One platform for all needs

As open architecture and third-party distribution of investment funds grows, fund platforms linking manufacturers, distributors, transfer agents and custodians, are helping to increase automation and standardisation across the industry.

Distributors wanting to provide clients with a wide choice of investment products, in many cases managed by third parties, are faced with operational problems that manually-run system have not been able to solve.

Operational fund platforms have been designed to make things easier for those participating in the open architecture world by limiting delays and errors and reducing costs. Such platforms have been around for a while but as the volumes in the fund industry grow, their role is becoming more important, gaining the support of all those involved in the business.

Automation processes

“We are big promoters of this type of automation processes,” says Javier Nuñez, general manager at BNP Paribas Asset Management (BNP PAM) in Madrid. “We believe in open architecture when it comes to fund management and also in the outsourcing of those activities that we think third parties can do better.”

Mr Nuñez adds that during the last five years there has been a very important increment in distribution through third parties. “We have more than 1,000 distribution contacts and around 40,000 operations a month, 25,000 of which are done via STP [straight through processing] systems,” he says. In Spain alone BNP PAM has contact with around 100 different distributors. STP systems are used in 65 per cent of total transactions. “But the rest is still done manually, which means late confirmations, possibility of mistakes, and so on,” admits Mr Nunez.

He explains that by using Euroclear’s fund platform Fundsettle, BNP PAM has been able to increase the efficiency of their investment fund operations.

“Platforms like this offer possibilities that we think are very interesting, because at the end of the day all our objectives are the same. We want to grow our business, improve production costs and reduce risks. [These platforms] generate important benefits like confirmations in less time, service improvements, better information and the reduction of errors that can happen when operating manually. “Fundsettle is not the only platform but it’s a very valid one. It represents a single contact point with the different transfer agents,” Mr Nuñez adds.

When working with this platform, clients can use different messaging types to automate their fund dealing and confirmation processes, as well as their settlement functions, allowing cash and shares booking within their custody process and the integration of the cash management function. Fund reconciliation and corporate action notifications are also automated.

In Luxembourg, Edouard Bokuetenge, head of network management at Banque Privée Edmond de Rothschild Europe, also believes in the need for automation and standardisation as business volumes grow across Europe. Before using the Fundsettle platform, the private bank had relationships with more than 150 transfer agents. “This was time consuming, with a lot of paper involved and a lot of fax transmissions and telephone calls. It was really a nightmare,” Mr Bokuetenge says. “We wanted to centralise, standardise and automate all these processes and now we have only one counterpart, with Fundsettle acting as global custodian for all third-party mutual funds. ”

Mr Bokuetenge finds benefits for using this platform in both front and back office operations. “In the front office, all ordering was made by fax or telephone and now all our processing is made by Swift,” he explains. “In the back office, in the settlement, securities and reconciliation departments, confirmations from different sources used to vary in quality, and now we have a standard reporting and a high quality database provided by Fundsettle.

“For us, this platform means the automation and standardisation of mutual funds regarding instruction, order and transaction processing. It allows us to access a large database of information on mutual funds and we work on it everyday. But one of the most important points is that the platform allows us to manage our operational risk with regard to mutual funds because we only have one counterpart.

“Our operational risk before was huge and now it has been mitigated. But the most exciting point is that during the last four years that we have been using Fundsettle, we have seen a great increase in our volume of assets of third-party funds, and at the same time we didn’t have to increase our headcount.”

Gary Janaway, operations director at Schroders in Luxembourg, who participates in the Fundsettle’s user group says: “STP is about reducing costs, reducing risk and servicing our clients and our distribution base. In terms of our operation in Luxembourg, we have seen volumes increase by 300 per cent and we haven’t had to increase headcount for doing it. We have just re-allocated the focus of people to look after communication and distribution rather than putting orders.”

It is clear that fund platforms are playing an important role in helping the growth of the fund management industry, but for some the prices to pay in order to access these services are still too high. Although Fundsettle has modified its fee structure recently, this has mainly benefited larger clients, while smaller players feel that they are being somehow penalised. In April, Fundsettle reduced its fees, but introduced a minimum monthly fee for clients wanting to use the platform.

“Euroclear is a company that is defined by its users and we have to absorb all the costs related to development. What happens is that when you add more and more funds and more and more markets there is a cost for doing that. We see this as an investment, but this investment has to somehow be paid by the clients that use the system,” says Bernard Ferran, director and unit head for Southern Europe, Middle East and Africa for Fundsettle. “For the time being, our policy is not just concentrating on the big banks but to also accept all banks that had sufficient level to use the system. We have introduced a minimum fee of ?1000 a month and this helps us to concentrate our efforts on those banks that can go above that initial minimum fee, after which clients then only pay the real costs.”

Mr Janaway adds: “We discuss costs and how can we get these down so more people can participate. We have said to Euroclear ‘if you want more participation, you have to lower the cost’, and they have done that. We believe they listen and the culture of the service is very strong.”

This attitude has benefited Fundsettle when clients are faced with different platforms to choose from, including Clearstream’s platform Vestima +. “The main difference for us between Fundsettle and Vestima, is that Fundsettle has reached out to the market and actually asked the clients, the asset managers and the custodians about what they would like to see in a mutual fund platform. They have built it to industry specifications,” says Christina Frees, distribution services manager at Goldman Sachs International. “Vestima wanted to come to the market with something very tickling, something that would be on top of their core Clearstream system. Unfortunately, because Euroclear and Clearstream were not initially built for the traditional mutual fund market, there was a lot of open questions in terms of issues that were evolving like secondary market trading, how to do the accounts for fractional shares and the registration of shares and how to deal with the servicing part” she explains.

Although in the past both Fundsettle and Vestima were offering similar integrated solutions covering order routing, settlement and asset servicing, today the new Vestima+ focuses only on providing order routing, allowing clients to choose their preferred settlement location, which means the two platforms represent now two different propositions. Vestima+ is also trying to attract clients by offering its new modular pricing model under which clients are able to select and pay for the services they want to use, rather than paying a bundled price.

It is clear that the way fund management is developing means industry-wide standards and automation are crucial for operating in the sector. “We as an industry spend a lot of time re-keying and re-entering trades,” says Ms Frees. “Assets and transactions are growing and automation is not going to stop at this point. Your clients and your competitors are thinking about this issue now and the question is whether you are doing the same. You can either invest in a platform like Fundsettle or you can invest in additional headcount. The choice is yours.”