| efm: About two years ago, you said in efm that as an asset class, the investment fund industry was noticeably less mature and less developed relative to equities and bonds, where fully automated systems are normality. I would like to catch up with you now and ask you, how you feel the investment fund business is doing today in that regard?
Seyll: We definitely see progress in terms of communication automation. SWIFT was and is an important tool in this respect. Nevertheless, communication automation is not directly addressing a further necessary step of the development, which is the centralization of asset holdings and settlement as seen with bonds and equities in the various CSDs and ICSDs. The market is still characterized by a large number of bilateral relationships. Centralization is key in that respect.
With our Central Facility for Funds Settlement System (CFF), we have made a large step towards establishing the required centralized infrastructure to further increase the overall market efficiency. The success of CFF, which within one year added more than 20,000 fund share classes, clearly reflects the market’s recognition of our approach.
In absence of a centralized clearing and settlement solution in the cross-border market, a huge variety of bilateral relationships have to be maintained.
efm: STP is an often used keyword in the fund industry. Did we reach the goal yet?
Seyll: No. For equities and bonds, we have had standardized systems since the mid eighties. The fund industry is not there yet, but it is on its way. One stepping stone is our order routing system Vestima+, which we have spoken about in efm before.
efm: Could you tell us in a nutshell where Vestima Plus comes into the picture in the value chain?
Seyll: In a nutshell, it takes the order from the fund distributor to the transfer agent. Currently, we have 37,000 fund share classes on Vestima+ and we offer it in eight European markets. In 2007, Vestima+ processed more than 800,000 orders.
efm: So Vestima Plus is the trading platform that you are offering. How about settlement?
Seyll: In the fund industry, automated and centralized settlement systems are not widely used yet. (The settlement does happen on the books of the various TAs that the Distributors interact with). However, we have introduced our Central Facility for Funds Settlement System (CFF) in June 2007, and there are now more than 20,000 fund share classes on it.
efm: Could you briefly describe for those that are not so familiar with back office issues, the difference between trading and settlement in the fund business?
Seyll: Trading, which is also referred to as order placement, is the process that routes the orders (subscriptions/redemptions/switches) from the distributors and the transfer agent. It must happen before the fund cut off time. Passed that deadline, the order will be executed at the next valuation time, which could range from a day to a month.
Settlement is the process that follows the trading and that in most cases happens three days after. In the event of a subscription into a fund, it is the process during which fund units are delivered to the investor against the credit of the invested amount to the fund’s cash account. In the case of a redemption, the investor’s fund units get bought back by the fund against the credit of the relevant cash amount to the cash account of the investor.
efm: What are the advantages when fund buyers use the CFF settlement system?
Seyll: It is a post trade solution (after trading) and handles the settlement of subscriptions and redemptions of fund units; actually, it matches the money with the order. This way, we help to speed up the treatment of fund orders and bring down processing costs. By bringing the cash leg and the security leg together, we increase efficiency. The settlement efficiency is 99.8 percent, which you can never reach with manual order handling. We want to bring the efficiency of equity settlement into the fund industry, with trade date matching and delivery versus payment (DVP). Without this, both parties run a risk that the deal will not be completed during the period between trade date and settlement date.
efm: Cross-border business in the fund sector is increasing, and will do so even more when the UCITS IV directive is implemented. Can CFF also support cross-border settlement, or is it only possible to use it in one or two countries?
Seyll: CFF started in 2007 with funds that were domiciled in Luxembourg, as this is the largest market in Europe for international funds. In the meantime, we also connected funds domiciled in Belgium, Ireland, the UK, and Switzerland. In this way, we can already say that we offer an infrastructure for cross-border settlement of investment funds.
| efm: What makes cross-border settlement complicated for the time being?
Seyll: In absence of a centralized clearing and settlement solution in the cross-border market, a huge variety of bilateral relationships have to be maintained. Domestically driven centralization approaches, e.g. through CSDs, lead to fragmented and inefficient processing. It is unlikely that one of the domestic solutions would evolve into a pan-European solution. The resulting costs have to be carried by the investor in the end.
Communication automation is not directly addressing a further necessary step of the development, which is the centralization of asset holdings and settlement as seen with bonds and equities in the various CSDs and ICSDs.
efm: Market efficiency varies within Europe. What are your observations in the different markets?
Seyll: It appears that the German and the French markets are quite efficient to serve their local constituency. In the absence of a centralized clearing and settlement venue, Luxembourg, Ireland and Belgium are currently still inefficient.
efm: In Germany, investors can also buy and sell investment funds units via the stock exchange. Does CFF also support this?
Seyll: Yes it does.
efm: You offer Vestima+ and CFF. Why do you need two systems? And do you plan in the future to merge the two systems into a single one?
Seyll: Vestima+ caters for trading flows, where CFF takes care of the settlement. They offer services for different parts of the fund processing chain and allow a fully automated integration of these steps. We do however offer an open architecture where our clients can use Vestima+ and use the settlement platform of their choice.
efm: The European industry association EFAMA is currently developing version 2.0 of the fund processing passport (FPP). This FPP is designed to provide fund distributors the information they need to transact in fund units in a standard format, also cross-border. How do you regard this European initiative?
Seyll: We welcome all initiatives that standardise information formats or processes over different markets. In our role as National Numbering Agency for Luxembourg ISIN codes, we have accumulated substantial information for more than 60,000 funds. In cooperation with the two Luxembourg companies (CCLux and Kneip Communication) appointed for the support of the FPP initiative, we facilitate the fast implementation of the FPP and its continued efficient maintenance.
efm: How else can a reliable and solid infrastructure in the fund industry help to increase efficiency in the financial business? I am thinking about derivative trading, for example.
Seyll: Exactly, here a solid infrastructure can make a huge difference. Then you can not only give bonds and stocks as collateral in derivative trading, but also fund units. As proven for other asset classes, an efficient clearing and settlement infrastructure is a prerequisite for further usage, e.g., collateral. Funds are a much more transparent and regulated investment product than structured products that are currently used as collateral.
efm: Apart from the solutions that Clearstream is offering, what developments in back office services do you see for the next five years?
Seyll: I believe that the way that funds are distributed will change in the coming years. My bet is that more funds will be acquired via different trading venues, one of them being stock exchanges. We are setting the scene in such a way that wherever the funds get traded, we at Clearstream provide an efficient settlement platform to support those new trading venues. It is in that space that we want to position CFF.
efm: Thank you very much, Mr. Seyll, for this interview!
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