Citi Rides Outsourcing Wave

By Maria Trombly | Securities Industry News | February 23, 2004

February 23, 2004 - Keeping track of paperwork for qualified institutional buyers (QIBs) is often a nightmare for broker-dealers--but that could be changing.

Earlier this month, Citigroup confirmed that it has handed over the entire QIB process to Communicator's QIB Hub.

The QIB compliance process previously used up significant time and energy, said Scott Richter, Citigroup's managing director of global fixed income sales. Faxes or PDF files would come in from the institutional buyers that Citigroup did business with, and were manually entered into an Excel spreadsheet, he said. Occasionally, a trade would not go through the system because an up-to-date QIB wasn't on file.
"Now, our sales team won't have to scramble around trying to find a QIB to reprocess the trade," Richter said.

And it's not enough to have one QIB form per institutional customer--brokers need separate forms for every fund or account the institutional buyer trades in. Every broker-dealer has the same problem. Every 16 to 18 months, all the QIB forms have to be updated.

"It becomes a paperwork nightmare," said Larry Tabb, CEO of the Tabb Group. Indeed, compliance costs can be as high as $1 million a year, according to Scott Lichtman, head of marketing at Communicator.

Citigroup started moving over to the QIB Hub system at the beginning of the year, and expects to be finished in the next four to eight weeks.

The company has opted for the highest level of integration, though a Web-only version is available for broker-dealers that don't have much QIB volume. Citigroup and Communicator declined to say how much the process would cost, but QIB Hub will be completely free to participating buy-side firms, who will also save time and money by sending only one fax to QIB Hub--or filling out one online form--instead of separate faxes to all their brokers.

Institutional buyers sending their QIB information to QIB Hub can choose how many broker-dealers to forward it to. Most opt for the widest possible dissemination.

Communicator takes care of making sure that the QIBs are always up-to-date. Communicator has already established relationships with 2,500 buy-side firms, and has more than 2,000 QIB letters on file, covering more than 25,000 separate trading sub-accounts. And, although Citigroup is the only customer that has gone public, Communicator says that more than a dozen other broker-dealers are either in the midst of negotiations or ready to start using QIB Hub.

"We hope to expand this to other analogous situations where documentation is required and the same documents are required across the Street," Richter said. For example, he added, it would be nice if a third party could handle USA Patriot Act compliance for the sell side.

Communicator's Lichtman confirmed that his company does plan to go after other identity-related areas. But so far, the Securities and Exchange Commission has only given approval to QIB Hub, through a no-action letter in 2002. Communicator is currently in discussions with the SEC about broader coverage, Lichtman said.

"There are hundreds of documents out there, especially on the institutional side of the business, that could easily be outsourced," said Tabb. "And especially with the amount of regulatory involvement, because of everything that's happening with the SEC these days, the firms would love to have someone do it for them."