The Finanser interviews: René Frijters, Founder and CEO of Knab Bank (Aegon's digital first bank)

Following on with our regular weekly interview the Finanser talks this week with René Frijters, Founder and CEO of the Dutch digital bank Knab.  

Rene Frijters

Knab is the digital first bank funded by Aegon.  In Aegon’s latest results summary, there are some interesting comments.

Knab, Aegon’s online bank in the Netherlands, has been recognized as having the best new investment concept for its simple, convenient and accessible investing. It provides sample portfolios to help guide newer investors as well as advanced analysis tools for more experienced investors. Knab’s innovations have now attracted more than 50,000 customers, following a strong increase in 2014 … Gross deposits tripled to EUR 1.0 billion. This was mainly the result of the continued strong performance of Knab, Aegon’s online bank in the Netherlands. Knab accounted for EUR 0.6 billion of gross deposits in the fourth quarter, up from EUR 42 million in the same quarter of 2013. The number of clients at Knab has grown significantly in 2014 and now stands at over 50,000, supported by very high customer satisfaction scores.

Here’s what René has to say about it:

Can you give me a bit about the background to Knab Bank? When did it launch and who is behind it?

Knab was founded in September 2012. The initiative was started, mid 2009, by Rachelle van der Linden, Marcel Kalse and me. Rachelle has a marketing background. Marcel and myself were heavy involved in Alex Beleggersbank, a stockbroker which we had set up in 1999. Alex Beleggersbank was sold in 2007 for 380 mio Euros to Binck Bank. I was co-founder of Alex and Marcel head of business development.

For setting up Knab we needed a banking license and a lot of funding not only for the necessary investments but also for the required capital. Because of this we contacted several financial institutions to see if they wanted to support our idea. Aegon Bank (part of Aegon Insurance) was enthusiastic about our vision and became 100% shareholder at the end of 2010, the moment we started building the bank.

What is the bank trying to achieve and how did you see the market opportunity before you launched?

The reason why we started the bank was threefold.

First, we wanted to give customers a better insight in their financial situation, because increasingly they are becoming more and more responsible for their financial future.  For example, governments are reducing tax-facilities to build up pension, to deduct interest on your mortgage, etcetera and companies are moving away from defined benefit to defined contribution systems, so pension risks are transfered to the employees themselves.

Second, we wanted to build a bank which really acts in the interest of it’s customers , instead of only talking about customer centricity while the company tries to earn as much money as possible without telling the customer at the same time.

Third, we wanted to give customers real attention. Preferred and private banking concepts completely fail in the Dutch market. Only a very small group of customer really get the attention and the pro-active advice they require from their bank.  

Has that view  of the market changed at all since you launched?

Not really. Because of the economical crisis we see more and more laws coming in, which strengthens the need to get better insight in your financial situation yourself. Banks try to be more customer centric, but they change very slowly because of various reasons (impact on P&L, legacy, reorganizations, compliance). 

Why is the bank called Knab?

The name Knab says everything about our intention. Knab is bank spelled backwards. We try to work in exactly the opposite way the established banks are doing things. We put the customer – which, in Dutch, is ‘K’lant – first and the ‘B’onus on last, as in we don’t pay bonuses.

And do you offer all the usual bank services, such as deposit accounts, debit and credit cards, cheque books, loans, mortgages and so on?

Yes, we do. At the moment we offer a current account, a savings account, term deposits, a credit card, two investment products (Execution Only and Asset Management) and a lot of services and tools.

In fact we offer our customers a PFM platform together with a bank. So our tools and services are even more important than our products. 

You talk about Banking-as-a-Service, could you explain that a little more?

Traditional banks live from product push. They talk about customer centricity, but their focus is on selling as much products as possible. We don’t believe in this model and really try to stand on the customers side by offering our customers all kind of services to improve their financial insight and situation. Let me give you three examples.

Personal (highest) Interest Service.

