In the back office of the funds industry, Utopia can be represented with three letters: STP. They stand for straight through processing, an ordering, creation and settlement system that would require no manual intervention after the initial keying in of the investor’s order.
The European industry is not quite there yet.
“The predominant technology in fund markets is still the fax. Some people call that STP, because it is usually an electronic fax,” says Kevin Lee, chief executive of Calastone, a UK-based funds transaction network.
In the US, where the market is much more closely integrated than in Europe, despite the best efforts of the European Commission and even many industry players, there is one fund clearing and settlement platform, run by DTCC, the Depository Trust & Clearing Corporation.
In Europe, there are two major platforms: Vestima+ and CFF (Central Facility for Funds) run by Clearstream, and FundSettle, run by Euroclear.
In the next few months, DTCC is planning to enter the market with its Fund/SERV facility, a second attempt on the fragmented and multilingual European industry that defeated it six years ago.
So, what is different this time around – different enough to warrant DTCC’s renewed optimism?
For a start, the European fund industry has grown enormously, especially in its cross-border aspect. In the five years to September 2008, assets held in Ucits funds, the European cross-border vehicles, grew by 44.7 per cent to €5.18bn (£4.8bn, $6.9bn), even after disastrous outflows and falls in global markets in the past six months.
It is also now much closer to the goal of STP than when DTCC first tried to offer its services to funds.
Clearstream’s Vestima+, which routes fund orders to transfer agents, now counts more than 44,000 funds on its platform in more than 30 countries. The success of this fund processing platform led Clearstream to launch the central funds facility, which automates the post-trade settlement process, 18 months ago.
“We believe the investment fund world needs a centralised place for settlement,” says Philippe Seyll, head of investment fund services at Clearstream.
Clearstream has used the experience and infrastructure it has in securities clearing to build an analogous system for investment funds. A year and a half after launch, and five years after work started on the project, the CFF now has 35,000 funds on it. This scale is important, says Mr Seyll. “Not only did we build the solution, the centralised place would be nothing without the liquidity.”
Euroclear has also made great strides with the acceptance of its clearing and settlement platform FundSettle. Unlike the Clearstream philosophy that funds can be treated in this arena similarly to other securities, Euroclear’s offering was designed with the differences very much in mind.
“We’ve been able to build a platform for funds with the specificities of investment funds in mind,” said Ivan Nicora, director and head of investment funds product management at Euroclear. These include the complex relationship between the distributor and the fund promoter. “What is driving the economics of investment funds is the retrocession fees between fund manager and distributors. We can automate the processing of the commission that is at the centre of the funds industry.’
The 39,000 funds that use FundSettle include hedge funds as well as the standard mutual funds, says Mr Nicora.
With 92 per cent of fund transactions through FundSettle now achieving STP, he claims a client signing up to the utility can save as much as 65 per cent on processing costs.
This saving may seem desirable, but while there are two major players in the market, fund companies may not be able to cut their costs as much as they might like. Frédéric Pérard, global head of fund services product at BNP Paribas Securities Services, points out that it has not been possible to choose a single platform. “In the French market, we work with Euroclear, but in Luxembourg we are more integrated with Clearstream.”
For Mr Pérard, the challenge is for differing models of clearing and settlement – central securities depositary or transfer agency – to converge to a unified solution. “A lot of small actions are pushing in the direction of a big one. We should come to a solution across Europe in three to five years.”
He complains, however, that to a certain extent, Euroclear and Clearstream themselves are part of the problem. “The position of Euroclear and Clearstream is not always crystal clear. Sometimes they position themselves as market utilities, sometimes as service providers competing with us.”
Mr Pérard is interested in what DTCC has to offer this time around. “The way DTCC entered the market five or six years ago, that was a bit premature. Then open architecture [when distributors offer products from a range of fund managers, not just their inhouse provider] was in its infancy. Now the world has changed.
“Do they have the infrastructure?” Mr Pérard asks. “Europe is still a sum of markets. I don’t see how it’s going to be possible to offer a global solution.”
Get alerts on Fund management when a new story is published