Keep ordering in order

Through the recent acquisition of EMXCo, the leading provider of order routing in the UK, Euroclear plans to develop the first automated order messaging and settlement solution for transactions of UK funds. This could cut fund trading costs by up to 50 per cent, according to the parties involved in the deal. By combining the EMX technology with the know-how developed by CrestCo – the settlement agency for the UK securities, part of the Euroclear group – the international securities settlement organisation expects to be able to significantly transform the operational structure of the UK fund industry, which is still “plagued with inefficiencies, high costs and risks, largely due to manual intervention”, according to CrestCo chief executive officer Tim May. EMXCo, founded by the UK fund industry association in 1999, has brought automation and degree of standardisation to order routing, the process by which an order message is passed from a distributor to a fund provider or vice versa. By employing a standard mechanism of communication, the Fix protocol, the data relative to the trade is keyed in once and then re-used constantly down the supply chain. This enables the order confirmation mechanism to be speeded up, reportedly saving costs associated with manual trading, errors and misinterpretations. The company now handles about e4bn of fund trades per month. However, in the settlement process – where money is moved against assets from the intermediary to the fund manager, or from the fund manager back to the intermediary on a redemption or sale – there is still a total lack of standardisation for UK-based funds. Fund managers and distributors use their own systems and settle through Bacs (Banks automated clearing system) or CHAPS (electronic bank to bank same-day payment). But these methods still require people to input data manually. Edward James, product manager at Euroclear, explains that CrestCo still has a limited number of transactions in funds going through per month. The acquisition of EMXCo will enable it to access the order flow create the settlement message. The UK fund market has always been difficult to enter, says Mr James. This is because fund distribution has historically been led by IFAs who do not hold clients assets and are not CrestCo members. By collecting all those instructions from the IFAs and the other parts of the fund community, EMXCo is a natural partner for CrestCo, says Mr James. Process automation EMXCo chief executive Max Wright explains the technicalities of the solution. The aim is to develop an automated link between the order routing and the CrestCo settlement system. There is currently a disconnection between the two mechanisms. “What happens is that the clients would complete the order and then would re-key the data into the Crest system,” says Mr Wright. “What we want to do is automate that process, and take out an additional layer of manual processing.” This new development has been received with some enthusiasm by fund distributors. “If you look across the market, there is a lot of manual processing going on and you are reliant on the other party to fulfil their obligations,” says Paul Miller, head of investment administration at the UK division of Skandia. “Often payments will not be received through the banking system in time, therefore you have manual processes that go on after that to deal with those houses’ settlements. I would expect that that situation would be removed or at least being minimised in an EMX/Crest type solution.” Skandia is currently one of the main EMX shareholders, with £32bn (e48bn) in assets under management, predominantly invested in third party funds. Skandia uses both EMXCo and European competitor Swift for routing its orders. Like a number of larger organisations, it has developed its own systems for settling funds, because it is big enough “to justify the investment cost”. Settlements are prepared in its back-office systems and communicated to its banking systems automatically. Mr Miller is certain that the solution will provide material savings for the industry as a whole. However, he is not sure heavily automated organisations could save 50 per cent. The cost of the solution must also be considered. This STP solution is expected to be implemented by the first quarter of 2008, following market consultation. EMX users will be able to decide whether to settle on Crest and there is no obligation to route through EMX for those institutions settling in Crest. Philippe Seyll, head of investment fund services at Clearstream, the rival organisation wholly owned subsidiary of Deutsche Börse, says this move will have no impact on his company’s strategy. Clearstream will keep on concentrating on its home market, Luxembourg, for which it will offer central settlement through its Central Facility for Funds, planned for the end of the year, combined with order routing via its Vestima+ platform.

Wright: automating the process