There is no doubt that growing volumes in the cross-border distribution of funds across Europe have driven fund processing automation and standardisation, which are crucial to improve efficiency and timing in the industry. For third-party fund distributors that have seen the number of their counterparties rapidly increase, the manual workload and operational risk are no longer manageable.
The financial crisis may have led European banks to push their in-house products to improve margins, but this is generally seen as a short-term effect of the downturn. Last year’s trend to separating asset management and distribution is preparing a more fertile ground for open architecture and, consequently, for the need for increased levels of automation.
What the market downturn has generated is widespread attention to costs. “The financial crisis, almost in a perverse way, has had a beneficial effect on the take up of automation, as there has been a lot more focus on cost containment, both on the side of the distributors and the side of fund promoters,” says Lieven Libbrecht, director in the Investment Funds Product Management division at Euroclear.
Fund processing, which includes order placement, cash settlement and asset servicing, is provided as an integrated solution at Euroclear’s platform Fundsettle. Together with competitor’s Clearstream Vestima+ and its settlement engine CFF, these are the two main pan-European platforms, both Luxembourg-based, that position themselves as a single access point for distributors and asset managers. Both claim to offer cost savings and gains in operational efficiency to their clients, by providing a valid alternative to the so called spaghetti model – still prevailing in Europe – where every distributor has to develop automated processing links with each fund manager or transfer agent (TA) they need to liaise with.
“Distributors drive automation and fund managers tend to follow their distributors on the platforms they connect to,” says Mr Libbrecht. As it is extremely difficult for distributors to really estimate their internal costs of order processing, and because they may have the erroneous perception that sending a fax is free, in 2008 Euroclear launched a rebalancing scheme. This is a partnership with a number of leading fund providers who have agreed to sustain the costs of fund processing through Fundsettle for their distributors.
Worth backing
“Fund managers see that there is a market infrastructure that is worth supporting and investing in, and want to make sure that there is maximum automation that flows through it,” he says.
Automated links between the cross-border structure and the Euroclear group’s companies in Europe will improve. For example in the first half of this year it will be possible for cross-border promoters on Fundsettle to distribute to UK distributors, without having to make a second connection to the local infrastructure EMXCo, as this is now part of the group. The reverse link between Fundsettle and EMXCo allowing non UK distributors to buy UK funds already exists.
However, to liaise with fund managers who do not adhere to the Fundsettle rebalancing initiative, distributors bear all the costs of fund processing through the platform.
At Clearstream, the business model is slightly different as asset managers always pay between 10 and 20 per cent of the total cost, the remaining cost being borne by the distributors. Over the past couple of years, Vestima+ has doubled the number of funds on its platform, which now hosts 70,000 funds located in more than 15 different domiciles.
“We worked on getting as many funds as possible on the platform, in the recognition that the distributors we talk to are looking at one single central place where they could have one single access to the market for the funds they want to deal with,” says Philippe Seyll, board member at Clearstream. “What we are witnessing is a decrease in the average number of fund families that the distributor deals with, in order to reduce its operating costs. We believe this trend will continue.”
Distributors wanting to remove funds or change third-party asset manager and want to get an automated connection to them quickly will benefit from the increased number of funds on the platform.
Last year, order routing platform Vestima+ saw an increase of 12 per cent in the number of distributors to 450. This is clear evidence that organisations believe in the value of the hub model for the distribution of funds and the efficiency of managing risk through it, says Mr Seyll. Moreover, as the strength of the Ucits brand grows outside the European Union, new international markets are being opened.
“Last year, we got 15 new clients from Asia, and we want to get more,” says Mr Seyll, explaining that currently a quarter of the total distributors on the platform are based outside the European Union.
