Clearstream is to add a centralised settlement service for Luxembourg-based UCITS funds to its Vestima+ mutual fund order-routing platform, though use of the so-called Central Facility for Funds (CFF) will not be obligatory for Vestima+ users. The new delivery-versus-payment (DvP) service will be pilot-tested with a group of transfer agents, fund promoters and fund distributors in the second half of this year, with a view to going live in the second half of 2007.
Philippe Seyll, director of investment fund services at Clearstream, says offering a DvP service will not undermine the principal attraction of Vestima+: the ability for fund distributors to route orders to fund promoters, fund managers and their transfer agents without having to use the settlement and custody services provided by Clearstream. “It’s a must to keep the model open,” he says. “It is why we talk about an open architecture. We want to keep the solution very open-ended. We don’t want to get trapped in a silo. We want to be totally independent from the order-routing side, but we don’t think having Vestima+ as an order-routing option will undermine the value proposition of CFF.”
In other words, traffic between fund distributors and transfer agents can continue to travel via SWIFT or fax or proprietary message formats and networks, and still settle DvP in CFF. But Seyll does not deny that the multiplicity of bi-lateral links between distributors and transfer agents inflates costs, as manual keying errors are made and payment takes place through correspondent banking networks. “The lack of DvP restricts the growth of the European mutual fund industry,” he says. “CFF will be cheaper on a per transaction basis.”
Clearstream itemises a number of other advantages of CFF. The most important is that the simultaneous exchange of cash and mutual fund shares or units will eliminate the counter-party risk between the creation of the shares or units and receipt of the cash to pay for them. It will also obviate the need to borrow if cash does not arrive. However, Clearstream says fund distributors will also be able to communicate automatically with multiple Luxembourg transfer agents in a single, standardised format. The ICSD predicts that the higher rates of automation that ensue is what will cut costs as well as risks.
Seyll says CFF also meets calls from bodies as various as ISSA, EFAMA and the European Union to bring settlement processes into line with the equity markets, although the reports from these groups in fact focus more on standardising the processing of mutual fund trades than the settlement procedure itself.
At this stage, the service is confined to Luxembourg-domiciled funds administered by Luxembourg-based transfer agents, Although fund distributors throughout Europe can make use of CFF to buy, sell and switch between Luxembourg-domiciled funds, the service will not be available for funds based in, say, London or Milan. Expansion beyond Luxembourg is a long term goal, but for now remains purely theoretical.
Vestima+ was originally based on the insight that the majority of fund traffic – chiefly, subscriptions, redemptions and switches, but increasingly dividend payments, other corporate action entitlements and portfolio switches as well – takes place between domestic providers in domestic markets. But Clearstream is under no illusions that it can displace existing domestic order-routing platforms (such as EMXCo in the UK, or the Investro platform that its parent owns in Germany) or challenge domestic CSDs (whose membership is often limited to domestic institutions) or disintermediate payments made via domestic banking systems.
Instead, its offering is aimed at the “offshore” distribution of UCITS funds from centralised fund administration centres into multiple European markets – which means Dublin as well as Luxembourg. “At this stage we have got no pre-conceived ideas about geographic expansion,” says Seyll. “But if you look at the different markets in Europe the first one that comes to mind is Dublin.”
Seyll adds that a Euroclear-style “senior advisory board” (SAB) of users will be appointed to advise, inter alia, on which jurisdictions to enter next. Though he emphasises that CFF products will be developed and proposed by Clearstream rather than determined by the advisory body, the SAB will have clout. “Any move has got to be endorsed by the SAB, and if they tell us not to go in particular direction, there is no way we will go in it,” explains Seyll. “I don’t want to be right, but out of a job.”