Cofunds, FNZ , Nucleus, Henderson and Schroders have signed letters of commitment backing Calastone to develop a settlement alternative to Euroclears UK&I CREST system.
In November 2008, Calastone announced its application to become a CREST central sponsor, paving the way for automated settlement for mutual fund transactions, according to the press release at the time. However, according to Dan Llewellyn, head of market standards at Calastone, as discussions matured, the fund industry pushed for an alternative to the CREST system.
Speaking to Global Custodian, Llewellyn previously product manager at Euroclear explained the reasoning behind the move: Euroclear have been going through a consultative process with the market for the last three years, and the fact that this hasnt moved onto any live users of their system, tells us that all is not well within the market.
We have been through quite an extensive consultation process, where we spoke to twenty to thirty different organisations, the conclusion was that people wanted a very light tough approach to settlement, they did not feel that they needed to take on infrastructure that was more applicable to a secondary market. They thought that because they operated in a primary market there was a more simplistic approach, and they did not want to re-engineer all their back-end technology.
A Euroclear spokesperson stated that It is not clear as yet, what Calastone are looking to provide by March of next year. But, we welcome initiatives that improve fund-processing efficiency.
Euroclear bought EMXCo, a UK mutual fund order routing network, in 2007, and has aimed to combine EMXCo messaging with the settlement capabilities of CREST. Although the combined system has failed to sign up any clients, according to someone familiar to the situation at EMXCo: “Following comprehensive dialogue with all 26 members of the UK Funds Liaison Group – a trade body representing the UK investment funds market – there are several leading fund providers and distributors in preparatory testing of EMXCo/Euroclear UK & Irelands automated processing link. We expect them to go live in the near future.”
According to Llewellyn a serious problem with the Euroclear Crest system concerns the liabilities of market participants: If you look at the equities model that CREST has today, the legal ownership of the assets moves within the CREST system. If you look at the model that was being put forward by Euroclear CREST system, the legal title would still reside with the fund managers legal holding registrar. There was a feeling in the market that the secondary market model was being adopted, with all the technology that needed to be invested in, but for what reason?
The new solution from Calastone will be based on a matching engine approach, designed to calculate counterparty net settlement positions together with automated notification of legal title in fund unit positions. Currently, settlements are undertaken on a many-to-many bilateral basis and the Calastone approach will enable firms to settle their transactions using a more efficient model. The Calastone model is anticipated to be launched by the end of Q1 2010.
In addition, Gartmore, and others have voiced support for the Calastone initiative. IFDS and Capita Financial Group have confirmed they will be supporting their clients developments for this service. The service will be available to the entire funds market.
Giles TurnerNews Editor