Open architecture for the modern age

Roundtable Attendees

- Gerry Barber, head of product development, Ansbacher & Co Limited, London

- Ian Berry, chief operating officer, Lombard International Assurance S.A.

- Edouard Bokuetenge, head of network management, Banque Privée E. de Rothschild Europe

- Sébastien Chaker, director, investment fund product management, Euroclear

- Jean-Paul Gennari, head of UBS Fund Services, Luxembourg

- Gary Janaway, operations director, Schroders Luxembourg and vice-chairman of ALFI’s TA and distribution forum

- Sébastien Lecaudey, head of global fund services, BNP Paribas Fund Services, Luxembourg

- Stefan Richter, head of fund distribution, Robeco

- Moderator: Roxane McMeeken, associate editor, PWM

Roxane McMeeken: We are holding this roundtable here in Luxembourg because we believe that open architecture is one of the most important topics in European investment management at the moment. The question is no longer whether to do it; that was the question two years ago. The big issue now is how to do it.

That is why we are very pleased to be joined by people from all sides of the equation: fund managers, product distributors and securities services providers.

The first question I would like to put forward is, when distributors move to open architecture, what changes must they make to their back office arrangements?

Edouard Bokuetenge: When you start to distribute third-party funds it comes as a shock to your business. At Rothschild, we started five or six years ago. We have seen the number of counterparties, i.e. transfer agents, increasing each month. We used to have more than 150 transfer agents.

Each time you make an order you must fill in a subscription form by hand, submit all of these documents and read all of the prospectuses beforehand. With so many different contacts to deal with, the quality of reporting can be variable. Consolidation is quite difficult as well, as you may receive reporting each day but you must then chase down any other information that you need.

Even if your counterparty is on Swift, they will have their own standard of messaging. You can work on the basis of FTP [file transfer protocol] but this places pressure on IT departments, because a special connection is required each time and there are security concerns. It has a big impact on your operation.

Gerry Barber: As a private client manager, we find that if you are buying into a fund for clients, dealing with all of the paperwork is horrendous and expensive. Our core business is wealth and asset management for private clients. Where possible, we are outsourcing that service to somebody else who can do the bulk of it. It is a kind of halfway house to STP [straight-through processing]. We create a deal ticket in a branch office and that goes off to a global platform provider. We let them deal with all of the administration processes and obtaining pricing information for long-only and hedge funds. This all feeds back into our systems so that we can produce the reports for our clients.

If you can trade stocks on the market using STP, why can we not do the same for funds? That is an issue that the fund management industry needs to tackle at some point. Until the fund industry accepts that and starts to build their own systems to be able to cater for that, we will be continue to be caught in a manual process and systems, which is invariably expensive.

Jean-Paul Gennari: At UBS we have almost the same problems, having to recreate work in every entity within the group. Instead of outsourcing, we have organised it centrally within UBS to cope with these problems. Now we have one entity to handle all processing and therefore we have only one interface with the outside world.

Sebastien Lecaudey: Most private banks come to us with the same issues. They want an overall package. They want reporting on funds and everything else. They want a single provider for equities, funds, derivatives – every single product on a single platform. They do not want different types of reports or to have to deal with too many providers. They also want foreign exchange and financing from the same provider. That is the main strength of our products. We are able to provide these services and on top of that we have the custodian product. They all basically want a one-stop shop.

Roxane McMeeken: What are the problems of working in this way?

Sébastien Chaker: If distributors try to automate their links with each of, say, 100 transfer agents, the problem is that they have very different volumes with each TA. They may try to put in place FTP or, in the best case, Swift links with each TA but, when they analyse the costs, there is typically no business case to support the investment. There may be a business case to automate a link with a high-volume TA, but not the 99 other TAs with which they deal less frequently. Promoters are also under pressure because it is ultimately the end investor who pays for this inefficiency. If investors are forced to pay too much, then perhaps they will not want to invest in funds any longer. With FundSettle, distributors and promoters need only to establish one link to automate transaction processing with all relevant parties.

