and beyond. Ken Tregidgo and Jonathon Willis explain the aim for automation
How is Calastone growing and helping to improve the industry?
Ken Tregidgo: We’ve really been helping the industry to become more efficient, with lower costs and risk. Calastone started in the UK, was expanded into Europe, and now we’re taking our transaction network and making it a global service. Through the funding round that we went through with Accel partners and Octopus Investments last year, we have been able to scale-up the technology and invest in products, as well as opening up representative offices with sales and client servicing staff in other locations.
What we’ve done with our products is help the industry become more efficient. We did a calculation last week and it is estimated that we’ve helped the industry save directly about £78 million in terms of costs in order routing, because we’ve brought competition and a lower cost offering of electronic messaging.
Jonathon Willis: I think the challenge has been that the industry has been driven in such a way that the dynamics are still a lot of paper. In creating a solution for a lot of paper, the industry looked for low costs operations outside of the UK and Europe to deal with paper. What the industry really should have been looking at was straight-through processing (STP). In a way it did STP, but it sent things straight to Pune (India), which lowered the cost of the input but didn’t take away the paper.
When Calastone was created, the industry had come together to get a single solution set put forward and the industry decided that it needed competition. The challenge with this industry is that choice isn’t necessarily a good thing. Choice sometimes can be a reason why it doesn’t do anything, as participants will wait to see what happens.
As an industry, we need to do a lot of work to create very simple solutions to the challenges that are in the industry, whether it is improving the whole connectivity, or whether it is making the lives of the intermediaries more simple so that they can focus on the end customer, because we tend to lose sight of that. If you talk to the regulator now, everything comes back to consumer outcomes.
There is a lot that the industry can do, and there is a lot that Calastone can do to influence the way that those consumer outcomes will improve over the next few years, because we need to ensure that the consumer stays trusting in the industry as there is a lot of related financial services material out there at the moment where the consumer loses faith. If that happens, then they won’t invest, and if they don’t invest, there will be no industry.
Does Calastone have a lot of dealings with emerging markets, particularly in Asia?
Tregidgo: We have a big presence in Taiwan, Hong Kong and Singapore. Taiwan was a very big fax sender and we worked with the Taiwan Depository & Clearing Corporation (TDCC) to automate the outbound flow from Taiwan to, predominately, Luxembourg and Dublin.
The average hold time in Taiwan is 16 days and with the addition of trade funds, it’s a big churn. It’s the nature of how they see the investment, so there is a large amount of flow coming out of Taiwan and it was a massive challenge for the funds industry.
With a higher degree of automation, it is driving down the costs, and the volumes have consequently picked up significantly. With Singapore and Hong Kong, we’re growing a significant Asian business now.
Willis: Asia is a complete mix of countries, each of which have their own requirements. In Taiwan, for example, there is a restricted currency, which means Taiwanese dollars cannot be taken out of Taiwan, so you’ve got to figure out how you are going to move the money, because the order and the money have to move together.
Singapore is a domestic, whereas Hong Kong is where most of the fund managers are based as everyone is waiting for China to open up and they think that Hong Kong is the starting blocks through to China. But there are a lot of flows coming out of a lot of areas of Asia. There is talk about Asian fund passporting and where that is going to go and Australia wanted to play a big part of it, but they haven’t got the language skills, so there isn’t a ‘one-size-fits-all’ solution for Asia.
The beauty that Calastone has is that it has grown up having to adapt the same thing, but just slightly differently for each market. Therefore, by understanding what those slight differences are, Calastone is making it relatively easy to go into Hong Kong and get domestic and cross-border, then go into Singapore and do the same, while also covering the different requirements for the Australian market, all the while using the same message.
Simply, it is the overlay of the actors in that message set, which Calastone understands. Calastone can say to clients on one side of the globe wanting to trade with another side, “we’ve got this good solution that we can adapt to make it fit”, and everyone gets the benefit of the wider organisation.
What products have Calastone been developing?
Tregidgo: We have been working with a number of clients wanting to automate structured products. A challenge is that it is not a standard ISIN, so clients need to create their own label for the structured product. The aim is to create a closed user group of distributers that they can see and transact with. They want to be sure that the product would only available to certain counterparties, and that both counterparties can see these structured products in order for them to enter an order, communicate it electronically, and catch the order.
What Calastone has done is essentially provide a solution for both sides, initially through a set of screens.
The second phase will be to automate it and link it up to the back-office systems to enable structured products to be electronically communicated, rather than through fax or paper.
We have leveraged the tool kits that we have used for traditional fund order routing and packaged them to enable structured product automation, so clients can set up their own fund distribution channel and enable flows to be communicated electronically.
Willis: Part of my remit since joining Calastone is to get out and reconnect with the industry, to listen to the industry, find out what their problems are, and find what solutions we can bring to help them.
One of the things we want to do is keep the industry moving forward. We have to make sure we keep our products fresh and that we keep listening to all of the players in the marketplaces that we try to help.
It is about remaining outwardly focused, as very often as a growing organisation, you naturally end up focusing inward.
Where is Calastone’s position on cloud-based technology?
Tregidgo: We have virtualised our infrastructure to run as a private cloud and we are very focused on the security and encryption around the information that we hold. It is a zero-footprint solution in that we don’t have technology software running behind the client’s firewall.
Our messaging service is delivered to the front-end out of our cloud.
Being on the cloud enables us to scale up. As part of the last investment cycle, we scaled up the technology to cater for this growing community. Every time Calastone adds a client, the client doesn’t just trade with one counterpart, it trades with many, so the number of links goes up exponentially and we have to scale up our infrastructure to cater for the growing messages.
To do that we have invested in virtualisation and the same type of cloud technology within our own data centres.
Willis: Bringing it back to our clients and the solution sets they need delivered, we have to be very careful that we don’t drive the price of solutions and automation to become more expensive to the consumer. Because the industry has moved in the right way, you don’t want the cost dynamics to drive them back to STP being about finding the next low-cost centre.
Ultimately, end-to-end ownership has to be cheaper and better for a whole host of reasons—time and risk for example.
We have to understand that the volumes for certain players and sectors don’t have the same drivers for other players.
Becoming part of the Calastone community, we can ensure that we cater for that and not only deliver that benefit of scale to our community but keep improving on that benefit of scale.
Tregidgo: We have this point of creating a single pipe for the whole of the market, so you can connect to Calastone with a single connection and get access to the whole of the global mutual funds market.
Our solutions have to fit for the smaller, medium-sized and larger players.
We have to make sure that our price points and solutions fit, regardless of the scale, the location of the client, and that we are always looking at something that solves their business problem, at the right price and with the right package