A single, unified pan-European clearing and settlement system for mutual funds would make matters much simpler for transfer agents (TAs) and distributors of investment products. But any attempts to instigate greater cooperation have been frustrated by the mass of parties with conflicting interests.
Some of the main players were gathered at the recent Fund Forum in Monaco, and it was not long before sparks were flying across the conference floor. Tony Solway, head of BNP Paribas Securities Services in London, said investors were generally happy with back-office standards in their own markets, but problems arose where funds were sold across borders. He said platforms such as Euroclear and Clearstream were not the answer to harmonisation.
“If you want to create a cross-border funds business, it is time consuming, error-prone and not very transparent if you are an investor,” said Mr Solway. “Platforms are making my life more complicated, not less, as they lead to multiple reconciliations. The Vestima model is valuable to distributors selling multiple products. The TA model, which BNP Paribas has, is serving investors. The two models are on a collision course, but there is no dialogue.”
Mr Solway pointed to initiatives by Fefsi, the pan-European funds federation, to come up with a solution, but without success. He said the answer was a “road map”, but not one imposed by US institutions. “The NSCC [US-based National Securities Clearing Corporation] could not get off the ground in Europe. We Europeans have to figure it out for ourselves, but we don’t quite know how to do it.”
Distrust among European custodians, competing platform providers and asset managers have compounded the problem of lack of harmonisation, which can only be solved by the distributors, said Mark Tennant, senior vice-president of global client management at JPMorgan Investor Services. “Distributors think there is no problem, but us transfer agents are having a nightmare back at the ranch. We need to hang our heads in shame in the UK. Those of us in the UK are the most manual, useless, paper-pushing set of crows that ever existed. We have to get the Citibanks and UBSs of the world to drive this.”
Distributors, said Mr Tennant, must hold the mutual fund providers to ransom and dictate the way in which the funds are traded. Otherwise, the entire industry will be swamped with documentation. “There is not a cat’s chance in hell that we won’t end up with the biggest paper-pushing disaster in history if the volumes increase as predicted.”
Mr Tennant complained about $3 (e3.7) a trade minimum costs levied by Euroclear, against the NSCC’s 30 cents. “Total Expense ratios are already 240 basis points in much of Europe and 300 in Luxembourg. If equity markets only go up 8 per cent, investors will eventually realise there is no point whatsoever investing in a mutual fund. It is better to put money in the bank. Then our industry really will be in shock.”
Credit where it’s due
However, some improvements to trading addressed by platforms, were praised. “Platforms bring more efficiency to the market,” said Jean-Louis Bernardo, product manager, SG Global Securities Services. “They address improvements such as order routing and database issues, but it doesn’t necessarily mean all orders must go through one platform.”
Euroclear, Clearstream and EMX were defended by Keith Haberlin, head of sales for investment funds at SWIFT, who said much progress had been made in clearing and settlement over the last two years.
Bruno Zutterling, director of investment funds services at Clearstream added that “there is no incentive for distributors to make the food chain more efficient, because costs are not in their hands”.
Currently, a distributor may be given a 15-point checklist by one fund company for compliance purposes, but just three points from another house, leading to confusion and a lack of standardisation, said Richard Willis, product manager for Continental Europe at The Bank of New York. “Often, investments have not taken place because of the nature of the administration behind them,” he said.
“Enhanced compliance is where we have major problems. We may deal with the same distributor for a variety of asset managers, but they may not agree with the compliance rules.”
While the systems are actually becoming more efficient, Mr Willis also argued that there were too many of them. “The TA’s life is becoming even more complex, with distributors being offered a choice of what they use. We will now have to feed UK distributors into Europe through EMX, another connectivity we have to make.”
Taken to the cleaners
Asset managers must let transfer agents talk to distributors, and they will benefit from improved efficiencies, said Mr Willis. “Currently, we are making them pay for manual transactions and bleeding them dry.”
Fund management costs have been raised to satisfy commission-hungry distributors, leading to a need for improved operational efficiency, said Rudolf Siebel, managing director at BVI, the German funds association. He said a 40-strong team coordinated by Fefsi, including representatives of platforms and distributors had already helped reduce payment times from 40 days to three.
The challenge is to encourage messaging through an xml format in place of faxes. “Fefsi is trying to put oil in the machine and remove the grease, although it cannot rebuild the machine,” said Mr Siebel.
Solway: ‘platforms make my life more complicated’
Tennant: ‘transfer agents are having a nightmare’
