Magazine Issues » September 2010

CLEARING and SETTLEMENT: a decade on

Ivan_NicoraTen years ago Euroclear launched its automated funds processing platform, Nicholas Pratt asks Ivan Nicora (pictured) how much has changed and if the industry is nearer to achieving end-to-end automation.

FundSettle, the platform for automated funds processing and asset servicing offered by settlement infrastructure service provider Euroclear, celebrates its tenth anniversary later this year. In a market where technology and consolidation have developed at a rapid pace, it is a testament to FundSettle’s longevity that it has neither been made obsolete nor had its name changed as part of a takeover during the decade. How effective, though, has FundSettle been in achieving its initial goal of encouraging and promoting the automation of funds processing?

According to Ivan Nicora, director and head of investment fund product management at Euroclear, there was a willingness among fund managers to embrace automated funds processing as far back as the 1990s. The problem was the technology. “The legacy systems of central securities depositories and within banks and other financial institutions were all geared towards fixed income and equities. They were not designed to cater for the special characteristics of an investment fund – handling decimals, creating enough transparency at the investor level, managing commissions and routing order flow. Delivering automated funds processing using legacy system technology was impractical. What we needed was a dedicated platform designed specifically for funds processing and this is where the idea of FundSettle came from.” 

FundSettle launched in November 2000, meaning that it had just under a year to establish itself before the economic downturn in 2001 halted this early progress. “The bad economic conditions between 2001 and 2003 meant that the industry’s adoption of FundSettle was relatively low,” says Nicora. “Back office automation was not a huge priority. It was not until 2004 that FundSettle really started to gain traction.”

By the end of 2004, FundSettle had recruited 20,000 funds, 350 transfer agents and 100 active distributors. Today, these figures have more than doubled with 50,000 funds, 500 transfer agents and more than 350 distributors all using the platform. Despite the growing number of adopters, perhaps the biggest change that Nicora has witnessed in the last ten years is the motivation behind the adoption. “In the beginning, the drive for automation was defined by the need to reduce costs. Now it is much more about using automation to grow the business and to increase scalability.”

Challenges ahead
Despite the progress made, Nicora accepts that several challenges still remain in achieving the aim of industry-wide adoption of end-to-end automation for funds processing and servicing. “The funds industry is not yet at the same level of automation as fixed income or equities, where there is a lot more consolidation and standardisation as regards infrastructure. In the funds industry there are still too many options and lots of different providers offering different solutions for different parts of the process.

“Competition is always healthy, but not everyone is aiming at the same target. People have different definitions of what constitutes automation and some providers are offering solutions that only address part of the process – they create a solution to patch an inefficiency, which disguises the underlying issue. Automation delivers its full benefit when it is end-to-end and standardised, but achieving that requires the market to evolve.”

Encouraging evolution is no easy task and Euroclear has spent significant time getting the market to not only adopt new tools, but to change their old practices. “For example, we have had many discussions with the UK market to encourage market participants to move away from faxes and transmit orders electronically, routing them  through EMX to Euroclear UK & Ireland’s settlement platform,” says Nicora.

Euroclear has also offered incentives to speed the pace of change by rewarding the adopters of automation with higher service levels and lower processing costs, a strategy that intensified in the latter half of the decade, notably in September 2008 when FundSettle slashed its transaction costs by 85% and made asset servicing and custody services free for distributors.

But the incentives have not been provided by Euroclear alone. “Some of the fund promoters are also providing their own incentives to distributors and transfer agents,” says Nicora. “They realise that they are automated only to the extent that their network is automated. We are not imposing automation, but promoters seeing its value are eager to work with us and together we shape the right incentives.”

Another significant obstacle to achieving 100% end-to-end automation is the fact that each national market has its own individual approach to fund processing; for example, messaging. Some regions, such as continental Europe, have adopted ISO messages whereas other markets like the UK have adopted FIX. In light of these inconsistencies and the growing demand for cross-border funds transactions, FundSettle has opted to provide a bridge to users operating with different messaging protocols.

“We feel it is important to recognise that there are differences and to respect the various market practices and standards used in individual domestic markets,” says Nicora. “It is too much of a jump to expect an entire market to move to a new single standard. While we make progress in automating the end-to-end process for the cross-border fund market, we also need to allow participants in individual markets to use the messaging format they are most comfortable with.

“Eventually, the market will move to a single standard, but to wait for this to happen and bear the costs and risks of manual procedures in the meantime would stagnate the industry’s growth. So we have taken a more progressive approach. We are still looking to provide full straight-through processing [STP], but if we need to provide a bridge to get there, we will take that short cut on an interim basis. As we cannot expect full market standardisation overnight, this hybrid approach is acceptable.”

Another example of how Euroclear is attempting to ease connectivity to FundSettle is the arrangement it has put in place with Bloomberg.  Clients, such as Citi, are now able to link the front of house with FundSettle’s back-office processing capabilities via their Bloomberg terminal. “We are open to these kinds of ideas. There are always hurdles to the adoption of automation. If we continue to find ways that make it as easy as possible for users, while also advancing the long-term move to standardisation, then it will speed the process up.”

Of course, any move to encourage automation and standardisation is always somewhat dependant on regulatory developments and it is no different with the funds industry. The European market has been radically shaped by the Ucits directives, particularly in the way it has encouraged and enabled greater cross-border distribution of funds. And with Ucits IV set to be introduced over the next few months, cross-border activity is likely to increase, says Nicora. “Ucits has established itself as the gold standard for distribution and there is no sign of this extinguishing, so it is important that automation remains on everyone’s radar.”

Mainland Europe’s funds market is still essentially based on an in-house distribution model where the funds are promoted and distributed by the same bank-based entities. However, Nicora anticipates this model changing and resembling the Anglo Saxon model where funds are distributed on a third-party basis. A consequence of this change, along with the continued influence of Ucits IV, will be a greater awareness of the different ways that markets operate across borders, which in turn will strengthen the case for automation and standardisation. This will give FundSettle an opportunity to extend its reach beyond Europe.

“The increasing popularity of cross-border distribution and the desire for fund promoters and investors to explore new markets is where FundSettle can add value. There are strong net inflows coming from Asia and the motivation to automate will be very different in Asia compared to Europe. In Asia, the cost of labour is much more affordable, so the driver will be more about the ambition to reach new markets and expand fund investment opportunities with non-Asian providers that are already automated, rather than reducing cost.”

Consequently, market participants that will be driving the case for automation over the next ten years will be those that have fully embraced the global distribution model and the need for a standardised infrastructure that these international ambitions necessitate.

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