Jon Willis
Calastone

Individual gross trades are so passé, and Calastone has a solution all tied up, according to chief commercial officer Jon Willis

What are the main challenges for distributors in the mutual funds industry?

I see two main challenges in mutual funds distribution today. The first is that when a distributor buys a whole series of funds from a fund manager, all of those transactions are completed on an individual trade level. The underlying systems record one trade at a time, each with an expectation of money, and on settlement day that money is expected to move in one way or another.

People spend a lot of time trying to manually work out whether the money they have received is what they expected, based on emails and even fax messages from counterparties saying what they have sent and how it relates to those trades. It’s a lot of post-settlement activity and it’s very painful on reconciliations.

The second challenge is the way that the banking system works with regards to CHAPS. Participants try to send their payments as early as possible, but for those waiting for the money to arrive, there is sometimes a point where the payment has been sent but not yet received—it’s just somewhere out in the ether.

This tends to happen because everything runs through central clearing. CHAPS departments work first on sending payments out, and receipt allocations come later. While the money may have been sent out, it won’t hit the recipient’s account until it has been properly allocated through the system. A big distributor may have to move money between a whole host of fund managers. If they’re buying, that’s fine. But if they’re selling, distributors have to get that money back before sending out to the clients, or fund on a gross basis until the end of the trading day.

At the same time, with the new Client Assets Sourcebook rules, regulators are starting to look much more closely at intra-day exposure and clients’ money, which means eventually individual client allocations will need to be protected during the day.

Why is this such a big problem?

In 2015, there was £303 billion of trading value moved between participants across mutual funds.

Calastone has been looking at that to see if those trades can be netted, not just to one movement each way, but to one single movement combining all the sales and all the repurchases, moving funds only one way.

Trading activity across our own network totalled about £143 billion in 2015, and we found that if we had used that netting technique, that would have been reduced to about £68 billion, less than half of the actual total.

About 52 percent of the total trade aggregate value is, in effect, moving unnecessarily. For the entire market, that equates to about £158 billion in unnecessary settlement payments. These money movements have to be tracked, reconciled, and funded, which is a significant burden on the industry.

We have created a net settlement solution, which, first of all, is a matching engine allowing both buyers and sellers to allege and match trades no later than T+2. On settlement day-minus-one both parties have to approve the net cash movement again. It means both parties can start creating their potential cash ladder in advance of settlement day, and, importantly, they can know if they’re going to be long or short.

How does the trading value translate in to costs for participants? What could they save?

Additional payments mean additional banking costs; if more than half of the CHAPS payments are unnecessary, participants could effectively half their CHAPS costs.

There is also a cost to creating that intra-day liquidity, whether this is because firms can’t utilise money where they would like to, because they have to agree intra-day overdraft limits in order to fund flows, or because they’re simply keeping more cash available. There is both a physical banking costs and a cost of non-use.

It would be great to calculate what that cost adds up to, but when banking charges vary and potential funding costs are different, calculating the real costs to the industry is difficult. Having said that, if half of the payments moving around could disappear, I would assume that the savings would be significant.

Why haven’t participants been aware of this before?

It’s a combination of issues: people have not been aware of the numbers involved; there hasn’t been a solution available; and they haven’t been able to calculate the costs, either.

To a degree, payments are now relatively automated. The difference is that they’re done on a trade-by-trade basis. There’s no point in automating payments until you have automated orders. Equally, there were potentially more manually intensive processes that needed a solution, so this had not been a priority.

However, we are trying to solve problems across the entire lifecycle of the investment, and this has become key. Regulators are focusing more on intra-day risk, which increases the more money is moved around. There is also more focus on client money and asset protection. Whereas before, as long as everything was balanced at the end of the day it was broadly okay. Regulators are now making sure clients’ money isn’t used to settle other clients’ trades—even on an intra-day basis. So in total the costs are becoming much greater.

Is this part of a wider culture-change in the industry?

Looking at the way that the regulators have been trying to make sure the investment funds and the whole industry are safe and protected, the focus is very much on the client. The client starts with an amount of money to invest, and only parts with it when he or she has a realisable asset that is protected. The client is never left exposed.

Our commercial settlements system solves this problem for the funds industry. It’s a product specifically for the mutual fund market and for UK settlement practices, which provides an economical way for our clients to ensure that they keep their clients protected.

Interviews
The latest interviews from Asset Servicing Times
Drew Nicol and BNY Mellon’s James Slater discuss the results of a joint research study with PwC exploring buy-side opinions on central counterparties, incoming collateral rules and the rise of peer-to-peer lending
Real Estate Investment Times

Visit our sister site
for all the latest real estate investment news

realestateinvestmenttimes.com
View interviews section
Features
The latest features from Asset Servicing Times
Matt Davey, new recruit to SGSS’s business solutions team, speaks to Stephanie Palmer on the trials and trends he’s seeing in the sector
As the FCA consults on the potential expansion of its Senior Management and Certification Regime, Stephanie Palmer gauges the initial reactions
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
In a climate of regulatory change, cost pressures and cyber threats, the network management industry will be at its strongest if it sticks together. Stephanie Palmer reports from The Network Forum in Warsaw
Regulation and technology were still the hottest topics in town at Fund Forum International in Berlin. Stephanie Palmer reports
As the active-passive fund debate reaches fever pitch, there is a third option, says Broadridge’s Stephanie Clarke
Asset managers are increasingly relying on data, and the service providers that can manage it, heard attendees at London’s TSAM conference
As the long-standing Barclays Point risk analytics solution winds down to retirement, investment managers have some tricky decisions to make, according to Confluence’s Katie Kiss
Fund administrators could be best off leaving back-office technology upgrades to the professionals, says Kelly Ashe of Pacific Fund Systems
View features section
Country profiles
The latest country profiles from Asset Servicing Times
The Asian market may be improving on the harmonisation front, but the situation is still far from ideal. Experts discuss what there is still left to do
Brazil is hogging the limelight from its South American neighbours. But, although reforms are in full swing, there is still work to be done
Securities Lending Times

Visit our sister site
for all the latest securities lending news and analysis

securitieslendingtimes.com
No nation is an island, and the Polish CSD has post-trade services to cater to all of Central and Eastern Europe, says KDPW’s Iwona Sroka
In a region as geographically, culturally and economically diverse as Asia, funds passports have a tricky road ahead if they’re to redefine the industry
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
The Chinese market has taken a knock to its confidence, but despite its size, it is still merely an emerging market, and must take these setbacks in its stride
Rich in sunshine, cork hats and tired clichés, Australia’s funds industry doesn’t buck the trend, boasting record levels of assets under custody
As the Saudi Arabian stock exchange finally opens its doors to foreign investments, the influx from abroad will be in baby steps, not leaps and bounds
View country profiles section