With this service we monitor the interest savings rates of the customer’s accounts at other banks and warn the customer when a change has taken place. Even when a competitor of Knab offers a higher interest rate than Knab, we send the customer an alert to make him/her aware.

Smart Cash Management Service.

With this service we automatically transfer money from the current account to the savings account when the amount on the current account exceed a customized threshold. And we do the opposite when an overdraft occurs on the current account. At traditional banks customers pay 14% on the overdraft while they get 1% on their savings at the same time. We see this as a kind of robbery from customers and refuse to do this.

Smart Alerting.

Based on all the data we have, we send our customers alerts to call their attention to potential financial gains and risks. We have built about 100 of these alerts and they are only being sent to customers if it’s relevant according to his/ her profile

This also comes with an ‘subscription like’ payment model. A customer subscribes to one of our services (basic, plus, premium or business) and then gets a bank which is on his/her side.  

You also talk about Knab as  a Digital Bank – how do you define a Digital Bank?

Knab is 100% digital. We don’t have any branches and will not have them in the future (except from  perhaps a flagship store in Amsterdam). Customers can do all their activities via Internet and mobile apps. They can reach our Customer Service desk via phone, (video) chat and social media (FB and Twitter). Signing of legal contracts is being done by using your bankcard, the same applies for changing your address, you card limits, etc.

What about customer onboarding, how you deal with KYC and all that?

The onboarding process is 100% automated. Customers can open a current account with us within five minutes. The only thing which they have to do, is to transfer money from an existing account at another bank, with exact the same name, to Knab to identify themselves. We do all kind of checks and balances (EVA-check, world compliance check, etc.) in the background, fully automated.   

Is the bank using any form of social media outreach and, if yes, how?

We have introduced Knab Live. Knab Live is our community platform where customers can give feedback about our services and bring up their ideas. 100% open and transparent. We also organize a monthly Knab Open session at our office. Each customer is welcome and we use these events to co-create our products and services together with our customers. And of course we interact with our (potential) customers via Social Media.

You are a Dutch-based bank, and many Dutch folks seem more digital than elsewhere. Would you agree, and what’s the typical sort of customer you are attracting?

In Holland we have a very good infrastructure and 95% of the people are online. Most of our customers are between 35 and 55 year old, but in comparison to the Dutch population, we are more dominant in the age between 20 and 35. Our customers are well educated and most of them have more than double the average Dutch income.

I note that you’ve achieved quite a high take-up of new customers compared to other banks, is that through heavy promotion, advertising or are you offering special deals on interest or other account opening incentives?

It’s a combination of facts.

First, banking is about trust and we see that, after two years, people believe we are here to stay.

Second, after a difficult start with only one proposition (premium) we have introduced in November 2013 a Spotify-like type of proposition. Customers can start saving with us without paying a subscription fee and grow within our bank (Basic., Plus, Premium).

Then we have changed our ATL-campaign from a more ‘brand advertising’ type of campaign to a more ‘proposition’ type of campaign where we communicate concrete advantages (two times interest, fixed subscription fee, etc.) .

Fourth, we started a multi-channel distribution strategy: partnerships / channels; comparison sites (referrals), independent advisors, Aegon customers.

We started doing ‘fact based marketing’. So, we measure every step a customer makes, do A/B testing on our site, etc.

Finally, we offer one of the top three interest rates in the savings market.

All these things helped us to grow our business with more than 40.000 customers in 2014.

From a marketing perspective, does the bank have any brand values, and what are they?

The brand values of Knab are:

a)            We build the bank together with our customers

b)            We share our tools and knowledge to help our customers to get better insight in their financial situation. So they can get the most out of their money.

c)            We offer outstanding service, 7 days a week16 hours a day

d)            We are 100% transparent

e)            We always keep innovating to make maximum use of new technological possibilities

Specifically, are you providing a service that is different to other banks and, if so, how?

