However, this red-hot competition omits a very important player in the clearing industry, the Luxembourg-based Clearstream. Clearstream is the custody and settlement division of Deutsche Böurse, and according to Philippe Seyll, head of Clearstream’s investment funds services division, a service already exists that offers complete coverage for fund processing on both a domestic and cross-border basis.
Clearstream launched its central funds facility (CFF) in 2007, the same year that Euroclear and EMXCo merged. Initially CCF was a post-trade solution for cross-border investment funds in Luxembourg, but it has since expanded.
“We have close to 100% coverage of the most commonly traded funds in Luxembourg, Ireland, Switzerland, the UK, Belgium and Austria,” says Seyll.
Of particular concern to Seyll is the idea that Euroclear-owned EMX Co and Calastone are the first organisations to introduce centralised settlement of funds in the UK market. “We have already done this. All UK funds on CFF can settle centrally through a delivery-versus-payment process that is very similar to the rule in the equities or bonds market.”
So why are Clearstream’s achievements so unheralded? Seyll says that it is down to a discrete marketing campaign.
“We now have over 70 transfer agents across Europe on CFF and our distributor clients can access over 70,000 entirely automated funds on our platform serving over 70 markets. No-one else has that. But we have not done much publicity on this. We prefer to do our marketing on a one-to-one basis rather than through the trade press,” Seyll says.
“When we approach our distributor clients, they send us a list of funds that their clients are buying. In most cases we have between 97% and 100% coverage so there is no need for any distributor on our platform to set up an alternative means of funds processing. There is a single set of instructions and the same process for funds across Europe. We have the most streamlined process with the widest coverage on the planet.”
Despite the gloomy financial landscape, Clearstream has signed over 150 new cross-border distributor clients with a third of them emanating from Asia. As seen in the UK, Clearstream and its cross-border offering is also trying to compete with the domestic focus of Calastone and Euroclear EMX. At present, neither of these domestically focused providers can offer their Luxembourg- or Irish-based clients a single, cross-border service and while this may be immaterial for any fund distributors or managers that are solely concerned with their domestic markets, Seyll is hoping that the idea of a single, automated process for both cross-border and domestic funds will prove more attractive in the long term.
“Our focus is primarily on the cross-border market but we are finding more and more distributors coming to us for their domestic settlement also,” he says.
This is particularly important in the UK market, where there has been a more domestic focus relative to mainland Europe, and Seyll believes that the inroads made by CFF makes it a far more practical option for both fund managers and fund promoters.
“Euroclear still has five different mechanisms and platforms for settlement. We have only one. Calastone is building such a capability but it takes time. It takes effort and money to connect all the various transfer agents and central securities depositories on the back end with the distributors on the front end. It took us nine years to get to the point where we are today.”
Despite Seyll’s insistence that Clearstream does not want to engage in a public battle with Euroclear and Calastone, the competitive element is an unavoidable feature of the settlement process in Europe. In most instances, competition is seen as the preferable option to market monopolies, as seen by the introduction of the Markets in Financial Instruments Directive, or MiFID, and its objective of replacing the domestic dominance of the various securities exchanges with a deregulated and competitive environment across Europe.
However, MiFID is about execution. Settlement is clearly different to execution and many market participants are simply looking for a reliable process regardless of who supplies it. The price wars and battle for liquidity that we see breaking out in an unseemly fashion among Europe’s various execution venues, old and new, are not so welcome in the post-trade environment. And many market participants are concerned that competitive clearing may in fact create extra cost and complexity if it is not coupled with clear interoperability.
But in terms of the funds market, the biggest competition Clearstream faces still comes from the fax machine rather than the likes of Euroclear or Calastone, says Seyll. “We are trying to get that flow that still goes directly from the distributors to the transfer agents via fax. How do you make them appreciate the cost to the industry from the flows that they think are free? Any initiative to try and balance the cost of funds processing for both sides will only work if you can offer additional services. You cannot go to a fund promoter and ask him to pay for efficiency if you do not offer him anything in return.”
Seyll says that Clearstream, like its rivals, is attempting to solve this conundrum. “We are working on a set of services that we think fit this description – some extra services that we think they will be prepared to pay for. And later this year we expect to be able to make an announcement providing the fund promoters with a more transparent set of information, helping them to see through their distribution network. That will be done without compromising the efficiency of the settlement systems that we have put in place.”
This task is all the more difficult given the economic conditions, even if there is a school of thought that there is nothing like a global downturn to focus the industry on hacking away unnecessary costs and inefficiencies found in their operations.
Some industry players have done and Clearstream has signed up new clients including a number from Asia. “I think the Asian firms have been the ones that have paid most attention to their set-up,” says Seyll.
Level of demand
So is the industry actually at the stage where the processing of a fund will seriously influence fund managers when they select new products to launch? Won’t the promise of greater returns always trump the guarantee of lower cost?
“It is a criterion that is becoming more important and we are seeing managers state on their RFPs [requests for proposals] that they will only invest in funds that can be centrally cleared through a platform like CFF,” says Seyll.
Unlike campaigns for greater transparency or better corporate governance, these demands are coming from fund managers’ back offices, not from end investors, who could not care less about the processing environment and the choice of settlement platform. “Of course, they would care if they were aware of the cost of inefficient processing, but no distributors publicise these costs to their clients.”
There are two areas in particular that have provoked most client interest, says Seyll. The first of these concerns funds that are traded through stock exchanges on the secondary market (for example, there are 3,000 of these operating on Deutsche Börse).
“Vestima [an order routing product] will in 2010 give access to those funds, mutual funds or ETFs, which trade on the stock exchange. We think this is very innovative,” says Seyll.
The second area of interest concerns collateral management. “Cross-border funds have never previously been used for collateral or given a collateral value. But we are now seeing greater demand for this. We have already had deals of this nature during 2009. I am convinced that it will expand in 2010,” he adds.
©2010 Funds Europe