28 March 2008

FT: Call to improve plumbing of fund processing

The processing of fund transactions in Europe may be entering the modern age at last. The post-sale treatment of investment funds has long been the poor relation in the unglamorous but essential business of financial plumbing in Europe. Now, more than three decades after computerisation of securities clearing and settlement, automation for investment funds is jumping up the industry agenda with a push from European Union politicians.

A recent study from consultants Deloitte for Luxembourg-based Clearstream, one of Europe’s two big international securities settlement providers or ICSDs, estimated that only 47 per cent of investment fund processing across Europe’s frontiers is automated. Although improving, this level of straight-through processing of orders remains “very low”, according to Deloitte.

“Close to half the market has gone through automation in one form or another. But there is still a need to go much further,” says Ivan Nicora, director of investment fund product management at Brussels-based Euroclear, Europe’s other ICSD.

Clearing and settlement of securities and derivatives is completely computerised, with infrastructure providers handling tens of millions of transactions worth trillions of euros on peak trading days. But the paperwork surrounding investment fund processing in Europe often remains just that: a mix of faxes and phone calls that are labour intensive, prone to error, and which greatly increase the costs for European investors.

Pressure for change is growing, however. More effective cross-border fund processing in Europe could help channel savings towards productive investment, tackle the pensions’ time-bomb and realise the EU’s goal of a single deep and liquid capital market. Existing operational inefficiencies may impede fast growing sales in Asia of Ucits, the global best-selling brand of cross-border funds “made in the EU”.

European investors, wanting higher returns, are no longer content to buy from a limited range of funds offered by their banks. But as open architecture business models and Ucits have grown in popularity, they have also highlighted exorbitant cross-border processing costs.

According to Deloitte, the average cost of buying or redeeming a fund across borders in Europe is €62 (£49, $98). Eurofi, a Paris-based economic and financial think-tank, puts the end-to-end cost of just executing cross-border orders within the EU at €20 to €50 for manual orders and €3 to €15 for automated orders.

Such figures are estimates. But European processing costs are clearly far higher than in the US, where The Depository Trust & Clearing Corporation cut the fee per transaction of its Fund/SERV unit this year to just 7.5 US cents from 11 cents previously.

The EU cannot reproduce the single language, currency, legal system and more or less uniform tax laws of the US. But initiatives are under way to lower fund processing costs and catch up with the efficiency of other EU financial infrastructures. For Bernard Delbecque, chief economist at Efama, the European Fund and Asset Management Association, the market may be at the point where “2008 will see a critical mass of momentum” towards automation. Among current developments are:

● Euroclear is expected soon to announce details of plans to implement straight through processing from order to settlement for the UK fund market. The group’s various fund processing services for the UK, Ireland, France, Belgium, the Netherlands and Luxembourg will later be put on a single platform due for completion in 2009-10.

● Clearstream, which last year launched its Central Facility for Funds (CFF) to provide participating firms, transfer agents, fund distributors and promoters in Luxembourg with standardised settlement services based on synchronised payment for and delivery of fund units after a trade, is introducing the service more widely, most recently in Ireland and Belgium.

● Swift, the provider of messaging services for the financial industry, plans a “light” interface tool to allow smaller companies to automate without the need for extensive IT infrastructure. This global project, codenamed Lite, will be trialled in the fund sector in the second half of this year.

● Efama is working on a revised and improved version of its fund processing passport that standardises information as a preliminary to automation of fund processing. The FPP – not to be confused with the fund management passport often discussed in these pages – is a harmonised form on which fund promoters provide the key operational details of their products. The FPP is being implemented in the UK, Germany, Italy, France and Luxembourg.

Meanwhile, political pressure on the industry is growing. The European Parliament has called on the Commission to act “if the industry does not substantially progress in greater use of electronic and standardised fund processing by the end of 2009”.

Wolf Klinz, the MEP who wrote parliament’s report, also co-chaired an industry working group for Eurofi that proposed additional measures to accelerate automation and standardisation of cross-border processing. Marc Truchet, a consultant for Eurofi, says the group wants a “road map” with monitoring tools in place to lift automation to about 80 per cent of cross-border deals by 2011.

That goal could be ambitious, however. “The easy wins are behind us,” says Euroclear’s Mr Nicora. Encouraging smaller distributors to embrace automation may require financial incentives. “For many distributors the cost of automation mistakenly kills the case for automation, until they realise the benefits,” Mr Nicora says. “And this blocking factor affects all: fund managers, transfer agents, distributors and investors.”

Peter Norman is the author of “Plumbers and Visionaries: Securities Settlement and Europe’s Financial Market”, published by John Wiley & Sons .

By Peter Norman

© Financial Times