innovation. The emergence of digital assets and crypto fund managers, for example, is a trend which many global custodians and broker-dealers are trying to find a response to. As more clients begin to invest in these digital assets, the DDQ will have to evolve accordingly. Nonetheless, Cameron said he had not seen any demand yet from network managers to incorporate questions about digital securities into the DDQ.