November 2008

INVESTOR SERVICES: Automation for the people

Nicholas Pratt talks to Frederic Hannequart (pictured), chairman of Euroclear bank, about the quest for more automation and a pan-European infrastructure ... hannequart.jpg Clearing and settlement organisations such as Euroclear have been preoccupied of late with the unenviable task of undoing the various positions taken up by failed investment banks, such as Lehman Brothers. Special action plans reserved for when a major default occurs have been put in place, transactions have been cleared and settled and the financial world has continued to turn.

Aside from dealing with the current issues, there are some longer-term ambitions for the clearing and settlement firms that still need to be realised. Prominent among these ambitions, and one with possibly the longest horizon, is the mission to bring more automation to the funds industry.

Euroclear has been accelerating its efforts through its FundSettle platform which was launched back in 2000 as a means by which fund distributors, promoters and transfer agents could automate their funds transaction processing.

In September of this year Euroclear introduced a new tariff for users of FundSettle that promises a price reduction of up to 85% with no charge for automated order routing, asset servicing and custody-related services, something which suggests two things: that the service was overpriced before and that introducing more automation and increasing straight-through-processing is vitally important to the likes of Euroclear and its members.

“What we are trying to do is bring more efficiency to, and reduce back-office costs within, the funds market,” says chairman of Euroclear Bank Frederic Hannequart. “We have been contributing to the accomplishment of this objective over the past eight years, ever since FundSettle was launched.”

Automation has become the dominant process for transactions in other markets but, according to a survey carried out by Deloitte back in 2007, automation was only used for 47% of the total funds processed. So what is it about the funds market that makes it so manually intensive?

The main obstacle to greater adoption of automation, says Hannequart, is the fragmentation. “There is geographical fragmentation to manage in that there are domestic funds and also cross-border funds. Then there are the complexities of linking together all the different intermediaries involved in these transactions – distributors, promoters, transfer agents, custodians – which all work in different ways and, before FundSettle, were processing fund transactions manually. This is what has served as the driver to automate and standardise fund operations.”

Incentive to automate
The new tariff launched in September clearly represents an improved incentive for those in the funds market yet to invest in automation. The second tranche of Euroclear’s two-pronged strategy to improve the business case for automation is to build a truly pan-European infrastructure that will enable firms to trade higher volumes across borders through the same platform.

“The reality is that through FundSettle more than 37,000 funds already have a single order-routing mechanism, a single settlement engine and a single point for asset servicing. Whether clients are trading domestic or cross-border funds, they will have a single point of entry,” says Hannequart. “When we look at the geographical range covered by Euroclear as an international or domestic central securities depository (CSD), we account for 60% of the European fund market and 75% of the sales of funds in Europe, which is a very good point from which to expand.”

Euroclear is working on developing an order routing link between its UK and Ireland operation (EUI) and the recently acquired EMXCo, so that two counterparties using different protocols can communicate with each other without having to develop a further protocol. In France, where Euroclear is the domestic CSD, it has introduced a link between its order routing service and its settlement service and it is now looking to do the same in Belgium, the Netherlands and Luxembourg.

“As platform consolidation evolves, there will be more business processed on the same platform, increasing STP and reducing costs,” says Hannequart. “This is the broad picture of what we are trying to achieve by making the differences in protocols invisible to clients.”

Euroclear is targeting the distributors and financial intermediaries above all, says Hannequart, so that they can make the process as cheap as possible for their end investors in both a domestic and cross-border context.

But it is not alone in its ambitions. The Deutsche Börse-owned Clearstream has similar initiatives with its Vestima+ and Central Facility for Funds. And in terms of the protocols used for automation, yet again there is the oxymoronic situation of having mutliple standards all competing for de facto status.

“We are not trying to position ourselves as the dominant provider and we are working with Swift and ISO and others to develop standards,” says Hannequart. “There is no completely harmonised, operational environment within the funds market today, in the same way as say the bonds and equities markets, so we are looking to provide an adaptor-like service where communication between two parties using different protocol standards can be seamless, so that a communications standard used in one market can be converted to a different standard used in other markets.”

Higher costs
Nevertheless Hannequart accepts that while a healthy sense of competition is good for the industry, it is still a fixed cost business and the more funds-processing automation solutions that are used, the less volume will be on each platform and the higher the cost will be for each transaction. Similarly the less concentration there is, the less likely it will be that workable standards emerge to the extent that they have in equities and fixed income.

But the high level of fragmentation that has held the funds industry back in its pursuit of automation will remain for some time, says Hannequart.

“We will eventually reach the same level of automation that we see in the fixed income and equities markets, but they are further along the way.

The business case has already convinced those in the equities and fixed-income business. But funds are a different animal and we don’t expect their characteristics to change. In fact, we are not looking to make funds more like equities; instead, we are looking to accommodate these differences in standards within the solutions that we design to increase STP levels.”

It is also apparent that the business case for automation is easier to make for a large player that is active across markets rather than a small player operating in one domestic market and this is another reason why automation levels are still below 50%.

But, says Hannequart, the benefits of automation are there for everyone. “Today’s small-volume firms will grow and look to explore new cross-border markets. What we have to ensure is that the cost of automation is spread across all those who benefit from it.”

He adds: “There are a still a number of large-volume fund professionals that have yet to automate and the counterparties that they deal with manually do not want these manual transactions anymore and they are willing to provide incentives to have them automate. In essence, the laggards are preventing them from realising all of the savings they could enjoy from fully automated processes.”

“It has taken time to get nearly 50% of the funds market to automate and there have been ups and downs in the markets during that time,” says Hannequart. “But the trend is clear. People are buying into the idea." ©2008 funds europe

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