June 2012

CROSS-BORDER FUND PROCESSING: In defence of standards

KnightThe funds industry has tried many times to address processing protocols with varying degrees of success. Nicholas Pratt looks at the work of one initiative that could show the way forward. On April 30, the European Fund and Asset Management Association and Swift, the bank-owned co-operative for financial messaging, issued their sixth monthly report on the automation and standardisation rates of fund orders received by transfer agents (TAs) in the cross-border fund centres of Luxembourg and Ireland in the latter half of 2011. The reports were started in 2008, with some encouraging statistics, namely that the adoption of standardised ways of communicating had increased by 4.1% in the past 12 months, suggesting a decline in the use of proprietary file transfers. There were, however, some less encouraging figures – the fact that automation rates increased so slightly (from 75.4% in 2010 to 75.6%) suggests an impending plateau. And that the number of fax-based orders increased by more than 400,000 in the past six months shows there is still work to be done, especially as the cost of new regulatory requirements builds in the next few years. As Swift’s head of securities and treasury markets, Fabian Vandenreydt, says: “To address this industry challenge, major fund industry players are engaged with Swift on a large-scale ‘kill the fax’ plan that should deliver tangible results in the coming two years”. To some, the “kill the fax” concept may conjure up images of Swift stormtroopers patrolling fund distributors’ offices while a family of fax machines cower in the stationery cupboard hiding underneath a shelf of manila folders. There are, though, other projects to promote processing efficiency in the funds industry led by the fund managers. One that is nearing fruition after four years of work is the dematerialised fund sales agreement (DMFSA) initiative. It was first proposed by Noel Fessey, of Schroders in Luxembourg, as a way of creating a standard mutual fund sales agreement that could be made suitable for electronic creation, transmission and storage using open technology standards. That the project should be started by a senior employee at one of the largest players in the cross-border funds market is no surprise. “I have a good insight into the preparation of these documents and the frustration of turning them into completed transactions,” says Fessey. “At best, it is a broken value chain. At worst, it is a chain without any value.” A better way
The DMFSA initiative is notable for the fact that it has not come on the back of regulation or been dogged by conflicting commercial interests. The objective has been to get the standard out in the market at no cost, or low cost, until the software companies can integrate it into their own applications as a DMFSA add-on, says Fessey. “There is no patent and no royalty involved. We are not looking to exploit the IP directly.” One of the objectives guiding the project is the idea that the sales agreement should be seen primarily as an operational process with a legal basis rather than a legal document that has some operational implications. The process typically breaks down, says Fessey, when the document gets handed over to the legal teams and a game of legal tennis ensues where both sides compete to get their version of the agreement ratified. “It costs time, money and goodwill. It can takes weeks, even months, to be completed and becomes frustrating for everyone involved. I decided there must be a better way.” The most important part of the sales agreement is the commission schedule, he says. However, the legal parts of the agreement do not satisfactorily describe the operational process, such as valuation points and aggregation of calculations. “It is no longer possible to do this on paper, we have to use software and we need a common language. We looked at several examples of templates used by companies and found that people were not discussing the terms of their agreements but referring to previous models. But that means only one side knows how the calculations are made, so we created a common syntax to eliminate any ambiguity.” Next level
The next stage is to complete the translation of the sales agreement into an ISO20022 message, a Swift message that allows counterparties to exchange agreements electronically. This not only improves the efficiency of the processing, it also enables third-party administrators to more easily calculate commissions for fund managers by using a standard document, says Fessey. “There is a significant risk of misinterpretation in describing commissions. To reduce the frustration, speed up the process of translating a legal document.” The Swift version of the DMFSA will hopefully launch on to the internet in the next few weeks, says Fessey. It can then be dragged into a firm’s operating system and integrated into the order management set-up by a programmer. This means that firms can adopt the automation in their own way. It will also help in terms of encouraging industry-wide adoption and in addressing parts of the cross-border funds processing chain. “Creating a standard to set up the document is one thing, the next thing is to use that information at the next level,” says Martin Fritsch, product manager at Luxembourg-based Kneip and a former member of the DMFSA working group. “If you have a trailer fees agreement, you can upload it to that folder and automate the calculations. The DMFSA is just the starting point. The Swift message status will be a boost to the project for common acceptance and usage. Without the Swift status, people will be reluctant to use it.” This view is supported by the asset servicers and TAs, some of whom may feel that the fund managers have not done as much to make the distribution process more efficient as they have themselves. “The benefit of the DMFSA is that we can store the details of sales agreements electronically and on the TA side pick up all the necessary data components,” says Richard Hale, head of sales and distribution for the UK, Ireland and Middle East at RBC Dexia Investor Services. “If we can get those components delivered as a Swift message, it would be a very important step.” Fessey is hopeful that the DMFSA standard can go all the way from the sales agreement to the payments and reconciliations process. “It would benefit everyone to have a standard agreement between the asset servicers and all of their asset manager clients,” he says. “We already have a standard syntax and there are not many more terms needed to create a great reconciliation agreement. It is easy to read so we do expect to get into the statement space – for summarising the top level of commission or for NAVs [net asset values], aggregations and [foreign exchange] rates.” ©2012 funds europe

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