Automated solutions for paper overload

The implementation of STP can complicate relationships in the processing chain, but if the volume of transactions continues to increase at the present rate, fund distributors may have no choice but to automate. Roxane McMeeken reports on Vestima, the platform designed to eliminate manual processing. If the experts are to be believed, Europe’s investment fund industry is headed for an explosion in volumes that can only be accommodated by straight-through processing (STP). Luxembourg clearing house Clearstream, recently taken over by Deutsche Börse, claims it has the key to implementing STP across Europe in the form of its Vestima platform. However, others argue that such platforms merely add an extra link in an already unwieldy chain. “PricewaterhouseCoopers predicts that the number of transactions in Europe will hit 70m a year by 2007. We simply will not be able to process them if the industry remains working as it does today, using faxes and telephones to send orders,” warns Daniel Coheur, investment funds manager at Clearstream Banking. The prevalence of open architecture models of fund distribution will put particular pressure on Europe’s ageing transaction processing models. Research from Luxembourg’s First European Transfer Agent (FETA) predicts that the percentage of funds distributed by third parties in Europe will leap from 17 per cent today to 35 per cent in just three years. Mr Coheur explains that processing funds without STP is hampering Europe’s funds industry in numerous ways:

• manual transaction processing is five times more expensive than STP because of the manpower employed;
• Europe loses E2bn a day through the costs of failed trades, which STP aims to eliminate;
• without STP, transfer agents will not be able to carry out their role in the open architecture model of executing transactions and paying dividends if volumes increase. One fax at a time Clearstream’s Mr Coheur adds that a recent visit to the office of a Luxembourg transfer agent revealed that the operation had only one fax machine for taking orders. The agent explained that he didn’t have the staff to process any more orders than the number that could come through a single fax. STP would allow a massive increase in orders without the need to increase manpower, Mr Coheur argues. Clearstream aims to offer a route to the replacement of the fax with STP through its investment fund platform Vestima, which links fund distributors and transfer agents in a standardised and automated way. There are two types of connectivity:
• “Workstation solution”. Vestima can be installed on a fund distributor’s PC. This enables the routing of subscription, redemption and switch orders to the relevant transfer agent. An order can be expressed either in cash or in units and requires the input of the ISIN code. After an online validation, which checks the integrity of the data against the Vestima database, the order is sent to the transfer agent. The agent has to fill the net asset value then confirms the execution of the deal to the distributor through Vestima.
• “Swift solution”. The distributor’s order is routed via the Swift network to Vestima using the new Swift format for investment funds instructions. The platform forwards the order to the transfer agent. No manual intervention is required. STP is implemented along the value chain from the initial input of the order in the distributor’s own trading platform until the final cash settlement. It might be asked why industry participants using Swift should not simply link directly to each other, without the intervention of Vestima. Mr Coheur says: “We are not in competition with Swift. Swift has defined the standard for us to send information. We add value to that information.” Vestima has 26 transfer agents connected and 10 more are due to come on board in the next two to three months, according to Mr Coheur. This compares with Vestima’s nearest rival, the FundSettle platform, run by Euroclear in Brussels, which says it has signed up 50 transfer agents. Nine thousand funds can be accessed through Vestima, which accounts for 90 per cent of Luxembourg’s products compared with 1300 on Fundsettle. But Clearstream has started to offer access to vehicles in other fund centres, such as Dublin, and is planning on entering a number of domestic markets, starting with France, Germany, Switzerland, the US and UK. It will then tackle Italy and Spain. Mr Coheur adds: “We are working on including all offshore funds and hedge funds. This is not a static market and Vestima is surely not a static service. More enhancements are to come.” Added work But despite these intentions, Clearstream has come in for criticism. At this year’s Sibos conference in Geneva, John Pauly, managing director of the transfer agent FETA, claimed that platforms such as Vestima were merely an extra cog in the order processing chain. He maintains that these platforms create extra work for transfer agents, since they have to reconcile with the platform as well as with fund distributors. “We all have our own way of working,” responds Mr Coheur. “We have to consider that all transfer agents work differently and we have to work on ways of accommodating them.” For instance, Vestima began working on a delivery versus payment (DVP) basis, where payment comes after the shares have been delivered. But Clearstream acknowledged the need to facilitate free of payment (FOP) transactions, where payment is made upfront, before the shares have been received. While Vestima can now handle such transactions, there are still problems in cases where one party to a transaction wants to work on DVP, while the other wants FOP and vice versa. Clearstream is working on this, says Mr Coheur. He adds that the company is also committed to improving transactions for investment funds, as opposed to concentrating purely on securities. He hopes that through these initiatives Vestima will widely be seen as smoothing the way for STP.