A safe approach to growing your loan book in wealth management

Wealth Management Lending

A safe approach to increasing your loan book.

Wealth Management Lending – Grow your loan book

© 2012 Rockall Technologies Confidential Page 2 of 12

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CONTENTS

COLLATERAL MANAGEMENT TODAY 4

A UNIFIED APPROACH TO MANAGING NON-PURPOSE LOANS 5

TOP 5 BUSINESS BENEFITS 6 1. Maintain or grow your loan book in a risk averse manner. 6 2. Enhance client retention 6 3. Minimize potential losses 6 4. Reduce cost – capital and overhead 6 5. Satisfy regulation and internal audit 7

HOW DOES UNIFIED AUTOMATION ACHIEVE THE BUSINESS BENEFITS? 8 Accurate Pricing of Collateral 8 Rules for Eligible and Ineligible Securities 8 User Defined Advance & Collateral Discount (margin) Rates 8 Concentration Monitoring 8 Monitoring, Communication, Margin Calls and History 9 Regulations & Compliance 9 Management of Cross Collateralization 9 Abundance of caution or non liquid assets 10 Chaos Prevention 10 Automated Annual Review 10 Automated reporting 10 User Profiling and Audit trail 11

ABOUT ROCKALL TECHNOLOGIES 12



Collateral Management Today The management of non-purpose loans is presenting financial institutions with significant challenges. However, the advent of automated and integrated collateral management systems not only addresses these challenges but also creates opportunities for lenders to reduce risk and costs and grow their loan books.

Today many financial institutions deal with multiple disconnected systems to manage non-purpose loans (sometimes known as accommodation loans or Stock based Loans). A non-purpose loan is a loan issued by a retail/private/wealth bank typically collateralized by a portfolio, or multiple portfolios, of liquid assets such as equities, bonds, futures, warrants, commercial paper and cash, usually held at the brokerage or trust division of the bank or a 3rd party bank. The collateralization of these is often managed manually or semi-manually with a series of spread sheets or rudimentary systems. Institutions must establish positions, make ‘margin’ calls, and apply different discount/haircut rates to get precise pricing for collateral. This is a highly manual effort that is very inefficient and is open to risk.

The proper management of a large number of non-purpose loans requires an institution to operate a fully automated and integrated unified collateral management system that calculates position in real time (or near to real time). With a unified system managing its loan book, a financial institution can protect itself from loss and can enhance the way it services non-purpose loans. Rockall developed its STOC software to provide that exact capability for financial institutions.

Institutions that want to grow their loan book and institutions that have a significant book of non-purpose loans already and want to manage their risk more efficiently from a people and capital requirement perspective need to consider improving their technology. The organisations that have already addressed the challenge are achieving their goals by using a unified approach to managing collateral.



A unified approach to managing Non-Purpose Loans

A unified approach to managing collateral and non-purpose loans brings together all of the processes for managing customer positions into a single solution, including:

– loans (commitments or outstanding balances), – collateral eligibility rules and collateral discounting rules (haircuts), – position monitoring (LTV/Margin), – regulations (e.g. Reg W 23 a/b. Reg U), – resolution management, – relationship management; and – credit review

A unified solution consists of a central system that allows for the configuration of business rules, has workflow capabilities, and integrates with other systems in the organization.

• It links to the key external systems such as trust and brokerage systems, loan origination and/or loan servicing and exposure systems as well as cash deposit systems.

• It calculates discounted (haircut) value of collateral based on user defined rules which are based on bank policy and can be adjusted / customized for individual customers and exposures.

• It brings client exposure and collateral data together, including cross collateral positions, so client positions (e.g. out of margin, concentration breaches) can be tracked automatically. In simple terms it monitors the LTV (loan to value) position. It also facilitates speedy and safe credit reviews.

• It supports regulatory monitoring such as Reg 23W a/b and Reg U.



Top 5 Business Benefits

1. Maintain or grow your loan book in a risk averse manner.

A unified solution that provides the up-to-date value of collateral vs exposure enables a financial institution to grow its loan book first and foremost by proactively offering risk averse loans to its client base. Many organizations only reluctantly sell non-purpose loans as they have to treat them as non-secured loans. Using a unified solution that provides the up-to-date value of collateral vs exposure enables a financial institution to grow its loan book by proactively selling risk averse loans. Automated collateral-value data enables the institution to track loan to value (LTV) ratios easily, so it can lend on a low risk basis. With the data and monitoring provided by a unified system, an organization can seriously leverage securities portfolios to proactively sell non-purpose loans with minimal risk.

