Lieven Libbrecht, director of investment fund product management at Euroclear

Much work has been done to standardise and automate fund processing, with several commercial solutions available, but the cost of processing fund transactions is still significantly higher than for bonds or equities and this is hampering critical mass. Is a more centralised market infrastructure needed to tackle processing costs? Writer Frances Maguire

The lack of a single standard for communication between the various participants in the fund management industry from custodians and brokers of various sizes to customers - is the biggest headache facing fund managers, alongside the fact that the industry is so diverse, across both wholesale and retail markets.

Lieven Libbrecht, director of investment fund product management at Euroclear, the market leader in transaction settlement services, says it is not a lack of solutions that is holding back more efficient processing of fund transactions; the problem is that some distributors are not choosing any solution.

"Moreover, the fact that there are 10 or 15 different solutions available shows that it is not a commoditised or mature market," he says. "there is no single infrastructure solution; there are too many different commercial solutions."

On a more positive note, Mr Libbrecht says that progress has been more rapid in order routing and order confirmations, and headway has been made in replacing phones and faxes in performing these functions.

There is an awareness and a willingness to change that did not exist 10 years ago these segments are typically the first part of the transaction process that fund professionals look to automate.

However, the adoption of full automation has been slower for fund transaction settlement and asset servicing, compared with other asset classes such as bonds and equities, primarily because automation requires a totally new way of working.

Onward march of UCITS

UCITS IV, the latest recasting of the EU's undertakings for collective investments in transferable securities regulations, is to be implemented next year, with the aim of promoting cross-border distribution of funds.

While UCITS was initially aimed at facilitating cross-border fund distribution within Europe, Mr Libbrecht notes that its success has meant UCITS being established as an international brand name, and distribution is needed globally.

He says: "looking at figures from the fund associations, last year almost half of the new inflows into funds came from Asia, and we're seeing increasing fund distribution in eastern Europe and Latin America. This brings an extra challenge to automation.

While the established distributors in Europe are embracing automation, a lot of new distributors [from elsewhere] are coming to the market using faxes, so the whole process will have to repeat itself."

He adds that the drivers and barriers to automation need to be clearly identified so that the fund market can move towards a similar level of automation as equities and bonds. It is clear that fund distributors are the essential component to achieving high levels of automation across the market.

"Once they can be convinced to get rid of the fax, and sometimes even their phone, real progress can be made," says Mr Libbrecht.

"Euroclear has worked hard to make sure that the barriers to STP [straight-through processing, not needing manual intervention] are as low as possible"

Formats and platforms

Euroclear enables market participants to choose which forms of connectivity they wish to use to access their domestic and international fund management community.

For example, in the UK, the majority of UK distributors use the EMX message system, now part of the Euroclear group, which adopted financial information exchange (fix) formats, rather than those of the International Organisation for Standardisation (ISO). Rather than force one or the other formats on its clients, Euroclear built in an invisible format transformer when it connected the EMX Message system with its FundSettle platform.

While there has been much effort to standardise around the ISO formats that were developed specifically for fund processing, there are still some localised variances within the standards.

Mr Libbrecht says the shape of the evolution towards a more centralised infrastructure to process fund transactions depends very much on whether a top-down approach is forced on the market or whether there needs to be more of a bottom-up approach that enables market participants to connect and then move towards process harmonisation.

"A pragmatic approach is needed during this interim period," he says, "by offering technical infrastructures that bridge the different formats."

Domestic progress

Philippe Seyll, head of investment funds services and member of the executive board of the Settlement House Clearstream, believes that there is a clear distinction between the progress made with domestic funds and the situation for cross-border funds. He says great strides are being made in the automation of fund processing in domestic markets, benefiting from more streamlining both during order routing and post-trade, but less automation has been achieved in the international market.

However, Mr Seyll adds that the financial crisis in fact helped the move towards automation in the fund management industry.

In terms of Clearstream's Vestima+ investment fund platform and post-trade processing, business boomed in 2008 and 2009. "during the crisis, companies looked very hard at their cost structures and streamlined their businesses, and there was a definite surge in the amount of automation used,"he says.

According to Mr Seyll, the way forward for fund management is not just centralisation; a system that fulfilled the distribution side without solving the industry's other automation problems would not make sense, he says.

"The only way forward is to treat the units of investment funds as if they were equities," he adds. "They are different [from equities], but they are not so different that good recipes prevailing in equities and bonds cannot be applied to funds."

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Philippe Seyll, head of investment funds services and member of the executive board of the settlement House Clearstream

Tackling in efficiency

The inefficiency of the fund management industry, caused by its underlying nature and the lack of centralised infrastructure during the crisis, is unsurpassed by any other asset class. Banks and brokers have to establish hundreds of links for buying and selling fund units, whereas equities have centralised routing mechanisms in place. At Clearstream alone, Mr Seyll says there are 80,000 funds on the routing platform. These are not different funds, but different sizes and different share classes, in order to provide the full array of orders that might be requested.

"Despite this complexity, Clearstream provides one place for routing orders and one single engine for settlement. Regardless of where the fund is domiciled, the way that the transaction is settled is exactly the same and this is what i call applying the recipe of the equities world to the fund world," he adds.

However, there is a fundamental difference between equity shares and fund units: the number of equity shares in any company floated on the market is constant, unless the company increases its share capital, but the number of units in a fund changes daily.this comes down to the fact that units are not bought and sold like shares but given back against cash to the fund and reissued. This complicates the process, so Clearstream has automated this issuance and fund recalculation so that this part of the process is taken out of the equation, enabling the fund units to be treated more like shares, by settling the unit on the company's books and having a repository of this.

The battle ahead

For Mr Seyll, the battle to achieve automation is still not won and Clearstream is looking to implement greater deployment of the system it has built. Clearstream's clients have a single account in the system for all their funds, and now Clearstream is looking to increase the similarity of units to equities or bonds by enabling customers to use these units to refinance positions, by finding someone either to give cash against units or to buy the funds to be used as collateral.

"We are now opening up our books and records of funds as a new asset class to benefit from lending/repo business," he says.

"This is very innovative and is only possible because we treat funds on an equal footing to equities and bonds. Funds are just another asset class that benefit from the same centralised process."

Furthermore, Mr Seyll adds that, since funds are treated like equities, Clearstream is working on making funds available on stock exchanges. "we will link our order routing system to stock exchanges to enable access to exchange traded funds, as well as plain vanilla funds, which would be quoted and traded on stock exchanges,"he says.

The pressure is on to find ways to speed up the move to widespread automation, and it is becoming clear that the use of centralised infrastructures will play a key role in this. Mr Libbrecht believes the most efficient and cheapest way of achieving industry wide automation is to have a limited number of large infrastructures with centralised processing.

For the moment, especially with the prospect of UCITS IV, the focus has been on creating an efficient intra-European process for fund promoters to market and manage funds across the EU and to improve investor protection, but not fund processing.

Fund industry figures realise that it will be better if they come up with a fund processing solution themselves rather than wait for regulation. "there is an awareness and a willingness to change that did not exist 10 years ago. It is now a question of offering the right incentives to fund distributors to start embracing automation as the only sensible solution," says Mr Libbrecht.

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