Yes, and maybe this a one of the biggest differentiators.  Although we are a digital bank we believe that customer service is one of the post important things to become successful and to create ambassadors. The employees who have contact with our customers are all selected based on the right ’DNA’. Can they really listen to the customer and are they able ‘to stand in the customers shoes’ when they talk to them. Are they able to ‘over deliver’ and ‘surprise’ customers. That’s the way we like it and so, why shouldn’t customers like to be treated this way?

We have a Net Promoter Score (NPS) of +26 and Customer Service is an important part of this value (Dutch financial institutions have a negative value of -20 on average). It’s impossible for traditional players to reach this level. They have a product and procedure based service instead of a customer based service. 

 Looking ahead, how do you see the longer-term vision for the bank?

We really must focus on Personal Finance and on customer experience. These will be the differentiating areas for the future because products will become more and more commodities. We will enlarge our products and service offering and add on services like P2P-financing, mortgages and perhaps Bitcoins. The last one isn’t possible today because of rules and regulations set by Dutch Central Bank.

Finally, what would you like the bank to best be known for?

We like to be known as the most customer driven bank.

Some more about Knab on Slideshare:

And a nice interview with Rene in Five Degrees and Financial Brand.

About René Frijters

René Frijters is Founder and CEO of Knab. Knab is a bank built with customers and takes the financial situation and the interests of its customers as the starting point. He vows to be completely transparent with fees, and describes Knab as “socially conscious,” encouraging customers to allocate part of their savings to select charities. Before Knab was founded, he was CEO of the Alex Investment Bank for 12 years.

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The Finanser interviews: René Frijters, Founder and CEO of Knab Bank (Aegon's digital first bank)

Following on with our regular weekly interview the Finanser talks this week with René Frijters, Founder and CEO of the Dutch digital bank Knab.  

Rene Frijters

Knab is the digital first bank funded by Aegon.  In Aegon’s latest results summary, there are some interesting comments.

Knab, Aegon’s online bank in the Netherlands, has been recognized as having the best new investment concept for its simple, convenient and accessible investing. It provides sample portfolios to help guide newer investors as well as advanced analysis tools for more experienced investors. Knab’s innovations have now attracted more than 50,000 customers, following a strong increase in 2014 … Gross deposits tripled to EUR 1.0 billion. This was mainly the result of the continued strong performance of Knab, Aegon’s online bank in the Netherlands. Knab accounted for EUR 0.6 billion of gross deposits in the fourth quarter, up from EUR 42 million in the same quarter of 2013. The number of clients at Knab has grown significantly in 2014 and now stands at over 50,000, supported by very high customer satisfaction scores.

Here’s what René has to say about it:

Can you give me a bit about the background to Knab Bank? When did it launch and who is behind it?

Knab was founded in September 2012. The initiative was started, mid 2009, by Rachelle van der Linden, Marcel Kalse and me. Rachelle has a marketing background. Marcel and myself were heavy involved in Alex Beleggersbank, a stockbroker which we had set up in 1999. Alex Beleggersbank was sold in 2007 for 380 mio Euros to Binck Bank. I was co-founder of Alex and Marcel head of business development.

For setting up Knab we needed a banking license and a lot of funding not only for the necessary investments but also for the required capital. Because of this we contacted several financial institutions to see if they wanted to support our idea. Aegon Bank (part of Aegon Insurance) was enthusiastic about our vision and became 100% shareholder at the end of 2010, the moment we started building the bank.

What is the bank trying to achieve and how did you see the market opportunity before you launched?

The reason why we started the bank was threefold.

First, we wanted to give customers a better insight in their financial situation, because increasingly they are becoming more and more responsible for their financial future.  For example, governments are reducing tax-facilities to build up pension, to deduct interest on your mortgage, etcetera and companies are moving away from defined benefit to defined contribution systems, so pension risks are transfered to the employees themselves.