2. Enhance client retention

In some situations a financial institution’s clients are looking to sell portfolios or part of their portfolio in order to raise capital. If an institution can offer a low risk alternative that uses these portfolios as collateral for loans, it will retain clients both from a brokerage point of view and potentially from a retail banking perspective. The key is to ensure that a financial institution retains clients and does not have its clients selling portfolios unnecessarily to raise capital.

3. Minimize potential losses

As a financial institution’s loan book grows, significant management oversight is needed the risk increases, both monetary and reputation. Without a quality tracking system, a financial institution is exposed to losses. With the comprehensive tracking and alert functionality of a unified system, an institution can quickly react to potential loss and significantly minimize the institution’s risk.

4. Reduce cost – capital and overhead

With a unified solution a financial institution will reduce Loss Given Default (LGD) by being in a position to treat non purpose loans as fully secured loans. This will in turn reduce the capital provision requirement and effectively reduce the cost of the loans. The finding across the market is that without a unified system this type of lending is that quite often treated as unsecured and hence more expensive from a capital provision perspective.

Also with real time monitoring the organization can ensure the default is kept to a minimum by proactively working with clients where default is threatened.

The efficiency of a unified solution also results in significant cost savings arising from the reduced manual effort in establishing positions and carrying out credit reviews.



5. Satisfy regulation and internal audit

With a unified solution addressing the key regulations Reg H, Reg 23W a/b and Reg U a financial institution will avoid unsatisfactory audit findings.



How does unified automation achieve the business benefits?

Accurate Pricing of Collateral

Having accurate pricing of a client’s collateral is critical. A unified solution pulls pricing from brokerage or account sources or external sources such as Bloomberg and Reuters to get up-to-date information to calculate the actual value of the collateral. Typically, the customer has some connection to trust or brokerage data. Through the unified approach, all of this data is in one place. Then the data from these feeds is used to calculate timely up-to-date value of the collateral. This allows the institution to track margin positions and customer positions automatically.

Rules for Eligible and Ineligible Securities

With a unified solution financial institutions can set up rules that define what is acceptable and what is unacceptable collateral. Customer portfolios often contain securities that are deemed ineligible, such as low dollar value assets (e.g. Stocks < $5), and without automated tracking a financial institution can inadvertently allocate value to these assets which in turn will yield a misleading overall position.

User Defined Advance & Collateral Discount (margin) Rates

It is highly recommended that any financial institution with a large number of non-purpose loans should deploy a solution that allows for fine grain control of advanced rates or haircuts. Defining advance rates or haircuts at a granular level controls how a security can be valued from a margin perspective. A financial institution can apply haircuts to various asset types and the asset typing should be flexible and extendable. For instance there can be multiple types of Bills/Bonds (e.g. Maturing in greater than 5 year or less than 5 years) or Equities (stock price greater than $5 or less than $5 ) or municipals or exchange traded funds or corporate bonds and many more. Over and above asset typing the ability to examine the attributes of an asset is important. For instance, for bonds, different haircuts can be applied based on the ratings or even maturity of the bonds.

Most organizations like to treat some private clients on a customized basis whereby they may wish to apply different (from standard policy) eligibility rules or advance rates or haircuts based on the relationship with the client. A quality collateral solution should provide for this.

Concentration Monitoring

It is important that a portfolio does not have an over concentration of a single asset type or types in the event that there is a market dip for that asset type which can result in a sudden under collateralized position. There should be the ability to monitor the concentration of an Asset Type within a loan and the ability to measure concentration within a single portfolio or across multiple portfolios. There should also be the ability to apply a cap to ensure that no asset type or CUSIP can exceed a percentage of overall value.



Monitoring, Communication, Margin Calls and History

A key benefit of a unified solution is monitoring. A good unified system measures the loan-to-value position and flags if a case is out of margin or if the value of the collateral after the haircut or discount is not covering the exposure. Monitoring by the unified solution also comes into play with clients that frequently border on margin. For these cases a financial institution can set up watch lists. As the client nears the margin position or the out-of-margin position, an alert is generated.

