Sibos tackles inter-country trading issues

Held in Atlanta, Georgia, under the title “Time for growth”, this year’s Sibos conference, staged by SWIFT, focused on the challenges facing the financial services industry in terms of reducing costs, improving efficiencies and regaining investor trust.

Although growth is usually seen as a good thing in the investment world, growing fund flows into a huge variety of products also reveals some of the problems the industry is facing, particularly lack of harmonisation and an inability to cope with higher volumes of cross-border transactions.

No more fragmentation

The basic aim of achieving straight-through processing (STP) of investment transactions has been largely accomplished within countries. The much greater challenge for providers of clearing and settlement services, custodians and regulators is now to overcome fragmentation and leverage these domestic accomplish�ments onto the international stage.

“STP is already overwhelmingly achieved in domestic markets, but the problem now [is that] transactions must travel across multiple operators and infrastructures outside domestic boundaries,” says Mary Fenoglio, managing director at Citigroup.

“This is a crucial area where STP activities have been concentrated over the last seven years.

“We are trying to achieve in the cross border market space the same efficiencies that we have achieved in domestic markets.”

Ms Fenoglio explains that STP is all about reducing risk, cost and volume sensitivity. She stresses the need for working on removing barriers for integration and consolidation.

Removing these barriers will require political support in addition to industry commitment. “It requires close cooperation between private sector agents and national governments because nine barriers need to be addressed by regulators or member states,” says Mark Alexander, managing director and head of transaction and custody services at Merrill Lynch. He adds that progress is required in many areas including core market infrastructures, harmonisation and automation, efficiency within individual firms and more direct access to clearing and settlement utilities.

In this area, European clearing and settlement agents are playing their part to help distributors cope with increasing transaction volumes. Both Clearstream and Euroclear – through their respective Vestima+ and Fundsettle platforms – are presenting themselves as the best solution for European distributors, knowing that pan-European dreams will only be possible by first achieving harmonisation within the domestic markets.

	‘You can imagine that in 10 years things will be combined in order to provide a unique pan-European solution’ Bruno Zutterling, Clearstream
	‘We are trying to reduce the amount of fragmentation and to increase automation and standardisation’ Denis Peters, Euroclear

“Market participants now are really looking for a pragmatic approach rather than a dream,” says Bruno Zutterling, director of investment fund management at Clearstream. “But you can have a dream at the same time. You can imagine that in 10 years things will be combined in order to provide a unique pan-European solution, but for the time being this is not the case.”

Urgent need

Clearstream’s Vestima+ is now focusing on improving the order routing process for fund distributors, since the group believes this is the area where automation is more urgently required. Distributors can choose their preferred settlement arrangements and custody providers, and pay only for the services they use rather than being charged a bundled price. “We think this unbundled structure is the best solution for our clients and can significantly reduce costs,” says Mr Zutterling. According to Clearstream, the unbundled pricing of Vestima+ could reduce costs by 20 to 60 per cent depending on volumes, compared with a bundled solution.

At Euroclear, on the other hand, Vestima’s focus on order routing is seen as an opportunity to position the Fundsettle platform as the only fully integrated solution available in the market. “One thing the market doesn’t need is yet another order routing process,” says Denis Peters, director and head of corporate communications at Euroclear. “We are trying to reduce the amount of fragmentation and to increase automation and standardisation not only in order routing, but also settlement and all the asset servicing that goes with it.”

Although the two firms have different approaches, they both agree on the fact the European market faces many challenges in the years to come. “Change is required,” says Mr Peters. “Back offices of funds, fund management companies and TAs [transfer agents] need to actually change the way they are doing business.”

He says it is necessary to build the right infrastructures to respond to rising volumes.

“The last thing you want is to have a crisis and not be able to respond. What we are seeing in the fund industry is that volumes will get so large that we may have a crisis like the one in New York in 1987, when the markets had to stop so the back office could catch up.”

Changing challenges

For Mr Zutterling at Clearstream, the challenges differ from country to country. “In the UK, for example, the most important topic is settlement. There you are able to subscribe to a fund through your IFA, but then you have to send a cheque by mail,” he says.

	‘Technology is the life blood of companies transacting huge amounts of data’ Joe Antonellis, State Street
	‘We are talking about very substantial amounts that need to be invested in technology’ Alan Crutchett, DWS

Other suppliers agreed that automation is still the market’s greatest challenge. As Heidi Miller, CEO of treasury and securities services at JP Morgan Chase, puts it: “Processes are still highly people and paper-intensive.”

How to introduce technology which will not only make the industry more efficient, but will also help regain investors’ trust in financial services, after so many market timing abuses and other scandals, is the other side of the same coin.

“Technology is the life blood of companies transacting huge amounts of data and if we get one of these basic functions wrong, we’ll lose client trust,” says Joe Antonellis, chief information officer and executive president at State Street Corporation.

Mr Antonellis is also concerned about the need for more transparency regarding costs, and describes the European industry as “too expensive”.

At DWS, chief operating officer Alan Crutchett, says it is also necessary to take into account that broker commissions, including those from global firms, are much higher in Europe than in the US. “For an asset management firm, the performance of our funds is [paramount], and if we can reduce the cost of acquiring investments in those funds, this is also a way to make substantial savings. So this is not just a one-way street.”

High tech costs

Mr Crutchett also believes in investing in technology to improve efficiency and reduce costs, although he admits not everyone can afford to do this.

“Asset managers need to move from low tech to high tech. But we are talking here about substantial amounts that need to be invested and, frankly, there are not many firms in the asset management industry that are going to be able to meet those investments costs,” he says.

In terms of harmonisation in the European industry, Mr Crutchett concludes: “A very important thing happening now is that SWIFT has reached out to the asset management industry and it’s working collaboratively with the asset management associations in various European countries, such as BVI in Germany, and Fefsi at European level. This could lead to much more efficient distribution channels in Europe.”