August 2009

TRANSFER AGENCY: The stuff of dreams

The funds industry agrees that greater automation is needed. Should it aim for the Utopia of a fully automated fund processing chain or settle for small increases over a long time period? By Nicholas Pratt

yellowbrick.jpgWe all have ideals and goals that are unlikely to ever be achieved but we still pursue them with unswerving enthusiasm because to do otherwise would be to admit defeat.

Among Europe’s transfer agents (TAs), the dream is of a fully automated funds processing chain. Manual processes are still frequently used in the funds market. Trade flow is polluted by the presence of faxes, as is the correspondence between investors, distributors and TAs. The commissions process still lacks straight-through-processing (STP) and cheques still feature heavily in the retail market.

All of these un-automated anomalies require costly manual intervention, which in turn increases the risk of clerical error. For TAs the business is becoming costly enough, as funds become more complex and cross-border in nature and distribution, without the added headache of manual processes. But efforts to encourage more automation have had only limited success and in the current market conditions how can anyone reasonably expect things to change?

It is the fund distributors that are held most responsible for the persistence of manual processes with even the largest of platforms relying on fax-based communication with their TAs. Various tactics have been employed by TAs to encourage more automation.

At France-based asset servicing firm Société Générale Securities Services (SGSS), a form of naming and shaming is in place where asset managers are given statistics showing the different STP rates of the distributors they work with. “We do not deal directly with the fund distributors, so it is a case of telling our asset managers that if they want a quicker, more efficient service they should use distributors that employ automation and do not deal only in faxes,” says Pascal Bérichel, head of fund distribution services at SGSS.

But Bérichel accepts that this approach can only have limited success due to the economics involved. “There is no real financial incentive for distributors to automate. TAs can charge more money for receiving orders via fax, but it is not a large amount and not as large as the initial investment needed to automate.”

“There are costs to automating such as the implementation of new message formats and the associated business logic,” says Paul North, head of product management Emea, BNY Mellon Asset Servicing. “And unless the transaction volumes are substantial it is hard to make the business case for the investment.”
Costs are further inflated due to the fact that many of the fund distributors’ platforms are using very large and mature legacy systems that would be very expensive to re-engineer for automation. “A greater efficiency can be achieved through software, workflow and the elimination of paper but how far do you go? What are distributors prepared to do? They have other things to focus on,” says Barry McConville, managing director of Linedata, a supplier of technology to transfer agents.

“We provide an interface to the various services of Swift, Clearstream and Euroclear and for fund administrators this is where they are focusing their efforts, but we still see a huge volume of orders done on a manual basis. Essentially there is no incentive there for distributors to automate and I do not see where this incentive will come from,” says McConville.

Euroclear, the Belgium-based settlement body, has a service called FundSettle which provides a single point of access for fund buyers to process their transactions. “Using FundSettle requires distributors to establish an electronic connection between us and them instead of using faxes to reach all relevant parties,” says Lieven Libbrecht, director, investment fund product management, Euroclear. “The assets are then centrally held on our system rather than being spread across 15 to 20 transfer agents.”

Free offer
In February Euroclear launched an initiative to entice more distributors onto the platform by making it free for them to use (courtesy of a number of large-volume fund promoters). “The response from distributors has been positive, particularly those that see this incentive offered by promoters as the means to become more efficient in their own back office,” says Libbrecht. “But we understand that it is very difficult for new promoters to get involved now, even though they all see automation as the right way to go if the funds market is to enjoy the same level of growth in the next ten years that it experienced over the last ten years.”

Not all distributors are shying away from automation, says Richard Barrett, group executive, client administration at transfer agent International Financial Data Services (IFDS). “We are actually seeing more pressure from distributors on their asset managers to embrace automation. They may have less to gain from automation than others but they still gain. For example, there are fewer operational errors with automation and this creates savings in the reconciliations process.”

