The grotesque inefficiency in mutual fund processing is one of the great why-oh-whys of the modern European capital markets, with fund managers, fund accountants, fund distributors, transfer agents and would-be centralized solutions all blaming each other for refusing to fix the problem. Now one of those centralized solutions has decided to stop griping and take the debate in an entirely different direction.
Clearstream announced today that it is modifying its Vestima mutual fund order processing service to take account of current reality rather than future fantasies about a single European marketplace in mutual funds. That reality is that 90 per cent of European mutual fund transactions are manufactured, distributed, ordered, routed, processed and settled by purely domestic providers using purely domestic infrastructure. Rather than automate a cross-border market which barely exists, Clearstream has opted to improve the efficiency of the domestic markets (which most certainly do).
To be sure, the “New Vestima” service will make use of centralized technology, in the shape of a refurbished version of the FORS mutual fund order routing system the Luxembourg-based ICSD acquired when it bought Filinks from CDC IXIS in 2002. The technology allows fund distributors to choose where they wish to settle transactions: in a proprietary system owned by a fund manager or bank, in the local CSD, or in Clearstream, or even in Euroclear via the Bridge between the two ICSDs.
Importantly, there is no obligation to use Clearstream settlement and custody services at all. “What we have created is a solution that recognizes the difference in markets within Europe,” explains Bruno Zutterling, the Director of Investment Funds at Clearstream, who came to Luxembourg with the Filinks technology from CDC IXIS. “With our new platform, we are delivering solutions to each market. Which is why we have termed this a ‘multi-domestic ‘ solution. Furthermore, we have investigated in detail the differing needs of the various players in the industry and we will deliver solutions which meet their specific needs, thereby easing the implementation process and reducing costs for the whole industry.”
Clearstream is offering the European mutual fund industry something it has not previously enjoyed or even (in its search for a European equivalent of the Fund/SERV utility owned by the DTCC in the United States) sought to enjoy: competition and choice. But of course the ICSD is clearly hoping that it can also extend the order-routing, settlement and custody services it has long offered to the offshore market to the much larger domestic fund markets in Europe, and so garner revenues for itself.
The initial target markets of France and Germany are well chosen: between them they account for almost two fifths of all domestic mutual fund transactions in western Europe. They also happen to be the markets where Filinks was pioneered and Clearstream parent Deutsche Borse has a naturally dominant position, and an ownership stake in the local mutual fund order-routing network.
“We have used our Group’s expertise in efficiently processing transactions and our ability to create cost-effective technology to launch this new and innovative solution which the investment fund industry has needed for some years now,” says Volker Potthoff, Managing Director, Banking and Custody Services, at Deutsche Brse Group. “We are delivering a very flexible solution where domestic and offshore market participants can elect which elements of the service they prefer in order to minimize their own costs and ultimately reduce the costs incurred by the end-investors.”
Clearstream estimates that mutual fund market participants could save as much as 35 per cent of their current costs by using the New Vestima Service, which will be launched this summer – simply by reducing the manual elements in mutual transaction processing and by choosing their lowest cost settlement route and custody provider. Clearstream says it has a proven and current track record of over 90 per cent STP in mutual fund transactions via Vestima, and an extensive network of links to CSDs around Europe in place already.
“We are aiming to radically reduce industry inefficiencies that SWIFT has estimated are costing as much as Euros 5 billion a year,” says Zutterling. “New Vestima will provide benefits to all major European mutual fund markets by delivering a low-cost solution for purely domestic, cross-border transactions in domestic markets, and completely cross-border transactions – all within a single platform.” He adds that users can route orders transaction by transaction, in real-time, or in batches. “Any and every market participant will be able to process mutual fund transactions in much the same way as they process other financial instruments,” says Zutterling. “Key to this is the ability for participants to use existing infrastructure, and to benefit from a single solution for all fund transaction types.”
Importantly, because the New Vestima order routing service will make use of XML integration technology, its customers can continue to use existing message formats. This in turn means that they will have to change virtually nothing about their own procedures, says Zutterling, simplifying the implementation process. However, New Vestima expects most messages it receives to be couched in the new SWIFT ISO 15022 message formats that are gaining popularity in the European mutual fund markets.
Clearstream is in no doubt that New Vestima, properly used and understood, has the potential to revolutionise mutual fund processing in western Europe. “As the industry gets to understand the new Clearstream service, it will clearly see that the debate has changed,” predicts a Clearstream spokesman.