Breaking down borders with new automation

As volumes of third-party distribution of investment products begins to grow across Europe, automation and standardisation become vital to improve timing and efficiency of transactions in the industry. Distributors embracing open architecture have seen the number of counter-parties, such as transfer agents, increase continuously and, as a consequence, their manual workload and operational risk have reached almost unmanageable levels.

All major domestic markets have been providing some form of automated solutions for a few years now. They range from order-routing to more complex, integrated solutions. The big challenge now seems to get all those markets to adopt one single pan-European solution, able to provide a cross-border integration of the different investment fund markets. “But getting all the players to move towards a single process involves either picking up an existing system or creating a new one. In either case the majority or all the players will have to adapt to a new system,” says Ivan Nicora, head of the investment funds division at Euroclear.

The scenario is complicated by the fact that domestic systems generally are efficient and rooted in the local fund investment markets.

For example, in the UK, in the year 2000 the national fund industry association, Autif, established a company, EMXCo, with the vision to automate the funds industry to one standard. The company is now the leading and arguably the only order-routing system in the UK.

Max Wright, chief executive officer at EMXCo, in an interview at PIMS International 2005, said: “Our whole model is based on automation. It’s a simple market. We are the pipe and what we do is simply moving electronically the data between the fund provider and the distributor. These are the only people we need involved in the trade.”

The system utilises one standard mechanism of communication, the Fix protocol, which means the data relative to the trade is keyed once and then re-used constantly down the supply chain, throughout order, reconciliation and settlement. This speeds up the whole process considerably and saves costs associated to manual trading, errors and mis-interpretations.

“We have clients who save 70 per cent of their dealing costs by automating their process,” claims Mr Wright. To support his statement, he mentions that according to the consulting firm Forrester, a manual trade costs around £50 (?73), while the cost of an electronic trade is around £15.

However, as the demand for international funds increases in all European markets, it becomes a priority for all solutions providers to be able to service cross-border funds. Mr Wright says: “We were founded in the UK and I think that is a major issue for a business that wants to be European.” But he also thinks that having been operating in a highly regulated market like the UK, characterised by “relatively complicated products”, will give them a competitive edge in Europe. EMXCo recently opened an office in Luxembourg and, at present, around 15 per cent of their flows are cross-border. EMXCo covers over 2,000 funds.

International organisations such as Euroclear and Clearstream, which also offer settlement and custody services, service first and foremost the cross-border markets through their respective platforms, Fundsettle and Vestima+.

Until January 2005, when Clearstream decided to restructure its offer, the two companies were offering a similar proposition, an integrated solution covering order routing, settlement and asset servicing.

Today Euroclear’s Fundsettle, which claims to be the only integrated platform on the market, covers around 27,000 funds, split into three main clusters: cross-border, domestic and offshore. Around 70 per cent of the funds serviced are international. Mr Nicora, who does not hide that Fundsettle aspires to become the “standardised platform in Europe,” explains that generally, domestically domiciled funds are used only by domestic players.

“Although there is work at European level to make sure that funds domiciled in one country can be sold and distributed in other markets, within the market the level of integration is generally higher than cross-border. Therefore, the need and the added value for a platform like Fundsettle has typically been more when you start crossing borders, hence the ratio of 70 per cent cross-border,” he says.

Local markets

However, Euroclear is now looking at opportunities to adapt its services to local markets. “Over the last five years we have merged with a number of clearing and settlement organisations in France, Belgium, Holland, the UK and Ireland,” explains Mr Nicora. “We are now looking at rolling out Fundsettle in the domestic markets. In France it is under implementation and we aim to launch the service by the second quarter of 2006.”

Not at all concerned about the different practices adopted by the European markets seems to be Philippe Seyll, head of investment fund services at Clearstream.

“I am not that worried about all those market difficulties and so on. National markets will progressively lose importance. In France, for example, people are asking for more and more international funds. In the UK, the Oeics [open-ended investment companies] were created to be a UCIT III similar kind of fund. Now, most of the companies in the UK are closing down their funds and are opening in Luxembourg. The trend is towards internationalisation.”

The new Vestima+, unlike Fundsettle, now focuses on order routing only, allowing clients to choose their preferred settlement location. Asked about the reasons behind this decision, Mr Seyll says: “We have not set back from the full service provision. What we did was to rethink they way we structured our offer. We thought that due to the complexity of the funds distribution landscape and the surge of cross border funds activity, the integrated model, which works well domestically when distributors only sell proprietary products, was not the best one to fulfill market players’ requirements”. Today, nearly 15,000 funds are available on Vestima+, which has seen routing orders increase by 150 per cent and assets grow by 51 per cent during 2005.