According to statistics from the European Fund and Asset Management Association (Efama), at the end of 2007, the European investment funds industry accounted for 33.2 percent of the E17,800bn global fund market, second in size only to the US funds industry which had a market share of 46 per cent.
Both regions have experienced dramatic growth over the past decade. Nonetheless, there remain stark differences between the two largest fund markets. There are for instance, over 50,000 funds in Europe as against less than 10,000 in the US.
While around 70 per cent of the European fund market is still concentrated in proprietary funds where banks and insurance companies sell their own products to clients, in the US, over 80 per cent of the mutual funds business is focused on third-party products.
The differences are particularly evident in the fund processing space, which encompasses order management, settlement and custody. The US enjoys the benefits of a single market, single currency and single set of rules for mutual fund processing.
It also has a single industry utility for processing and settling mutual fund orders, Fund/Serv run by the Depository Trust & Clearing Corporation (DTCC). Europe, on the other hand, continues to struggle with over 20 different markets each with their own rules, tax systems and settlement structures.
Adding to the complexity is the fact that these markets do not follow a common processing model. In markets like France and Germany, fund settlement and custody services are provided by the local central securities depositories (CSDs) on a DVP (delivery versus payment) basis. The UK, Luxembourg, Ireland and a few other markets follow the transfer agent (TA) model, where order routing, settlement and asset servicing are handled directly by fund distributors and transfer agents through a bilateral exchange of information.
Anecdotal evidence from industry participants suggests that the complex spaghetti of linkages and interfaces required for fund processing in Europe not only lead to high operational risk but can in some cases increase costs to over E100 per trade. A study carried out by consultants Deloitte last year estimated that the average cost of buying or redeeming a fund across borders in Europe is E62. The DTCC in contrast charges a mere 7.5 US cents per transaction on their Fund/Serv platform.
IMPROVING THE SITUATION
A pan-European fund processing infrastructure remains a distant dream. However, with the easing of regulatory constraints, and the consequent growth in cross-border transactions (Efama estimates that cross border fund transactions represent around 20 percent of total transactions in the European Union) and third-party distribution volumes, several initiatives are afoot to improve cross-border funds processing.
Most notable among these are fund platforms developed by the leading international central securities depositories (ICSDs), Euroclear and Clearstream.
FundSettle from Euroclear, which was launched in 2000 provides an integrated order routing and settlement solution for the cross-border market. Ivan Nicora, Director and Head of Investment Fund Product Management at Euroclear says that the platform is connected to over 500 European fund houses and over 200 distributors across Europe,
“FundSettle was launched at the end of 2000,” says Mr Nicora. “The first few years were about educating the market. Between 2004 and 2006 there was huge growth in volumes driven by the development of open-architecture, third party fund distribution. But from 2007, the pace of growth was lower than expected, due essentially to the financial crisis.”
Clearstream too started out with a bundled order routing and settlement product, similar to FundSettle, but now offers two separate solutions, Vestima+, and the Central Facility for Funds (CFF). Available since 2005, Vestima+ is an open order routing platform, which currently provides access to over 40,000 funds from around 200 fund houses.
CFF is a post-trade solution providing one single set of settlement and payment instructions for all participating firms, transfer agents, fund distributors and fund promoters. It was launched in May last year and was targeted primarily at investment funds domiciled in Luxembourg, the largest market in Europe for cross-border funds, but has since been rolled out in Belgium, Ireland and most recently, the UK.
With its coverage of Europe’s most important investment fund domiciles, CFF is fast becoming Europe’s infrastructure of choice for cross border settlement of investment funds, claims Clearstream board member Philippe Seyll. “In Luxembourg, we have 40 transfer agents on board, which cover 90 percent of the market. In Belgium, three of the major transfer agents accounting for around 75 per cent of the market have decided to use our solution.”
Vestima+ can be used without CFF and vice versa, Mr Seyll points out. “Unlike FundSettle we offer an open model that is preferred by some distributors and transfer agents.”
