| So far, so bad, for Europe’s EUR 8.2 trillion investment-fund industry. Yes, one would imagine that an industry sector that has enjoyed significant growth in recent years, in spite of adverse financial market conditions, would be at the leading edge of IT and operational processing methods. Unfortunately, this is not the case. Ours is an industry still plagued by manual intervention and low levels of straight-through processing (STP).
At least half of all fund transaction orders conducted in Europe, e.g., subscriptions or redemption orders, are dependent on the human touch, involving a web of faxes, telephones, paper reporting, and physical cheques to link the relevant parties together. Operational inefficiencies such as these equate to greater costs that end investors must bear. In fact, investment fund transaction-processing costs currently run 10 to 50 times higher than the cost of processing an equity transaction.
At least half of all fund transaction orders conducted in Europe are dependent on the human touch, involving a web of faxes, telephones, paper reporting and physical cheques to link the relevant parties together.
Crossing the Rubicon
As third-party fund distribution continues to grow, so do cross-border fund flows – according to EFAMA Q1 2008 statistics, cross-border fund activity represented the lion’s share of the total industry net inflows in 2007 (some EUR 268 billion). But, there will come a point when post-trade processing modernisation is a must to retain current business flows and accept new cross-border streams.
We are now approaching this point, as investment-fund promoters are finding it increasingly more difficult to position their funds with third-party distributors, if promoters do not offer sufficient automation. Why? Distributors are less likely to accept funds for onward distribution to clients that they will also burden with excessive processing costs – costs which have their origins in differing regulatory and operational market practices.
STP is crucial in driving down both the cost of fund transactions and the risk of human error, particularly in regard to the increasing cross-border volumes within Europe. EUROFI puts the total end-to-end costs of executing cross-border orders between 20 and 50 euros for manual orders compared to as little as 3 euros for fully-STP routed orders within the EU.
But where does the industry need to redouble its efforts in enhancing order-processing automation? Is focus needed at order-routing level, or downstream in transaction settlement? From a broad perspective, insufficient automation and standardised processing is characterised by the industry’s fragmentation across all levels of the value chain.
In the case of Euroclear, we have embarked on a business strategy of creating full end-to-end processing to support both of Europe’s main domestic-market models; the CSD model (for some domestic fund markets like France or Germany) and the TA model (as seen in the cross-border markets of Ireland and Luxembourg) to support fund-transaction processing.
Euroclear offers the natural solution to eliminate fragmentation inefficiencies by centralising European fund processing through a single access point. Euroclear already covers more than 60% of all fund assets via the five markets (Belgium, France, Ireland, the Netherlands and the UK) that are part of the Euroclear group and the cross-border fund markets, such as Luxembourg, served by FundSettle. Our international client base processes more than 8.5 million fund transactions per year with us.
| By joining forces with the fund promoter community, we are providing incentives to Europe’s major fund distributors to move en bloc to fully automated processing solutions. Tariffs will be as low as EUR 0.75 per transaction to route and settle a subscription or redemption order, compared with an average of EUR 7 today. Altogether, the new package represents a price decrease of up to 85%, which builds on the 60 – 65% of operational savings that price-conscious distributors have reaped since availing of Euroclear Bank’s FundSettle platform.
There will come a point when post-trade processing modernisation is a must to retain current business flows and accept new cross-border streams.
Joining-up the dots
There are very professional "order-routing only" mechanisms in the market that connect relevant parties to a fund transaction at the dealing level, but these do not unlock the efficiencies and economies of scale delivered by fully automated transaction flows encompassing routing, settlement, and asset servicing. It is only when order-routing agents link to automated post-trade platforms such as FundSettle or central securities depositories with high levels of processing efficiency, that substantial cost savings can be achieved for their clients. While certain funds are chained by manual processes, others are freeing themselves from the shackles and entrusting their business flows to automated service providers.
The UK fund industry is a case in point of how investment-fund processing is being joined up throughout the value chain. EMXCo, the provider of electronic messaging solutions for fund orders in the UK and elsewhere, and Euroclear UK & Ireland (EUI) will provide an automated “one-stop shop” for messaging, settlement and safekeeping of fund units, TA reporting, and cash management.
EMXCo will route fund orders to EUI, which in turn will leverage its existing post-trade infrastructure for equity and debt transactions to settle the cash leg of the fund transaction. As of summer 2009, combining EMXCo’s order-routing capabilities, EUI will expand its UK fund offering and give clients a single point to submit subscription and redemption orders, as well as receive settlement confirmations for their investments in Irish, UK, Jersey, Isle of Man, and Guernsey domiciled funds. Known as Cash PLUS, it will settle the cash component and reflect the stock element of the transaction, which is recorded on the legal register maintained by fund providers.
With STP rates rising in the order-processing domain, affiliated costs will fall, freeing up more means for more business to be done. Indeed, investors are still looking to the fund market as a vehicle to manage their pension savings, and we are seeing that they are opting for more balanced funds, rather than those with an equity or fixed-income bias. To date, there is a flight to safety, but not one of panic where investors are pulling out of funds altogether. Overall fund asset growth remained positive in 2007, and this inclination has continued in 2008.
Nevertheless, it remains an urgent action point for European infrastructure providers to remove the barriers preventing easier and cheaper settlement of domestic and cross-border fund transactions. As volumes continue to grow, automated solutions have the built-in scalability to grow with the market, whereas only more and more investment in people and fax machines will propagate the risks and inefficiencies the industry struggles with currently.
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