Second, we wanted to build a bank which really acts in the interest of it’s customers , instead of only talking about customer centricity while the company tries to earn as much money as possible without telling the customer at the same time.

Third, we wanted to give customers real attention. Preferred and private banking concepts completely fail in the Dutch market. Only a very small group of customer really get the attention and the pro-active advice they require from their bank.  

Has that view  of the market changed at all since you launched?

Not really. Because of the economical crisis we see more and more laws coming in, which strengthens the need to get better insight in your financial situation yourself. Banks try to be more customer centric, but they change very slowly because of various reasons (impact on P&L, legacy, reorganizations, compliance). 

Why is the bank called Knab?

The name Knab says everything about our intention. Knab is bank spelled backwards. We try to work in exactly the opposite way the established banks are doing things. We put the customer – which, in Dutch, is ‘K’lant – first and the ‘B’onus on last, as in we don’t pay bonuses.

And do you offer all the usual bank services, such as deposit accounts, debit and credit cards, cheque books, loans, mortgages and so on?

Yes, we do. At the moment we offer a current account, a savings account, term deposits, a credit card, two investment products (Execution Only and Asset Management) and a lot of services and tools.

In fact we offer our customers a PFM platform together with a bank. So our tools and services are even more important than our products. 

You talk about Banking-as-a-Service, could you explain that a little more?

Traditional banks live from product push. They talk about customer centricity, but their focus is on selling as much products as possible. We don’t believe in this model and really try to stand on the customers side by offering our customers all kind of services to improve their financial insight and situation. Let me give you three examples.

Personal (highest) Interest Service.

With this service we monitor the interest savings rates of the customer’s accounts at other banks and warn the customer when a change has taken place. Even when a competitor of Knab offers a higher interest rate than Knab, we send the customer an alert to make him/her aware.

Smart Cash Management Service.

With this service we automatically transfer money from the current account to the savings account when the amount on the current account exceed a customized threshold. And we do the opposite when an overdraft occurs on the current account. At traditional banks customers pay 14% on the overdraft while they get 1% on their savings at the same time. We see this as a kind of robbery from customers and refuse to do this.

Smart Alerting.

Based on all the data we have, we send our customers alerts to call their attention to potential financial gains and risks. We have built about 100 of these alerts and they are only being sent to customers if it’s relevant according to his/ her profile

This also comes with an ‘subscription like’ payment model. A customer subscribes to one of our services (basic, plus, premium or business) and then gets a bank which is on his/her side.  

You also talk about Knab as  a Digital Bank – how do you define a Digital Bank?

Knab is 100% digital. We don’t have any branches and will not have them in the future (except from  perhaps a flagship store in Amsterdam). Customers can do all their activities via Internet and mobile apps. They can reach our Customer Service desk via phone, (video) chat and social media (FB and Twitter). Signing of legal contracts is being done by using your bankcard, the same applies for changing your address, you card limits, etc.

What about customer onboarding, how you deal with KYC and all that?

The onboarding process is 100% automated. Customers can open a current account with us within five minutes. The only thing which they have to do, is to transfer money from an existing account at another bank, with exact the same name, to Knab to identify themselves. We do all kind of checks and balances (EVA-check, world compliance check, etc.) in the background, fully automated.   

Is the bank using any form of social media outreach and, if yes, how?

We have introduced Knab Live. Knab Live is our community platform where customers can give feedback about our services and bring up their ideas. 100% open and transparent. We also organize a monthly Knab Open session at our office. Each customer is welcome and we use these events to co-create our products and services together with our customers. And of course we interact with our (potential) customers via Social Media.

You are a Dutch-based bank, and many Dutch folks seem more digital than elsewhere. Would you agree, and what’s the typical sort of customer you are attracting?

In Holland we have a very good infrastructure and 95% of the people are online. Most of our customers are between 35 and 55 year old, but in comparison to the Dutch population, we are more dominant in the age between 20 and 35. Our customers are well educated and most of them have more than double the average Dutch income.

