France leads europe into new clearance era

France is set to become the most advanced market in Europe for fund processing when an order-routing functionality is added to the existing settlement and custody mechanisms of Euroclear France, the local central securities depository (CSD). The new mechanism, expected to go live at the end of March, will use the order-routing technology of Euroclear’s Fundsettle platform. The introduction of this order-routing infrastructure for French local funds is the result of the demand from market practitioners for a solution to fill some of the efficiency gaps in the market. Back in 2004, a study commissioned by financial intermediaries and assets managers and conducted by Eurogroup Consulting found that despite the fact the market was efficient in terms of settlement, there was considerable room for improvement in other areas. Contrary to other markets, such as Luxembourg, Dublin or the UK – where distributors place their orders with a transfer agent (TA), the settlement takes place there and payments are also made there – in France, funds’ securities are placed into the local CSD. This has presented some efficiency problems intrinsically linked to the nature of funds. “Funds are quite different from bonds and equities in the sense that they are a primary market,” explains Lieven Libbrecth, Fundsettle product manager. “If you want to buy an equity you just look for somebody in the market who already has one and gives it to you, so basically the issuer is not involved at all.” However, when it comes to investing in a fund you always have to go to the issuer in order to get a share issued or to give back and cancel one of your shares. On top of this, Mr Libbrecth says, the dynamics of the fund industry – in particular the third-party fund industry – are driven by commissions paid by the issuer to the distributor. “The fact that it is a primary market driven by commissions, means that in terms of processing, funds are completely different animals than bonds and equities.” The Eurogroup study found two main gaps in the processing of French funds. Firstly, the lack of an infrastructure to deal with the placement of orders meant the ordering was being done by ’phone or fax. Secondly, information regarding transparency, the identity of distributors and commissions being paid was not available. “Typically, because CSDs function on the basis that everything is put in the same box, you do not know who is holding what in terms of shares,” says Mr Libbrecth. When the study was published, Euroclear suggested to market representatives the possibility of linking the order-routing technology within its Fundsettle platform with the settlement infrastructure already in place in the market. After discussions between all the parties involved, the decision to give Euroclear the task of putting such an infrastructure in place was taken in January last year. Mr Libbrecth says: “In view of the size of the project, and considering it has been done in cooperation with the market, it has been a very speedy and efficient process.” The new infrastructure will allow French distributors dealing with a French TA to automatically route the order instead of using faxes or phones. “The fact that they are going to have a fully automated routing system and already have a fully automated settlement, really makes France the most advanced market there is,” he says. Mr Libbrecth says that similar services could be rolled out to other markets where the Euroclear group is providing settlement services such as the UK, Belgium and the Netherlands. In particular, taking into account that the Euronext markets – France, Belgium and the Netherlands – will move to a common settlement system somewhere between late-2007 and early-2008, it seems sensible to consider the possibility of putting an order-routing infrastructure in place in the Dutch and Belgian markets too. “Those are the two next market we will probably look at,” he says. He adds: “There is a working group in the Netherlands looking at an alternative solution to having funds trading in the stock exchange and we are in discussions with them to see if we can offer them the same solution we have produced in France.” For Euroclear, the developments in France fit the group’s business model of wanting to offer local market solutions for local fund activity, while serving the cross-border fund industry through its Fundsettle platform. “The logic behind having a group that covers a number of markets and also cross-border activity is to provide clients with a single means of access and a single way of processing all of its activities,” Mr Libbrecth says.

Libbrecth: funds different from bonds