Europe’s mutual fund industry is costly and inefficient for fund distributors. Frances Maguire looks at how one new fund processing platform aims to improve automation and cut costs.
Unlike the US, the European investment fund industry does not yet operate in a single market but in a variety of domestic markets. Within these, fund promoters, order issuers, accountants, administrators, and order handling agents sell and service mainly domestic funds, sold largely to domestic investors, over a domestic infrastructure.
The greatest inefficiencies in the investment fund industry do not arise in settlement, where systems are already in place, but in the routing of orders – particularly cross-border – which are largely carried out by telephone and fax. This highly manual, repetitive and inherently error-prone process is costly, and is also deemed unable to cope with the predicted rise in the number of mutual funds transactions over the next few years.
To address this problem, both Clearstream and Euroclear have built electronic order routing platforms – Vestima and FundSettle, respectively – to enable communication between fund distributors and transfer agents to be automated and standardised. However, their added value was limited to offshore funds only. This winter, Clearstream’s Vestima+ goes live.
New approach
Vestima+ will use the same centralised architecture as Vestima, combined with the FORS order routing technology recently acquired by Clearstream. Clearstream has taken a new approach with Vestima+ by addressing the problems that still dog European mutual fund industry, and it clearly accepts that while a pan-European market is developing, it is still far from materialisation.
Bruno Zutterling, director, investment funds at Clearstream, says: “Our goal is to make markets more efficient and to achieve this we have to recognise that Europe is a collection of domestic markets rather than a truly unified marketplace, because every market has its own structure and has different ways of processing transactions.
“You will never be in a position to ask a French distributor investing in a French fund, to settle with Clearstream, because of the additional cost but if he needs to process a German fund transaction, then Clearstream is his preferred settlement route. If we want to make this market efficient we have to focus on extending the capabilities of existing infrastructure – which are the Central Securities Depositories in some markets and the transfer agents of the funds in others.”
The significance of Vestima+ is that it will enable a free choice of settlement routes. Clearstream recognises that at times domestic settlement is more cost effective but that up until now there has been no real solution for automating domestic fund management because the focus has been so much on building pan-European platforms and systems. At the same time, a lot of domestic players are using Clearstream for settlement of offshore fund transactions. They can now settle in their own domestic markets and the offshore markets through one service, Vestima+.
Swift connection
Using a Swift connection, Vestima+ users will be able to send orders to any transfer agent (TA), receive an electronic version of the answer with an electronic report and be able to issue electronic settlement instructions to any third party. Vestima+ will automate the order flow for fund investment for financial institutions that have not previously had this kind of automation by receiving an order from a distributor, sending it to the TA, forwarding the TA’s answer to the distributor and instructing either Clearstream or a third party, in order to settle.
Mr Zutterling adds: “When a UK investor is investing in Luxembourg fund, he doesn't have to settle within Clearstream’s Vestima platform but it makes sense for him to do so. However, when the same investor in the UK is dealing in a UK fund, it doesn’t make sense for him to settle with Clearstream but makes economic sense to settle directly with the UK fund.
High-value proposition
“With the new Vestima+ service, we are enabling any type of order to be sent to Vestima+ and for the investor to select to settle through Clearstream or through another settlement route of his choice. This is a high-value proposition for market players because it is enabling them to combine their existing domestic infrastructure with a new service from Vestima+, to automate the order process for all transactions.”
Once launched, Vestima+ will process funds in the French and German domestic markets and in the existing offshore markets in Ireland and Luxembourg. These four countries together represent around 70% of the market share for Europe by number of funds, and 55% by underlying assets.
Vestima+ can be used by any type of distributors, no matter where they are located, as they will be able to use it to reach these markets for processing orders or investing in one of these markets. Customers of global custodians will be able to process orders on Vestima+ but still settle with those custodians. The service will be offered to a wider audience than Clearstream’s traditional banking clients but will also be available to insurance companies and asset management firms. Clearstream also claims straight-through processing (STP) rates of above 90%, which could bring users significant reductions in cost.
Mr Zutterling says: “If a firm is using Euroclear’s FundSettle, they could be paying a servicing fee for this, which is much more expensive than their own domestic market. We are enabling them to automate the order routing and to benefit from their own domestic infrastructure costs, which are much lower than FundSettle.
“With Vestima+, if a Euroclear customer wants to process a transaction in a fund, based somewhere where he has a Clearstream account, we will be able to process the trade and then settle with the Euroclear fund account, through the bridge with Euroclear. Even if you don’t have an account with us, and you have an account with Euroclear, we are able to provide the automation of the order and still enable settlement in the Euroclear account.”
BNP Paribas Securities Services will connect to Vestima+ as a centralised agent for its mandated French funds, while three German institutions – HSBC Trinkaus & Burkhardt, the European Transaction Bank (ETB) and Cominvest have also signed up to go live with the platform.
Secure execution
Frédéric Pérard, head of global fund services at BNP Paribas Securities Services, says: “The European fund industry is desperately lacking automation for fund transactions in the areas of both order processing and secured settlement. The combination of the Vestima+ service and a local delivery-versus-payment process provides a very secure way of executing orders on French funds.”
To enable non-French fund distributors to get access to domestic French funds, Vestima+ will communicate with BNP using Swift messages.
Bernd Sperber, ETB managing director, says: “Vestima+ is the only available solution that meets our growing and complex needs and we can see direct bottom-line benefits to our business and estimate a cost reduction of up to 80% for non-domestic third-party funds.”
Complex UK market
Clearstream plans to add three more domestic markets to Vestima+ – Italy, and Switzerland, as well as an attempt to tackle the complexities of the UK market. Mr Zutterling says: “While the UK is a very important market for us, it is also the most complicated because investors send cheques by mail, and there is a network of 60,000 independent financial advisers, which is not a common feature in other markets. We have to find a clever solution to enable us to cover these domestic markets, in a second wave, next year."