I note that you’ve achieved quite a high take-up of new customers compared to other banks, is that through heavy promotion, advertising or are you offering special deals on interest or other account opening incentives?

It’s a combination of facts.

First, banking is about trust and we see that, after two years, people believe we are here to stay.

Second, after a difficult start with only one proposition (premium) we have introduced in November 2013 a Spotify-like type of proposition. Customers can start saving with us without paying a subscription fee and grow within our bank (Basic., Plus, Premium).

Then we have changed our ATL-campaign from a more ‘brand advertising’ type of campaign to a more ‘proposition’ type of campaign where we communicate concrete advantages (two times interest, fixed subscription fee, etc.) .

Fourth, we started a multi-channel distribution strategy: partnerships / channels; comparison sites (referrals), independent advisors, Aegon customers.

We started doing ‘fact based marketing’. So, we measure every step a customer makes, do A/B testing on our site, etc.

Finally, we offer one of the top three interest rates in the savings market.

All these things helped us to grow our business with more than 40.000 customers in 2014.

From a marketing perspective, does the bank have any brand values, and what are they?

The brand values of Knab are:

a)            We build the bank together with our customers

b)            We share our tools and knowledge to help our customers to get better insight in their financial situation. So they can get the most out of their money.

c)            We offer outstanding service, 7 days a week16 hours a day

d)            We are 100% transparent

e)            We always keep innovating to make maximum use of new technological possibilities

Specifically, are you providing a service that is different to other banks and, if so, how?

Yes, and maybe this a one of the biggest differentiators.  Although we are a digital bank we believe that customer service is one of the post important things to become successful and to create ambassadors. The employees who have contact with our customers are all selected based on the right ’DNA’. Can they really listen to the customer and are they able ‘to stand in the customers shoes’ when they talk to them. Are they able to ‘over deliver’ and ‘surprise’ customers. That’s the way we like it and so, why shouldn’t customers like to be treated this way?

We have a Net Promoter Score (NPS) of +26 and Customer Service is an important part of this value (Dutch financial institutions have a negative value of -20 on average). It’s impossible for traditional players to reach this level. They have a product and procedure based service instead of a customer based service. 

 Looking ahead, how do you see the longer-term vision for the bank?

We really must focus on Personal Finance and on customer experience. These will be the differentiating areas for the future because products will become more and more commodities. We will enlarge our products and service offering and add on services like P2P-financing, mortgages and perhaps Bitcoins. The last one isn’t possible today because of rules and regulations set by Dutch Central Bank.

Finally, what would you like the bank to best be known for?

We like to be known as the most customer driven bank.

Some more about Knab on Slideshare:

And a nice interview with Rene in Five Degrees and Financial Brand.

About René Frijters

René Frijters is Founder and CEO of Knab. Knab is a bank built with customers and takes the financial situation and the interests of its customers as the starting point. He vows to be completely transparent with fees, and describes Knab as “socially conscious,” encouraging customers to allocate part of their savings to select charities. Before Knab was founded, he was CEO of the Alex Investment Bank for 12 years.

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Things worth reading: 10th March 2015

Things we’re reading today include …

 

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Things worth reading: 10th March 2015

Things we’re reading today include …

 

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Crime-as-a-Service: pay-as-you-blow with #bitcoin

So I’ve talked about Banking-as-a-Service for some time, but what about Crime-as-a-Service?  It does exist on a pay-as-you-blow basis.

Europol were one of the first to note this trend, in a report published late last year (from ITPro):

According to the organisation’s 2014 Internet Organised Crime Threat Assessment (iOCTA), the model allows cybercriminals to develop sophisticated malicious products and services before selling them on to the less experienced to use via the “digital underground” world.

As a result, it’s getting easier for less technically-minded criminals to engage with cybercrime, putting companies at even bigger risk.