Accordingly, fund distributors and fund promoters only need to make a shared investment, profiting from large economies of scale. This mutualised approach allows the fund industry as a whole to dramatically reduce transaction-processing costs to the benefit of the end-investor.

Ian Berry: We have to be realistic in that the promoters are effectively marketing-driven organisations. I think the marketing voice in a company will always drown out the operational voice. Will they reduce trailer fees to people who are not automated? In a textbook, yes, but in real life, not before we retire. It is the same with regards to distribution strategy. People on a pan-European distribution strategy will have to be flexible, because the fund houses have traditionally developed in national markets to serve national clientele. They are reluctant to make significant investments to accommodate international clientele, usually because there is no business case.

Roxane McMeeken: How could the hurdle of the lack of business case be overcome?

Sébastien Chaker: In addition to FundSettle providing a single link to all parties, what we have done to incentivise STP is to clearly differentiate pricing between automated versus manually processed transactions.

Distributors can look at their FundSettle bill and can see that 80 percent of their transactions settled on an STP basis at, for example, d6 per transaction.

The manually processed 20 percent cost them d25 per transaction. They are coming back to us, asking to see the list of promoters in the 20 percent. They then call these promoters and ask: “Listen, can something be done about this?” I think that is one of the ways we will achieve a much higher level of automation with lower-volume promoters.

Looking at the issue in a broader context, fund promoters could better reward distributors that have invested in automated transaction-processing solutions through higher retrocession arrangements. Indeed, there is a compelling rationale to do this since the costs of processing inefficiencies are borne by the end-investor through higher annual management fees. One could argue that relatively ‘unsophisticated’ distributors are penalising all fund investors.

Roxane McMeeken: Whose responsibility is it to lead the changes – distributors, manufacturers or securities services providers?

Gary Janaway: The problem is the same for all parties. This was highlighted to me at a recent conference after which I was invited to one of our distributors offices in Madrid. Functionally their offices were remarkably similar to ours. There are differences in their activities, they are the originators of orders that we receive and conversely they receive the confirmations generated from our operations. Essentially, we are talking about the exchange of information and communicating from the buy-side to the sell-side in the simplest terms. So we all have a common cause and interest which implies a joint responsibility to lead the changes.

There remain a number of frequently encountered obstacles, for example, the identification of players is very difficult in Europe. They often have two hats. Take a fund of fund, there will be an investment manager running the product and if they are buying third party funds they are effectively acting in the role of a distributor. Then there is the issue of reaching some of the smaller more specialised players in the marketplace who may be restricted from accessing distribution networks due to requirements such as market capitalisation or the business activities they are licensed to perform. So reaching everyone is difficult and you end up having to compromise on how you do this. Currently, we are moving at two speeds, with most of the larger groups leading as they have greater incentive and more pressure from their distribution partners to effect change.

Stefan Richter: As a fund promoter, we are focusing on the same issues. Two or three years ago, every fund promoter hoped to distribute their funds everywhere and to have multi-access. All of the new regulations are focusing on this issue and it has become costly. The trend now is for smaller fund promoters to reduce their distribution channels. For example, we have some promoters in Austria and we have to deliver tax figures for Austria. In Germany, which is a big market, to produce tax figures is too expensive for smaller promoters. The trend going forward is that only the biggest fund promoters will distribute throughout the world.

Gerry Barber: In the UK, depolarisation means trailer fees must now be disclosed to clients. Clients are given the choice to pay for the service via the trailer fee or paying directly. Clients usually choose the easy option. The issue we have had for many years is that fund houses are extremely poor at producing trailer fees in a timely fashion and keeping up-to-date with what they owe and to whom. From our perspective, the issue is trying to reconcile what we are owed and ensuring that it is what we are paid. For a firm to sell their fund to clients, they will have to focus on this and do it well.

Ian Berry: That is certainly true. Our number one priority is paying commissions, because at the end of the day this is the lifeblood of the people we are dealing with. Gerry is quite right about the fund companies, but the issue is not just confined to the UK.

