The sector in brief
A clearing house or central counterparty stands between buyers and sellers, guaranteeing that trades are completed. A central depository records who owns securities and handles their transfer. Both deal mainly with members, such as brokers and banks, rather than with end investors.
Their AML duties follow from that position. They must know their members, understand how those members use the services and watch for transfers and settlements that do not make sense. Because they handle the final record of ownership, they are in a unique position to see unusual movements of assets.
Supervisors expect these institutions to maintain strong controls even though customer contact is limited, because a failure at this level can affect the whole market.
Where the risk sits
Members with weak controls
A member whose AML programme is poor can pass illicit activity through the clearing or depository system.
Transfers of ownership without trades
Moving securities between accounts without a sale can shift value between parties without a visible price.
Collateral and margin
Funds and assets posted as margin or collateral may come from sources that have not been checked, and may be returned to different parties.
Nominee and omnibus accounts
Where members hold assets for many underlying owners, the depository sees only the member and not the end owner.
Sanctions and freezing
The depository's records are used to identify and freeze assets of sanctioned persons, so accuracy and speed matter.
Who supervises you
Clearing houses, central counterparties and depositories are supervised according to the market they serve. The Capital Markets Authority supervises those onshore and the DFSA those in the DIFC. Check which authority recognised your institution.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A compliance officer or MLRO with authority and access to the board.
- A risk assessment that looks at members, account types, products, collateral and geographies.
- Due diligence on applicants for membership and regular reviews of existing members, including their AML controls.
- Controls over transfers of ownership, free-of-payment movements and changes in account details.
- Sanctions screening of members and, where practicable, of the owners recorded in the system, with the ability to freeze at once.
- Monitoring of settlement, collateral and transfers, and a clear way to escalate concerns to the supervisor and authorities.
- Reporting through goAML, training, record keeping and independent testing.
Red flags to watch
- A member that moves large holdings between accounts without a trade.
- A sudden change in the beneficial ownership recorded for a nominee account.
- Collateral provided by an unrelated third party.
- A member that is slow to provide information about the owners of accounts.
- Repeated failed settlements followed by unexplained transfers.
- Requests to change records urgently without supporting documents.
A worked example
A transfer out of a nominee account
A member asks a depository to move a large holding out of its nominee account into the account of a company abroad, without a sale. The depository's control requires the member to explain the reason and to identify the owner behind the nominee account. The explanation is vague and the new account holder has not been identified. The depository holds the request, asks for more information and, if the member cannot supply it, refers the matter to the compliance officer, who considers a report.
How Adventant helps
Questions answered
Do central depositories have to know the end investor?
It depends on the structure of the market. Where accounts are held directly, the depository records the owner. Where nominees are used, it must understand how the member identifies owners and what controls it applies.
What does a clearing house check on a member?
The member's ownership, licence, financial strength and AML controls, both at admission and during membership. The review should repeat when something changes.
Why do free-of-payment transfers matter?
Because there is no price to show what value moved. They can be legitimate, for example within the same owner, but they need a clear reason and a record.
How quickly must assets be frozen after a sanctions match?
Without delay. The institution should have a documented process, with named responsibilities, that works within hours, and it should test it.
Should we report suspicious activity?
Yes, through goAML where the rules apply and suspicion arises. You should also have a way to tell your supervisor.