“In a simplified business model, a cybercriminal’s toolkit may include malicious software, supporting infrastructure, stolen personal and financial data and the means to monetise their criminal gains,” the report states.

“With every aspect of this toolkit available to purchase or hire as a service, it is relatively easy for cybercrime initiates – lacking experience and technical skills – to launch cyber attacks not only of a scale highly disproportionate to their ability but for a price similarly disproportionate to the potential damage.”

Many of these transactions take place on the “Dark Net”, which the report states has fuelled evolution of cybercrime in recent years.

They followed this up on Tuesday with an assessment that cryptocurrencies are becoming the value exchange of choice for Crime-as-a-Service (from Coindesk):

Digital currencies are increasingly serving as a money laundering platform for “freelance criminal entrepreneurs operating on a crime-as-a-service business model”, according to a new Europol report.

The EU’s law enforcement agency said that the decline of traditional hierarchical criminal networks will be accompanied by the emergence of individual criminal entrepreneurs, who come together on a project basis.

The report, which identified the key driving factors affecting the EU’s criminal landscape, predicted that the role of freelance crime organisers is expected to “become more prominent”.

It added that individuals with computer expertise are very valuable to criminal organisations and that people with such skills are expected to advertise their services in exchange for payment in cryptocurrencies.

The report continued:

“Virtual currencies are an ideal instrument for money laundering. In addition to traditional layering methods, cryptocurrencies use specialised laundering services to obfuscate transactions to the point where it is very resource-intensive to trace them.”

This gets interesting as I attended a policy forum last week where the UK’s National Crime Unit were saying that they’ve spent “an inordinate amount of time investigating cryptocurrencies”.  I asked what they meant by that, and they clarified that it was time spent understanding them.  When I then asked if they saw much criminal activity in cryptocurrencies, they said not yet.  The National Crime Unit see most money laundering crime in cash (€500 notes being the launderers note of choice).  They only use cryptocurrencies if the payee demands payment that way.

However, this is because cryptocurrencies are still minor league compared to cash markets, and they are being studied as some of the action in cryptocurrency exchange is for illicit activities on the dark net.  Note cryptocurrency guys that I say some, not all.

For example, in a further Europol study produced in February, they find that bitcoin is the preferred currency of paedophiles (from Coindesk):

http://www.coindesk.com/europol-bitcoins-popularity-growing-in-illicit-online-markets/

Bitcoin is increasingly being used to pay for livestreams of child sex broadcasted over illicit Internet sites, according to a new Europol report.

Produced by Europol’s EC3 cybercrime centre, the report sheds new light on the commercial sexual exploitation of children online, while providing evidence that individuals with a sexual interest in children are becoming more entrepreneurial.

“Live streaming of abuse for payment is no longer an emerging trend but an established reality”, the report said.

It continued:

“There is a clear shift from traditional credit card payments to the ones providing the most anonymity, namely alternatively payment options, including virtual currency.”

In line with the International Centre for Missing and Exploited Children’s (ICMEC) findings, the report said that “there is apparent migration of commercial child sexual exploitation, along with other criminal enterprises, from the traditional payments system to a new, largely regulated digital economy made up of hosting services, anonymising Internet tools and pseudonymous payment systems”.

Add to the above the use of bitcoins for terrorism.  According to Bitcoin News, the United States Central Commands have been studying the alternative payment methods terrorist organisations raise and transfer money around the globe to support their activities. Digital currencies proved to be of the most efficient mechanisms for the transfer of funds due to their decentralized nature that facilitates anonymous donations as opposed to traditional banking transactions with the use fiat currency. Recently, an Israeli analyst has come up with concrete evidence that the ISIS is raising funds in Bitcoins, most likely in the United States, to fund their operations.

This is not even to mention the use of cryptocurrencies for drug dealers.

What is intriguing in all of this is that the cryptocurrency community believe they are unassailable in all of this.  Money is decentralised by bitcoin and they believe (or hope) it is therefore immune to governmental and regulatory control.  Anyone who disagrees is a statist.