Two areas in which we see very poor service by fund houses tends to be recurring incomes, the trailer fees, and the payment of dividends in the form of shares. The amount of time that is spent reconciling those two items is rather depressing. We have recently taken a few fund groups off of the list we deal with, just because there are others who are better at it. They are household names.

Roxane McMeeken: What are the difficulties of dealing with hedge funds on an open architecture basis?

Sébastien Chaker: The business case is difficult. Our clients have asked, since we cover 95 per cent of their portfolio, to also address the other 5 per cent in hedge funds. We have developed a hedge fund service, but not at the same low price or level of automation as for mutual funds.

When we deal in mutual funds, our clear objective is to automate daily transaction flows. We do not have the same approach in hedge funds, mainly because volumes are low, the market is highly fragmented and paper is still required in the process. Basically, we have relationships with 200 different hedge fund transfer agents in the Caymans, Bermuda and so on, to whom we send a few deals each month. We do not have the business case to talk to them about automation and nor do they with us. We believe it will remain a manual process for quite some time.

Sébastien Lecaudey: When investing in hedge funds you have to look at the financing capabilities of the providers. Since you have to pay upfront but you receive the money afterwards, if you want to get out of an underlying hedge fund and into another one, the provider must be able to provide the right financing, or else you cannot do it.

Roxane McMeeken: What hope is there for solutions on the mutual funds side?

Jean-Paul Gennari: The key to standardisation is actually the global clearing house network. It has an awfully big hand to play in this. If you look at the global clearing agencies’ network today, with Euroclear, Deutsche Boerse Clearing and others, it is really controlled by a handful of houses globally. Increasingly, platform providers, private banks and others are using their global clearing networks. If you want standardisation, it is the global clearing houses who can actually drive that. They are the ones with the muscle and power to do so.

Edouard Bokuetenge: A lot has already been done in the last five years. I believe that initiatives such as FundSettle and Vestima are great initiatives for the market. It would have been better for them to have done it together, but they have different kinds of shareholders. One is open on the market and the other has only one shareholder.

My second point concerns Swift messages and the evolution of FundSettle and Vestima. We have seen that many transfer agents did not want to help both players bring about standardisation in order to improve the market going forward. With Swift, they can no longer resist the trend because there is a cost involved. Everybody is competing based on pricing and they can no longer work on paper to do that. They must go on to the Swift solution. I think the plug between Swift and global players is a good solution. Why should you go to a global player to do that?

I, for one, do not want to connect to 150 or 200 transfer agents to organise this, all of which have different standards. I do not want to have so many custodians. I have enough to do in a day and I prefer to concentrate on adding value and trailer fees. I have no interest in doing that job. For this reason we have outsourced the task to FundSettle.

Gary Janaway: I think it is the responsibility of all players involved to get around the table and contribute, because you cannot achieve wholesale change with just a select group of people. You can encourage and support initiatives and recommend changes in an open manner, but to be successful you will need advice from all parties, custodians, private banks, transfer agents, fund administrators and so on.

An example of such a body working in this manner is the Luxembourg TA Forum which considers most issues that are operationally orientated. It has a membership of over 100 companies. There is a steering committee that oversees and co-ordinates activities, this group is an appointed ALFI working group. Members of the TA Forum are involved in initiatives impacting the Luxembourg industry, examples being EFAMA's Fund Processing Standardisation Group and the SWIFT user group.

For these reasons we will continue to make available good people to participate and work with other parties in the industry. It is not a competitive arena; it is about pulling it together. We have heard a lot of endorsement around the table for Swift. We also support SWIFT as we have found them to be proactive in addressing industry issues. We need forums where we can sit down and discuss what we think is good. To implement our ideas we need to work hard at designing solutions, circulate them as part of the consultation process and then endorse and recommend them where possible.

I believe it is about getting good people into the industry bodies, making them strong and knowledgeable. This will enable us to reach agreement on areas of common issue that everyone is individually working on. No one directly benefits from this approach, it is the industry that benefits.

Luxembourg: the location for PWM’s roundtable