Transfer Agency Monitoring: Update on Benchmarking Individual Respondents

How the programme developed in its first five years

From the outset of this third-party monitoring programme in 2012, Thomas Murray rapidly found itself accumulating what is possibly the world’s most detailed and best data and qualitative information set on one of the world’s least well-known cogs in the workings of the global financial system, transfer agents. Like any machine, when a single cog breaks down, so does a large part of the mechanism.

Transfer agents fall below the bar of what the global authorities consider to be a market infrastructure institution like a national payment system or central securities depository, and are for the most part outside the perimeter of national regulatory authorities as well. And yet, as is true for most of them, their critical functions involve receiving and making payments for public funds, and maintaining share ownership registries for those funds. These are not small matters.

The regulatory question that led Thomas Murray to expand its services by providing third-party monitoring of transfer agents (‘TAs’) came about indirectly. The TAs themselves are not regulated specifically by most capital markets authorities; instead, the obligation arose indirectly: it is a regulatory requirement that the clients of TAs who rely on those critical services must themselves be assured of the soundness of these ‘cogs.’ To restate the point, it is the clients of TAs who have the need for Thomas Murray to approach the transfer agents to collect and assess information, and report back to them.

As a further sign of the complexity of today’s compliance environment, the regulation which triggered the monitoring need came from the European Commission. Given the interconnectedness of the global funds industry, any TA even indirectly involved with EU assets in public funds found itself caught in the reporting net wherever it is in the world.

With the need identified, Thomas Murray set about to form a working party to draw up a bespoke questionnaire that would solicit and organise the information required from respondents, the TAs themselves. The depositary banks, management companies, and ICSDs gave Thomas Murray the list of their transfer agents to contact jurisdiction by jurisdiction, and away the project went.

Five years on, the programme has issued over ten thousand questionnaires to nearly two thousand TAs in over fifty jurisdictions. Each year, the quantity and quality of the data has increased. TAs have become more comfortable with the programme and using Thomas Murray’s efficient and secure online platform. In actuality, the devastating impact of the regulations predicted by some in the industry has not materialized to nearly the extent anticipated.

As TAs have become more accustomed to the questionnaire requirement, a major side-benefit is that relationships between the depositaries and the TAs have developed where none existed before. There appears to be a better understanding of what TAs do and how they do it; and the flow of information and cooperation between entities has increased transparency. That should mean more security and assurances for investors.

The Evolution Towards Benchmarking

An interesting consequence of the programme is that TAs have become increasingly curious about their sector and the standing of their own services compared to their peers. From the outset, TM guaranteed confidentiality to all TAs, assuring them that their data would be completely safe and secure on the system. It was clear that the respondents would not be forthcoming with the information without solid guarantees of privacy and confidentiality.

Interest in the world of TAs was itself a new thing. The segment had been left alone to manage its own business. Perhaps due to the relatively low margins, it seemed more bureaucratic than business-like. The advent of AIFMD and UCITS V were universally unwelcome. Criticisms were voiced publicly that the regulators did not understand what TAs did, and that the regulations bordered on persecution!

Five years on since we began the programme, it has become significant that TAs have begun to ask about the data held, and if there was a possibility that any peer group analysis might be available going forward. In retrospect, the concept of benchmarking was an obvious consequence of collecting structured data. Now, with the information fields, experience, and above all confidence earned, the ancillary benefits of the regulations begin to be realized: Thomas Murray is now ready to provide TAs with a complimentary jurisdictional analysis. It seems like good courtesy to thank the TAs which provide the data in the first place. Thomas Murray overlays the individual TA scores and flags against the jurisdictional analysis, highlights of which are shown below.

The Question of the Moment

Every six months since the project’s launch, Thomas Murray has convened a user group to which it reports on world-wide findings, and with which it plans next steps for the programme. The goalposts for information gathering continue to move, and so the baseline questionnaire has to be adjusted accordingly by the Group.

In response to both TA and working party requests in 2016, TM synthesized and anonymized a segment of the data to begin to establish viable benchmarking for individual respondents relative to their peers world-wide. It is one thing to know more about one’s own work, which is what the monitoring service has done up till now; and another also to learn how one is performing relative to the global community.

