Euroclear and Strate, South Africa’s CSD, have partnered to develop a platform that would automate the processing of mutual fund transactions in South Africa.
The South African mutual fund industry is currently valued at around €91 billion and has over 1,200 active funds. However, the market has inherent inefficiencies due to a lack of automation, particularly because payment and fund unit creation happen independently.
“As a consequence, there is a real risk that the two transactions become separated,” says Mike Bolsover, director in Euroclear’s strategy division.
In South Africa, investors pay upfront, but the cash only reaches the fund management company at the point of reconciliation, and investors do not know how long it will take to receive the fund units. From the point that cash is pre-funded to the point of reconciliation with the fund manager, prices can fluctuate up or down. In conversations approximately nine months ago, Euroclear and Strate recognized that an automated platform could solve this problem.
“The object of our partnership with Strate is to get the two linked through the same platform so money and creation of fund units happens with certainty,” explains Bolsover.
He considers the platform to be the “vital plumbing” in the sense that it helps move the process along, but investors will not be able to actually place orders through the system. Instead, the platform centralizes fund data, order history and links the settlement process, which is where Strate comes into play.
“Rather than reinvent that wheel in other markets where greater fund automation is needed, we will look to link our funds processing platform to the domestic cash settlement systems,” says Bolsover.
Bolsover sees four main objectives for the platform that come as a result of this centralization and automation: “Firstly, it’s to reduce the cost overall…Secondly, it’s to reduce risk…Thirdly, we should be able to start responding to regulators need for transparency…Fourthly, we believe that—and it’s yet to be proven—but we believe that having a more transparent and efficient process will allow markets to grow and encourage savers to invest,” which is the goal of any emerging economy, he says.
While the project is in its early stages with Euroclear conducting feasibility tests, Bolsover expects that the platform would come to market in two to three years.
Euroclear and Strate Partner on Mutual Fund Transactions Platform
Euroclear and Strate, South Africa’s CSD, have partnered to develop a platform that would automate the processing of mutual fund transactions in South Africa.