Sub-custodians face backlash over added DDQ charges

Some sub-custodians have witnessed a dramatic increase in the number of questions being asked in their due diligence questionnaires.

By Charles Gubert

Debate is raging across sub-custodians as to whether they levy additional charges on clients for answering detailed supplementary questions tagged onto the AFME (Association for Financial Markets in Europe) DDQ (due diligence questionnaire), an idea which is unlikely to elicit much – if any – sympathy at globals or broker-dealers.

The AFME DDQ’s origins can be traced back to NEMA 2015 in Athens when the industry reached common ground and decided to push through with an initiative to standardise network managers’ DDQs in an effort to rationalise the due diligence process for both the provider and client.

While a standardised DDQ template was delivered, its creators failed to predict that network managers would pump the document with additional, proprietary questions. One provider said they had seen an 80% increase in the number of questions being asked in DDQs, which somewhat defeats the purpose of the entire endeavour.

It appears that many of the bolt-on questions in the supplementary section are organisation-specific or are being asked in anticipation of future changes instead of focusing on immediate business priorities. In response, some sub-custodians have touted the idea of being remunerated for filling out the add-ons.

DDQs need to cover an increasing amount of ground in order to satisfy different business divisions within a global custodian or broker-dealer, whether it is internal audit, vendor management or compliance. It is the role of the network manager to ensure that all of these stakeholders’ concerns are addressed in the DDQ.

One idea being circulated among sub-custodians could be to facilitate meetings between these internal teams at the client and their equivalents at their providers. While potentially time-consuming and amplifying the risk of duplication, it would negate the need for sub-custodians to charge their clients for the DDQ.

Other firms simply view the supplementary questions as a necessary evil to win and retain mandates. A provider speaking at The Network Forum in Cape Town, said that enhancements to the DDQ were simply a by-product of the increasingly thorough due diligence being undertaken by network managers.

In a highly saturated market, network managers are unlikely to swallow the idea of being charged for conducting rigorous due diligence. At the same time, however, the framers of the DDQ need to recognise that the template may simply be too commoditised for an industry operating across multiple, diverse markets, each with their own unique risks and regulations.