Conversely, for the reasons given above – terrorism, drug running, extortion and sex trafficking – this idea of a decentralised market that governments are excluded from controlling may be wrong.  To be clear however, bitcoin and cryptocurrencies are not the problem here.  You have massive use of cash for terrorism, money laundering, drug running and paedophilia.  It is the reason why the US dollar has more physical stores outside the USA than inside, and is the reason why it’s the currency of choice for people like Saddam Hussein.  Equally, it should be born in mind that cryptocurrencies are not anonymous, are traceable and are available in a form that can be identified, so governments do have ways to deal with them.

The most likely start will be on the cash-in and cash-out moments of cryptocurrency usage.  You may be able to use cryptocurrencies in a revolving credit and debit scheme bilaterally but, as soon as you try to cash out or put cash into the scheme, the national jurisdictions will make the transaction subject to national laws.

Over time they will then get other regulatory structures put in place.  A whole raft of papers have already been issued on these themes, with the latest iteration of the New York Department of Financial Services (NYDFS) cryptocurrency regulation – or the BitLicence if you prefer – providing clear requirements for cryptocurrency usage.  Issued last month, the NYDFS BitLicence requires any trading firm to adhere to a collection of rigid rules.  There’s a raft of requirements for capital provision, record-keeping, and even oversight of new or planned features, such as:

  • The BitLicence application itself costs $5,000
  • Firms must keep detailed records of customer names, addresses, dates, and transaction amounts for at least seven years
  • Audits will be made every two years by the NYDFS
  • Firms must get written approval before changing products or services, or creating new ones
  • Mandatory internal anti-money laundering programs must be implemented, including enhanced oversight of foreign customers and those who transact in amounts greater than $10,000
  • Firms must have an internal cybersecurity program to protect personal and financial information from hackers
  • Firms must show a clear disaster recovery plan in the event of attempted or successful theft

These BitLicence rules make cryptocurrency trading firms, for all intensive purposes, banks.

Equally, it means that for every step the cryptocurrency markets innovate ahead of the curve, the lawmakers review, analyse and try to keep up.  Whether they can keep up or not is a different question.

 

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Are You a Derivatives Dealer? If So, it has Possible Implications for You in Canada

In the e Lert that we published on November 6, 2014, we commented on new securities legislation that imposes reporting obligations on entities that engage in derivative transactions.&nbsp Entities such as financial institutions that engage in more than the occasional derivatives transaction but do not carry out derivatives dealing activities as their primary business need to consider whether they constitute a &ldquo derivatives dealer&rdquo as that term is understood in such legislation.&nbsp To the extent that you are a &ldquo derivatives dealer,&rdquo it may impact your reporting obligation under the trade reporting rules, such as Ontario Securities Commission Rule 91 507 Trade Repositories and Derivatives Data Reporting (the &ldquo OSC TR Rule&rdquo ), and may require you to register as a derivatives dealer.
&nbsp
Who is a Derivatives Dealer in Ontario?

The term &ldquo derivatives dealer&rdquo is defined in subsection 1(1) of the OSC TR Rule to mean &lsquo a person or company engaging in or holding himself, herself, or itself out as engaging in the business of trading in derivatives in Ontario as principal or agent.&rsquo
&nbsp
a)&nbsp &nbsp &nbsp Determining Whether one is &ldquo Engaging in the Business of Trading Derivatives&rdquo
&nbsp
Canadian Securities Administrators (&ldquo the CSA&rdquo ) Consultation Paper 91 407 Derivatives: Registration (the &ldquo Consultation Paper&rdquo ) was published on April 18, 2013, and proposed a framework for the regulation of key derivatives market participants through a registration regime. While not having the force of law, the Consultation Paper provides some guidance as to whether a person is &lsquo in the business of&rsquo trading derivatives. Factors to determine if one is trading in derivatives for a business purpose include whether one is:

Intermediating trades &ndash providing services relating to the intermediation of trades between counterparties to derivative contracts as a broker

  • Acting as a market maker &ndash making an effort to take both a long and a short position in a derivative or category of derivatives
  • Trading with the intention of being remunerated or compensated &ndash receiving, or expecting to receive, any form of compensation for carrying on a derivatives trading activity
  • Directly or indirectly soliciting &ndash contacting someone by any means, including advertising that offers derivatives trading or participating in a derivatives trade, or that offers services for these purposes
  • Providing clearing services to third parties &ndash providing clearing services for derivatives trades
  • Trading with a counterparty that is a non qualified party that is not represented by a derivatives dealer or adviser on a repetitive basis &ndash entering into transactions with counterparties that are non &ldquo qualified parties.&rdquo This may be considered to be in the business of trading derivatives unless that non qualified party is represented by a derivatives dealer or adviser. A &ldquo non qualified party&rdquo would include a party other than a derivatives dealer or a sophisticated, well financed counterparty and
  • Engaging in activities similar to a derivatives dealer &ndash carrying out any activities related to trading of derivatives.

b)&nbsp &nbsp &nbsp Determining Whether one is &ldquo Engaging in the Business in Ontario&rdquo
&nbsp
The Consultation Paper makes it clear that residency is not required for a party to be engaged in the business of derivative trading in a particular jurisdiction.&nbsp A person engaged in the business of trading derivatives may be a derivatives dealer in Ontario, even if they do not have a permanent office or other place of business in Ontario, if:

  • it intermediates a trade or trades on behalf of a resident of Ontario
  • it conducts trading activity with or on behalf of counterparties located in Ontario on a regular or repetitive basis
  • it actively solicits or markets a derivatives trading business in Ontario or
  • &nbsp acts as a market maker to a resident in Ontario.

Registration Requirements For Derivative Dealers

Qu&eacute bec is the only Canadian jurisdiction to currently mandate registration for derivatives dealers. Section 54 of the Derivatives Act (Qu&eacute bec) provides that no person may carry on business as a dealer unless registered as such with the Autoriti&eacute des March&eacute s Financiers. However, this registration requirement does not apply to

  • persons conducting activities or transactions in over the counter derivatives involving only &ldquo accredited counterparties,&rdquo and
  • persons authorized to act as a dealer or authorized to exercise similar functions under legislation applicable in a jurisdiction outside Qu&eacute bec where its head office or principal place of business is located to the extent it carries on business solely for an accredited counterparty and its activity involves a standardized derivative and that is offered primarily outside Qu&eacute bec.

Securities regulators in Ontario, Manitoba and other Canadian jurisdictions have indicated their intention to impose a registration requirement on derivative dealers in their jurisdictions but the publication of draft rules are not expected until well into 2015.

Reporting Obligations For Derivative Dealers

An entity&rsquo s status as a derivatives dealer will impact what reporting obligations, if any, it may have in connection with a derivative transaction.

The OSC TR Rule requires derivative transactions involving a &ldquo local counterparty&rdquo to be reported to a designated trade repository. However, to determine the counterparty on which the obligation to report falls, an entity must first consider the reporting hierarchy set out in section 25 of the OSC TR Rule. For example, if the transaction is not cleared through a recognized or exempt clearing agency and is between a derivatives dealer and a counterparty that is not a derivatives dealer, the obligation to report lies with the derivatives dealer. Hence the importance for a financial institution to determine whether it is a derivatives dealer for purposes of the OSC TR Rule and similar instruments in other jurisdictions in Canada.

Conclusion

The determination of whether someone is a derivative dealer and the obligations that flow from such a determination is a somewhat complex analysis and this e Lert is only intended to provide an overview of the relevant considerations. To the extent that you would like to discuss the application of this legislation to you in further detail, please contact any of the writers at your convenience.&nbsp
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