October 2010

AUTOMATION in MENA: rise of the machines

printed_circuitCompetition from international fund managers could force greater automation of processes like fund distribution in the Middle East. Some investment service firms are already trying to kick-start the trend.
Angele Spiteri Paris reports:

Investment servicing firms, such as the custody banks and smaller administration shops, have been pushing the funds market towards greater automation for years. It is a slow process.

A common criticism that investment service providers level at fund managers and bank distributors is that they are too reluctant to abandon their fax machines and embrace computer systems that use common protocols and templates for activities like transfer agency and updating shareholder registers.

Sometimes, though, even where some processes are automated, they are not always standardised across the industry or even across a firm, which only makes the industry’s march, or limp, towards full automation even slower.

Automation of the fund distribution activity is still far from perfect in Europe, and so straight-through processing (STP) rates among Middle Eastern banks that distribute fund products in their local markets are even further off the levels of more mature fund markets.

Supporters of automation say it reduces risks and can save costs. Risks are limited because data only needs to be entered once, unlike with fax machines where data may be duplicated, by hand, at least twice, creating more room for error.

The drive for greater automation in the Mena region is likely to come from foreign players, be they investment service firms, or fund managers who have seen the benefits of automation – namely reduced administration costs that can help fatten returns for their clients.

Richard Street, head of SFS for Middle East and Pakistan, Citi, says: “International fund houses will have to drive the increase in STP rates because the majority of flows into funds from the Middle Eastern investor base are going into the large European and US fund managers’ products. Therefore, it is the international players looking to distribute in this region that have to push for solutions.”

The presence of foreign players could stimulate regional managers to increase their STP rates.

Richard Hale, regional head, sales & relationship management, UK, Ireland and Middle East, at RBC Dexia Investor Services, says: “As the market becomes more competitive, and local players have to compete with the foreigners, the distribution process will have to become more efficient.”

At present, STP rates across the Middle East are meagre. So much so that the region is not considered independently in this regard, but rather is lumped in with Asia where STP rates average at about 25%.

As is usually the issue when trying to bring about change, the major hurdle in improving automation across the Middle East is that the local distributors are comfortable with the way they do things now.

Furthermore, asset servicers on the ground claim that STP is quite, if not significantly, low on the local banks’ list of priorities.

Hale says: “Since there is no open architecture in these markets, there has been little impetus for the local players to improve STP rates and increase automation.”

Fund distribution is only just getting started and, therefore, until the market matures, automation may remain on the back burner. Furthermore, certain pressures that pushed STP rates up in markets like Europe and the US are simply not present in the Middle East.

Street, of Citi, says: “You have to remember that clerical staff still come cheap in many parts of Asia. Therefore, STP is not as important as it is in the US and Europe, where labour is more expensive.”

So what will it take to shake the Middle Eastern banks out of their comfort zone when it comes to automation? Some say the key will be greater investor uptake of fund products.

Until the recent past, segments of the market, high-net-worth individuals (HNWIs) in particular, would invest in stock markets directly rather than through funds. But now market access through funds is slowly becoming popular.

Street says: “As fund distribution becomes more important and as retail clients begin to use funds for their investments, distributing banks will become more interested in automation. Participation and demand for mutual funds in the retail space will automatically push STP rates up because third-party distribution will become more important.”

Hale says: “The distribution of funds looks to be an area of growth and the key trend is the opening up of the Middle Eastern market to European and Asian investors.”

Hale says that RBC Dexia is currently building up new contacts and relationships in the region that are specifically around distribution.

Locals abroad
Another development in the Middle East that could aid the bid to improve STP rates is the increased use of foreign domiciles.

Experts say the Middle East is getting more comfortable with the use of offshore fund centres. Selling funds domiciled in mature markets into the Middle East will hopefully breed a desire to increase automation and STP rates among distributors.

Hale, at RBC Dexia, says: “The growth of Luxembourg- or Dublin-domiciled Ucits funds in the Middle East will be a catalyst for a more efficient trading model. If the Middle East follows the path of other markets when it comes to the distribution of Ucits, then it will continue to grow and therefore players will be forced to become more efficient.”

But how long will it take for this efficiency to come to fruition?

Street, of Citi, says: “In Europe, it took many years to get to the current STP rates, which themselves continue to improve. So it’s going to be a slow burn in the Middle East. Nothing will happen overnight; it will take several years rather than months to see changes. Hopefully during that time there will be certain institutions that will have great successes with increasing their STP rates which should catalyse improvements across the region as a whole.”

And one would hope that those successes would inspire others to follow suit.

But Hale says: “The more fragmented the market is, the longer  it will take for trends towards efficiency to show.”

Many people note that the Middle Eastern markets are far from homogenous. Although people tend to consider the region as being a single market, the different countries are actually very segregated, especially when it comes to fund distribution.

So it will be while before significant increases in STP and automation rates are observed.

©2010 funds europe

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