14 DecAccount ownership. A hiding place for unexploded bombs

This week’s post is inspired by a comment on inter-company trades; last week’s topics. Inside banks, in all the automated processing, it is the humble “account” that owns the transactions that are booked. The history of banks is filled with sudden discoveries of accounts that were not reconciled and had loss making positions or were used to hide fraud.

Fundamentally accounts can either be internally or externally owned. The FX trader has an account, or two or more; that is quite clearly internally owned. My own account at Credit Suisse is quite clearly externally owned. I have to review it and reconcile it. Making sure that all accounts are properly accounted for is though no easy task.

Some banks use the term “client” to refer to anybody they do business with. In day-to-day work, that is understandable. From a process perspective a little more precision is needed. Imagine for a moment that you are at say Citibank, London and you deal with two clients: Duck & Dive Ltd and Deutsche Bank Frankfurt. Duck & Dive buys and sells German government bonds and holds their cash and securities positions with you at Citibank. Deutsche is always your broker on the other side of these deals for Duck & Dive. Deutsche look after their own positions, taking delivery of what you sell them and delivering what you buy. On the statement front, the following is going to happen:

Duck & Dive: will get a statement from Citibank and it is up to them, and to their Citibank relationship manager to review activity and balances. This is externally owned.

Deutsche Bank: will not get a statement from Citibank. Or, if they do, they will certainly ignore it. They are completely indifferent to how Citi “keep score” internally. All they care about is that trades settle. This is internally owned.

This can go quite wrong:

You say “my account”; I say “your account”

In days past at Goldman Sachs there was a very active business trading warrants. We would sometimes exercise warrant positions for the Goldman traders. Say for example we were exercising CHF, Swiss Franc, warrants on a Japanese stock such as “Sekisui Chemical”. The process required us to deliver the warrants in Switzerland and then in Japan to pay the requisite amount of JPY versus a delivery of the corresponding number of shares. Sometimes payment was independent of the delivery, something referred to as “free”. With the same agent, normally one of the big banks, we may also have delivered rights on Swiss stocks or even sold the rights. Internally at Goldman, we would keep track of this in the traders’ accounts and an internal transit account. As far as the agent’s process was concerned, how they tracked things was a question of “Mind over matter”; we didn’t mind how they did and their approach did not matter.

Then one day, we received a phone call from SKA, the Schweizerische Kreditanstalt, the forerunner of today’s Credit Suisse. “Hello, ve hev some questions about your account viz us.” The account that this person wanted to discuss with me was not one of our Nostros or Depots, but an account to which they had been posting entries, in multiple currencies, to reflect all the exercises and rights transactions. Their view of life was that it was our, Goldman’s; account and they had unexplained balances. The person involved actually sent me over a copy of the statement, which turned out to have all manner of postings, both for things I could recognise and for stuff that I could not. Their view was 180º degrees round from how we looked at it. Clearly, the process in the Swiss bank had two sins: firstly, they thought it was ours so would expect us to review and reconcile it and secondly, there were all manner of postings to the account. We rather pointedly made it clear that since Goldman Sachs had not opened the account or requested it be open, it was up to them to keep score and we were not going to be involved in investigating or explaining the balances in the account. As far as we were concerned there were no pending, or open transactions.

Not for nothing was there a local nickname for the then Schweizerische Kreditanstalt; the Schweizerische Krisenanstalt, or Crisis Institution. Not much has changed.

Lessons to be Learned:  An external account can only be one where a person or legal entity has formally requested you to open the account for them. Otherwise, it is an internal one. All the internal ones have to be owned by a Relationship Manager or by Operations Control if they are for internal processing purposes.

Happy holiday season to all and best wishes for 2015.

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