Technology now provides cheap methods of converting to straight-through processing, so cost should no longer be a hurdle for the small transfer agents that Euroclear is trying to convert. Dan Barnes reports.

With French, German, British, Swedish, Swiss and some Austrian and Italian funds, Fundsettle – Euroclear’s fund settlement platform – has seven domestic markets on offer aside from cross-border and offshore. Thierry Logier, head of Investment Funds division at Euroclear, says: “The current FundSettle offering provides access to more than 23,000 funds from some 20 jurisdictions, with direct connections to over 400 transfer agents.” Straight-through processing (STP) has been achieved with the vast majority of the customers and is providing connectivity with cost and risk reduction, of which Mr Logier is understandably proud. “There is 100% straight-through processing between distributors and the FundSettle platform, whether it is via file transfer, SWIFT or web browser. Fund distributors can use FundSettle to access all of the most active fund promoters in cross-border distribution, and on a fully STP basis.”

Conversion challenge

The challenge for Euroclear has been to convert smaller transfer agents to STP, where manual communication is still proving dominant. Although they are connected via STP to more than 400 transfer agents, those that do not have the scale (defined by volume) still transact by fax and currently cannot justify the investment in STP. This represents a small percentage of the transfer agent population and transactions.

However, technology now provides cheap methods of converting and those who do not may find their future in jeopardy, according to Mr Logier. “Transfer agents have the same choice of communication means with FundSettle: at a minimum, they can get STP connection via a web browser, which does not cost anything. If they do not use such a simple means of communication, then they will run the risk of losing competitiveness, and inevitably some of their business.”

Euroclear sets targets

With almost 80% of transfer agents automated, the conversion targets for next year in Euroclear’s four biggest markets are 95% in Luxembourg, 95% in Germany, 80% in Ireland and 60% in the UK. Why is there such a marked difference in the target for the latter market? “The UK is probably the least developed of all the European fund markets for the simple reason that nobody pays to access funds. This means that all the processing costs are charged to the fund management companies. Because fund promoters have other issues to contend with, such as increasing pressure on their margins, they have not been in much of a hurry to automate their processing capabilities.

“The UK market is also extremely fragmented, which means that processing inefficiencies are often considered by individual fund promoters and their transfer agents to be relatively modest. As a result, the business case for automation is not so obvious. Taken collectively, however, it is an administrative nightmare and that is why we are pushing very hard for automation at the level of the UK transfer agents.

Motivation to change

The motivation for change may be limited, however, because of the way the costs are allocated. “When you standardise and automate, as we have done with FundSettle, you immediately reduce cost and risk, and improve service quality. One would imagine that reducing transfer agents’ costs and risks would be in their best interests. But since they are acting primarily as service providers to the fund managers, they tend to pass all their costs on to the fund management companies. Any delays in settlement, any risk that arises, is the fund promoters’ problem. That is why we are actively targeting fund promoters, because they are the ones who will have the incentive to push hard for automation once they realise the benefits a platform like FundSettle can deliver.”

When asked about the requirements of his clients, Mr Logier is clear: “Reduce the cost!” He believes that this will be achieved fairly quickly. “There will be a pricing reduction, definitely sooner than later.” He states that Euroclear will try to do whatever it can to reduce the cost to fund buyers.

Primarily, he regards STP as the cost saver through reduction of paperwork and manual processes, although he is keen to point out that Euroclear’s STP costs are not excessive given the quality of service received and the returns gained by clients.

“Comparing the various fund platforms in Europe today is like comparing cars. You will obviously pay more for a top-of-the-range BMW than for a bottom-of-the-range Skoda. But you will also get more in terms of performance, options and service. Other platforms may be cheaper than FundSettle, but they cannot do a fraction of what FundSettle does. Of course, our clients always want lower prices, but those who understand and value the service we offer believe that the cost is well worth it, because of the money FundSettle allows them to save in their own back offices,” he says.

Savings made

Clients have saved 30%-60% in back-office costs via the global Fundsettle approach through order routing, settlement and service, he claims. “On the sell side, fund promoters such as Credit Suisse have told us of reductions of up to 40% in their own back-office costs as a direct consequence of using FundSettle. On the buy side, fund promoters doing their own transfer agency have seen savings of 75-80%.”

Euroclear’s long-term plan involves combining the fund platform with that of other products to give their customers one view of all assets. “As we eradicate more and more paper, and automate and standardise more and more, the benefits will grow too. The key to reducing cost is the ability to offer a platform that acts as a centralising conduit between hundreds of distributors on one side and hundreds of fund promoters on the other. By positioning a one-stop shop between them, you are effectively replacing literally hundreds of operational relationships with a single one,” says Mr Logier.

“Our clients have been very clear: they want a single operational account on which to settle their bond, equity and fund transactions. In the infrastructure of the future, funds will be treated just like equities and bonds, all on the same platform.”

Building foundations

The first step in this is the development of the settlement system. “We are working towards a solution that will enable our clients to have a single interface with Euroclear,” says Mr Logier, “Euroclear’s platform-consolidation strategy comprises a three-pronged approach. First, there is the Single Settlement Engine that we are on course to launch in 2006. The SSE is the foundation of the new house that we are building. Like any house, it will only be as strong as the foundations that support it. The next stages in the process are a Common Customer Interface and the final piece of the jigsaw, the Single Application Platform (SAP).

“The single platform will be across the five markets in which Euroclear acts as a settlement and securities depository: the UK, Ireland, France, Belgium and Holland, as well as the traditional Eurobond. It’s based on the demands of our users for a one-stop shop, a single access point, not only to all these markets but also to all these different types of instrument. This is all on course to be delivered in 2008-2009.”

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