This first elementary benchmark attempt focused on applying a tried and trusted methodology used in other areas of TM’s business on the data held in the TA databases. It both scored and flagged responses by individual TAs in selected jurisdictions and produced a rudimentary benchmark across five pre-determined risk categories:

  • Financial Risk
  • Operational Risk
  • Data Protection Risk
  • Concentration Risk/Separation of Duties
  • Conflicts of Interest

These areas drew key criteria information from throughout the questionnaire accumulating tranches of data and applying the methodology, creating overall and category benchmarks. By utilizing this process the results produced two analyses: an overall scoring summary and flag summary. This was then filtered by the data held in the most frequently utilized jurisdictions. The chart on the right is the result of the scoring summary.

Perhaps the most obvious characteristic of this chart is that the average across all markets is reasonably similar. No one market offers an extremely poor or satisfactory service and even Norway and Sweden’s relatively low scores can be safely explained after further analysis. However, the overall average is quite low and indicates there may room for improvement. Of course, there are TAs in these markets that may have achieved a score closer to a 100% and others lower than 50%, but in general, these markets fare moderately well across all five risk categories.

The next analysis looked at, was how much of the TM questionnaire was completed, in general, by TAs in the key markets. The real question being asked here is, “Are there jurisdictions that customarily provide less information than others?”

This is important as the quality of the due diligence analysis produced is intrinsically based on the quality and quantity of data provided. If a TA only completed part of the questionnaire, then the depositary would be unable to complete its required due diligence. This leaves it exposed until such time as they can convince the TA to provide data to fill in the picture, supporting the due diligence process.

This chart on the left shows that the average for completion across these markets is about 87%, which is adequate. However, all depositaries would naturally prefer a higher percentage. Incomplete information has regularly caused issues with the programme; we are beginning to see the depositaries involving their underlying investors in negotiations with some TAs in an effort to get cooperation and/or increased information.

The honeymoon period for under-reporting TAs appears to be over. More depositaries are taking action with intransigent TAs. Disinvestment, redemption, waiver of liability contracts are now options for depositaries as they become more anxious about their liability exposure.

That stated, the majority of TAs approached freely provides a sufficient percentage of data to allow the depositaries to meet their regulatory deadlines.

Of the five risk areas covered in the analysis, the Conflicts of Interest chart presents some especially interesting scenarios. As well as scoring the data and averaging the result, the methodology assesses which scores awarded are high, medium or low risks in each risk category. So the question being asked in this chart is, “Which jurisdiction receive the most red or medium flags for the conflicts of interest category”.

The results are scattered, but the average remains quite low, in our view, at around 45%. The methodology has identified a number of key criteria issues with areas relating to this category in some jurisdictions.

This chart could clearly relate to the second chart above, as by default where no response is provided by the TA, the methodology automatically assigns a high risk flag. Therefore, for example, TAs in the Isle of Man may customarily neglect to respond to these questions, whereas TAs in Hong Kong are more forthcoming. The results could also be cultural and based in some innate aspect of the jurisdiction or region.

Whatever the reason, flags thrown up in this risk category should be seen as a concern. Improvements in either responding or service provision need to be made.

For a first attempt at a benchmarking, TM has been surprised at the consistency of results; and equally, at the low standards in some areas. It is hoped that the analysis TM is offering to TAs may be a step towards general improvement in the operations of this segment, and a beginning of thinking about establishing a best market practice scale. This would give some standardization to the provision of services in this disparate sector. It must be borne in mind that these post-trade services were launched and grew in such diverse national circumstances and ways of operating that direct comparisons in the way they are structured and operate simply would not give the information. Some TAs are part of large multinational operations, others are very small shops. Some are on-shore, many are off-shore.

The benchmarks must take the diversity of this population into account. As 2017 draws to a close, Thomas Murray is refining the information to be sure that the benchmarking is clearly understood for the value it provides, as well as the limitations inherent in it.


The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: Transfer Agency MonitoringTAsTransfer AgentsBenchmarkingRegulationcomplianceDepositary BanksDepositariesAIFMDUCITS V