Removing the data grind

The ever increasing volume of fund transactions in Europe and the escalation in the distribution of third-party products keep automation, or straight-through processing (STP), high on industry players’ agenda. But distributors have made clear that offering third-party funds is considered a necessary, but not sufficient condition for the implementation of STP. “Straight-through processing becomes indispensable when there are big turnovers and volumes, when the approach to fund or manager selection is more quantitative than qualitative,” says Dario Brandolini, head of quantitative management at RAS Asset Management. The Italian company, part of the Germany insurer Allianz, has been employing Euroclear’s Fundsettle – supposedly the only integrated platform in the market offering order routing, settlement and asset servicing – for a couple of years now. “The driver for starting to use Fundsettle was the introduction of a new management style for a new range of retail products,” explains Mr Brandolini. These new products – Unit-linked insurance solutions – employ third-party funds in addition to in-house funds and are managed using a quantitative style, which entails a very high turnover of funds. “Quantitative models grind a lot of data, as they aim to capture as many signals as possible, substantially from the prices of underlying funds. They tend to generate portfolios that translate these prices in indication of asset allocation. Therefore, these models operate with a large quantity funds in order to offer a wide diversification,” explains Mr Brandolini. “When there are 300-400 switch or buy and sell operations per month, you touch limits that are unbearable to a back-office system.” Moreover, quantitative models concentrate operations in two to three days, which creates further problems. “In this case, STP is indispensable, it would be a nightmare from the operational point of view to manage all this manually.” But the complexity of the STP process cannot be perceived or appreciated by a third-party distributor employing a traditional, fundamental investment style, which emphasises the manager’s qualitative models of selection. “If fund turnover is low, if there are not many transactions to do, the distributor has no problem in sending five orders by fax per day and to get confirmation in the same way,” says Mr Brandolini. Overly expensive Also, the costs of employing external platforms are “very dear”, he says. Recent results of a survey into European post-trade processing from SmartStream Technologies show that banks and asset management companies are “dissatisfied with the current clearing and settlement systems in Europe, which raise the cost of processing trades.” Ivan Nicora, director and head of Investment Fund Product Management at Euroclear, states that it is all matter of cost transparency: “There is inertia and unawareness of what the real costs in the industry are for not using STP.” The main difficulty is to convince the management of a bank to outsource the process and pay visible fees for the better service, when “there is no clue of how much the manual process they have been using for decades is costing them,” says Mr Nicora. Euroclear states that firms who have migrated from using their manual antiquated back office systems of telephone and faxes onto Fundsettle are saving, on average, about 60-65 per cent of their back office cost for processing funds. The trend seems to be towards price reduction, anyway. Euroclear announced a 25 per cent tariff cut last year and the introduction, this year, of a two-tier pricing structure depending whether clients embrace full STP or not, also translated in a further fees decrease. Economies of scale are also critical for service providers operating in the fragmented European market. “Fundsettle has critical mass business on its books and it can offer a much steeper cost reduction [than other systems],” claims Mr Nicora. Regardless of the cost, some products cannot even be conceived in a manual environment. “Had we not had Fundsettle, we could have not launched the new range of quantitative Unit-linked,” admits Mr Brandolini. The total value in these products has increased from ?60m to ?800m. “Given the growth, it has been possible to sustain the model thanks to Fundsettle.” All the other RAS AM’s products employing third-party funds, including “Ras Multi-Partner” and GPFs (Gestioni Patrimoniali in Fondi), are now processed through Fundsettle, even if these products use a fundamental investment style, in which fund turnover is low. In total, Fundsettle processes around ?2.5bn of assets out of the total ?36.5bn overseen by the Italian fund house.

Nicora: there’s an in­ertia over real costs