Now that the industry has largely accepted the benefit of automating cross-border orders, efforts are focusing on standardisation in processes. Nicholas Pratt examines the challenges involved
Wolf Klinz, the member of the European parliament and author of a wide-ranging review of the asset management industry, told the Committee on Economic and Monetary Affairs in 2007 that more efficiency was needed in fund processing. He praised the efforts of the European Fund and Asset Management Association (Efama) and its Fund Processing Standardisation Group, but stated that “progress made so far is unsatisfactory” and that “the Commission should take action if the industry does not substantially progress in greater use of electronic and standardised fund processing by the end of 2009”.
The latest statistics for the rate of automation and standardisation in cross-border funds processing do not suggest that “substantial progress” has been made. Although a recent report by Efama and messaging standards co-operative Swift – which surveyed more
than 30 transfer agents that process cross-border funds – found automation rates remained high in Luxembourg and Ireland, closer examination shows a stark contrast in the standardisation rates between them, 49.1% and 8.7% respectively.
Automation and standardisation go hand in hand, says Marco Attilio, head of funds, marketing division at Swift. “Automation is the first step but managers can be pressured by their different intermediaries to adapt to different proprietary protocols and this creates another challenge. But if everyone is using the same standard, the difficulty in maintaining, monitoring and controlling the funds process is much reduced.”
Thankfully, the industry has reached a consensus that in terms of the messaging format for cross-border funds processing, an International Organisation for Standardisation (ISO) standard should be adopted. However, there are two different formats in use – the ISO 15022 and the updated ISO 20022. “There is a calendar for adopting 20022,” says Attilio. “The majority of large intermediaries and transfer agents are going forward with this and I have no doubt that critical mass will be reached rapidly. Low levels of standardisation are more about communities rather than particular types of players.”
While new markets such as Asia and Latin America, where the fax is still a predominant means of processing, will represent a significant challenge in terms of automation and standardisation going forward, the focus currently rests with the main cross-border fund centres of Luxembourg and Ireland, where automation rates are 71.4% and 75.7% respectively.
“The sooner we can reach the 80% automation rate in Luxembourg and Ireland the better, and I think we can realistically achieve this quite soon. But the priority is to increase ISO standardisation. We want to see that reach 50% in both markets. It is realistic in Luxembourg that 50% will be exceeded but we are looking for a greater adoption rate in Ireland.”
According to Kieran Fox, head of business development at the Irish Funds Industry Association, the reason the standardisation rate is relatively low is because of the underlying market conditions and the fact that the Irish market serves a much wider portfolio of product types and a more diverse range of investors from more than 140 countries. “While our automation rate is very high, we also have to be flexible enough to accommodate a higher number of proprietary formats,” says Fox. “Conversely, much of Luxembourg’s market comes from continental Europe where the adoption rate for ISO 20022 is very high.”
Diversity not only explains the disparity in standardisation rates between Ireland and Luxembourg, it also lies at the heart of the dilemma that the industry will have to overcome if it is to increase the efficiency of the cross-border market. Fund distributors and promoters in Europe have been targeting investors in Asia Pacific and Latin America for some time now but automation rates in these markets are much lower than in the established markets of the United States and Europe.
It is harder to hold transfer agents or any other intermediaries to any specific targets in terms of automation when they are not in control of where the orders are coming from, says David Claus, head of offshore at BNY Mellon Asset Servicing.
“For example, much of the interest in Ucits funds is coming from other markets, such as Asia and Latin America where distributors are often using automated faxes. And if achieving a standardisation rate for 80% of orders is imposed, this rate would go down if a firm accepted new orders from Asia or another overseas market where automation rates are low.”
Having said that, the expansion of Ucits funds into new markets does give distributors the opportunity to lay down conditions to any new participants and the fact that many of the Asian firms will be approaching automation from scratch enables them to adopt the latest standards from the outset.
The challenge of encouraging standardisation outside Europe and among distributors is well recognised by Efama. “In Europe, automation is very high but given the international importance of Ucits funds, we need to improve the rate of standardisation outside Europe,” says Bernard Delbecque, director of economics and research at Efama.
Delbecque hopes that the plan to migrate from the old ISO 15022 messaging standard to the updated ISO 20022 version will act as the incentive needed to foster widespread standardisation. “There is a migration plan from Swift and an eventual time by which they will stop servicing the old standard but there are still a lot of firms using it. We need a standard that can be used across the industry – for banks, distributors, TAs, custodians and clients, and that is not yet the case,” says Delbecque.
Closer technical examination of the ISO messaging format, however, shows that more than standardisation is needed. Even if the entire industry adopted the ISO 20022 standard tomorrow, there are currently enough variations to create operational disharmony.
“One point that people tend to forget is that there are still a number of variations within the same ISO standard,” says Lieven Libbrecht, director, investment funds product management at Euroclear. “There are international and domestic formats within the same standard and even variations in how different firms use the same standard.”
The problem is one of legacy. When Swift first developed the messaging standard, it acceded to various demands from different countries to include add-ons that could accommodate the operational idiosyncrasies of each country. So while the development and adoption of the ISO 15022 standard has been a great step forward, there has been some devil in the detail, says Libbrecht. For example, the use of certain optional fields rather than purely mandatory fields creates grey areas for automated processing.
Without such harmonisation, intermediary services that sit between distributors and TAs, such as Euroclear’s FundSettle, employ Swift connectivity in most instances but have to develop lots of little add-ons when sending the same ISO message to different TAs. “While this creates added value for us, in terms of the service we can provide, it also creates more cost for the industry,” says Libbrecht.
The advantage of the new ISO 20022 standard is that it has been developed from scratch specifically for the funds industry. It uses the more flexible XML language and the scope of the different processes it covers is much greater than its predecessor. But migration has been challenging, particularly with the large bank-based distributors.
Many of them are using the ISO 15022 standard across a number of different business units, so why should they move to the ISO 20022 standard if it is only for one part of their business.
Economic incentives are important, says Libbrecht.
National trade associations and industry working groups are playing their part in promoting the benefits of automation and standardisation, particularly in the new markets so vital to the growth of Ucits funds. In addition to the work carried out by Efama’s Fund Processing Standardisation Group, Alfi, the Luxembourg fund association, has opened an office in Asia, and there is also the Asia Funds Automation Consortium which is helping to explain the case for standardised funds processing.
Wolf Klinz has not made any further demands on the industry since his 2007 report despite the 2009 deadline passing and substantial progress being made. At a recent Efama panel debate, he acknowledged this fact but stated that “as a liberal”, he preferred not to introduce regulation and let the industry regulate itself. And while his liberal persuasions may be a crucial component in the adoption of such a position, it is equally likely that Klinz recognises just what a challenging and thankless task it is to try and impose processing standards on an industry that becomes more diverse with every passing week.
So if there is any comfort for the industry to take from all of this, it is the fact that at least it will be left to come up with its own solutions to this particular problem.
©2011 funds europe