The UK Platform Group, which was formed in 2006 and counts CoFunds, Fidelity, FundsNetwork and Standard Life as founder members, has recently agreed that the ISO 20022 standard for financial messaging should be the industry standard for delivering automated, platform-to-platform re-registration messages. The next step is sorting out who will pay for it all. “The platforms have accepted that they will have to pay something for this because they will be getting some benefit from it, but there is no clear model for how the costs and the benefits will be divided between participants,” says Aubrey Nestor, project architect for Bravura Solutions, a software provider operating in the funds industry.
There are various schemes that could break the current deadlock, says Nestor – the proposed link between EMX and Crest to link automated messaging with automated settlement is a further benefit and if Swift could devise a simpler and less expensive way for IFAs and smaller fund managers to tap into its infrastructure, this could also help. But the current pressure on investment of any kind is in danger of stifling any momentum built up by such initiatives.

This momentum could be regained if Europe was to create a single all-encompassing structure for Europe as in the US, thereby eliminating any differences in rules, technology standards, data formats or market structure. Alternatively the market could find more compelling incentives for distributors to embrace automation. But if these two options continue to be unlikely, is it time the industry simply accepted that the current level of automation, roughly 50%, will not increase enormously and learn to deal with an imperfect market and develop solutions accordingly?

“It is unacceptable to believe that 50% automation levels are good enough,” says Euroclear’s Libbrecht. “Nobody is going to claim that we will see 100% automation, but there is considerable room for improvement. There will always be firms that want to embrace the benefits of automation quickly, but there are still some pretty big firms out there that have yet to automate.”

But others are less optimistic. “I think accepting the status quo and settling for small incremental increases in automation over a long period will be the most likely case,” says Linedata’s McConville. “I don’t think anyone in Europe’s funds market will shout this from the rooftop, but it is a fact of life that we will never see the level of automation that some people want.”

At SGSS, Bérichel agrees that TAs cannot simply accept the status quo and must aim for a higher level of automation, but he also feels that a more realistic approach would be to look to software developers for solutions rather than the distributors and fund managers. Currently vendors are producing services that boast of the ability to accept orders in any format and simply adapt them for automation. “Maybe we have to accept that distributors do not want to invest in automation and we as TAs would be better served by focusing on technology that can help us adapt to the imperfections and inefficiencies of the market rather than trying to change it,” says Bérichel.

Slowly but surely
“There are things that could and should be done,” says BNY Mellon’s North. “Industry bodies such as the Investment Management Association are promoting greater automation and to achieve this we need more standardisation of file formats and more development of infrastructure services. The implementation of Swift as a message standard and Crest settlement should increase automation but it will not happen overnight. I think it is more about a succession of small incremental changes rather than a big bang.”

North also points to new developments like UK-based Calastone that provides software to make it easier to exchange messages in any format, without needing Swift. “We saw an opportunity to provide an outsourced messaging interoperability service for the funds industry,” says Kevin Lee, managing director of Calastone. “It is based on a pay-as-you-use model so there is no licensing cost or maintenance cost.”
Furthermore, users do not have to use Swift. It is an outsourced utility that hooks into distributors systems, normalises the messages and delivers them in an electronic format, says Lee. For example, a number of firms use flat files which are put through applications such as ‘Right Fax’ and then sent to TAs in the form of a paper fax. “What our service does is take these messages and translate them based on ISO standards and deliver them to TAs in the electronic format of their choice. No one in the lifecycle has to change their technology or business processes.”

The service initially launched in the UK market but has now signed clients in Hong Kong and the cross-border centres of Dublin and Luxembourg in a bid to take the service further afield. But what of the critics that argue that services such as Calastone’s are only treating the symptoms rather than curing the disease and will only delay the industry’s bid to have a greater level of automation? “I don’t think that our service means that the adoption of automation will be even slower,” says Lee. “ISO 20022 is the nirvana and we are all aiming for that but we have to proceed at a pace that the P&L of participants dictates.”

©2009 funds europe