The system provides the financial institution with the information to inform their clients of why they are out of margin, exactly what has occurred, and how many times they have been out of margin in the past.

It is critical that a financial institution is on top of a “margin call” in real time so each client can be contacted and fully apprised of the situation. A unified solution can automatically make margin calls either by sending an alert to an employee at the financial institution to contact the client or by sending a notification directly to the client. Some financial institutions prefer to be prompted so they can make an interactive, personal call, while other institutions prefer to have the system automatically issue an email to the client outlining the position of the collateral.

As we know, good accurate and clear communication with a client, especially in difficult situations, is very important. Good communication means having all of the information that is required readily available. In addition, a good unified solution automatically generates the required correspondence and sends it via email or prepares it to be sent via standard mail.

Regulations & Compliance

Other processes that would be managed by a unified solution are regulations and communication. The key regulatory aspects of non-purpose loans are Regulation U for margin loans, and Regulation W 23 a/b for loans made to directors or loans that involve stock of an organization. Another important regulation in the United States is Supervisory LTV [loan to value], which is basically reporting on LTV. A unified approach can be configured to react on an exceptions-basis to issues that involve these regulations.

Management of Cross Collateralization

Another key aspect of full automation is managing cross collateralization, which is quite prevalent in the wealth management/commercial lending world. Cross collateralization is a situation that occurs when one piece of collateral or one portfolio is securing multiple loans. It is important that collateral that is securing multiple loans does not inadvertently get released when one loan is paid down. It is also important that the allocation of collateral to each loan is managed according to the policy of the bank e.g. seniority of loan, age of loan, highest value loan.



Abundance of caution or non liquid assets

In some cases a non purpose loan can be secured by non liquid collateral assets, e.g. Real Estate, Vehicles, Vessels, UCC’s etc., as well as liquid collateral. Often the non liquid collateral is taken as abundance of caution but nevertheless its value must be monitored.

Chaos Prevention

One of the critical aspects of having a unified solution is to ensure that if there is a significant market dip, like the one that occurred in 2008, that chaos does not occur.

A good fully automated and integrated unified solution tracks the entire loan book and provides triage. In other words, it identifies the highest risk cases (high risk clients or high risk in terms of value), and monitors those cases to ensure that the higher risk items are resolved first.

For example, one of our clients had a very significant loan book, and before they implemented our system, there was absolute chaos in terms of trying to track the overall position of the institution’s loan book. Since our system has been installed, their ability to react quickly to market problems [fluctuations/dips] minimizes their risk. As a result, their losses have been very small. Of course, there are going to be losses if portfolios decrease significantly in value, but the ability to react quickly allows the institution to control its liability.

Automated Annual Review

Another aspect of a good automated system is that it will allow cases to be reviewed efficiently and effectively on a periodic basis, often annually. For example, it used to take one of our customers nearly a full day to do a full review of a client with non-purpose loans. Now, using a unified collateral management system, it is taking them on average 1 hour.

Automated reporting

Every organization needs overall risk reporting. With a unified solution comprehensive reports can be generated automatically and directed at the appropriate people, for example, operations people or senior management.



User Profiling and Audit trail

Often an organization will attempt to manage its Non Purpose loan book with rudimentary tools such as spread sheets or basic disconnected systems. This type of approach does not allow an organization control what people can do. For example, as mentioned earlier, a typical wealth management / private clients group will want to treat some clients on a customized basis and have different rules on eligibility and discounting of collateral for these clients. However, a lender will want to control who can change such business rules and a quality system will provide for this.

In this regard a quality system should include the following features:

– Control on business rules update, data update and access to specific application functions.

– user profiling controls. – trace of user activity to ensure adherence to procedures. – record all user activity from an update and process perspective to ensure a full audit is

available.



About Rockall Technologies

Rockall Technologies is a market leader in solutions for collateral management. Our global, blue chip client base will attest to the value of using our solutions and expertise. Through using our solution STOC (Systematic Tracking of Collateral) they have achieved significant growth in a low cost, risk averse manner, while at the same time easily meeting the demands of regulation and compliance. Rockall has been delivering quality advice and solutions to the market and its clients for over 12 years. In particular, our solution addresses all of the challenges relating to processing non-purpose loans, as outlined in this document.

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A safe approach to growing your loan book in wealth management