Kurt Salmon
AST talks to Herwig Temmerman, Michel Kayembe and Josée-Lynda Denis of Kurt Salmon about geographic trends of fund vehicle distribution
What does Kurt Salmon do?
Herwig Temmerman: Kurt Salmon’s asset servicing advisory practice is comprised of two teams; one focused on investment funds and the other on securities.
Our securities services group has four specialised teams:
A strategy team who provides assistance to our clients in defining and reviewing their securities services business model and operating model.
Our securities solutions team specialises in the review and improvement of securities operational processes. Activities may include definition of key performance indicators (KPI’s), benchmarking the processes, or applying Lean Six Sigma methodology to identify value/non-value processes to optimise accordingly. Additionally, system selection and implementation is another core competency of the team.
The tax and regulations team provides feedback on new regulations, including tax rulings, affecting the securities industry and assists clients with operational implementation. They also render a point of view on the impact of the regulation on market infrastructure.
Our global liabilities management team advises clients on collateral management, credit and securities lending, and risk and liquidity management.
Michel Kayembe: The investment funds team helps our clients analyse and respond to the challenges facing the asset servicing industry using asset servicing key trends and Insights research that is conducted by Kurt Salmon. This research is global-reaching and focuses on custody/administration asset trends, includes a review of the cost income ratio of market players, and details future strategies and priorities. This team also assists fund administrators with achieving operational excellence in fund accounting, transfer agency and fund distribution. Additionally, the group works with asset managers and asset servicers to support their outsourcing programmes, beginning with the strategic planning phase, selection and assessment of service providers, conducting due diligence, through to solutions-delivery and transition management.
How do you go about benchmarking and selecting a custodian?
Temmerman: Kurt Salmon provides advisory services and assists clients with custodian benchmarking. Additionally, our holistic approach starts with hands-on collaboration with our client. Our approach includes definition and review of business strategy, and target operating and business models. Part of this exercise includes a clear and homogenous custodian bank and transfer agent network strategy. The next step is a review or, if not yet existent, the establishment and implementation of a centralised governance and dashboard for custodian network management.
For custodian benchmarking, Kurt Salmon uses a five-step approach—(i) inventory; (ii) assess; (iii) review and validate; (iv) measure; and (v) present—that involves the following:
During the inventory phase, we review or create a service library (gather service descriptions, process data, etc). In this step, it is important to take into account current and future client requirements, as well as best practices.
The assess phase includes review or establishment of a benchmark. We analyse data to evaluate or determine internal benchmarks and identify and construct best practices and standard market practices. A method is then proposed to measure performance for suggested benchmarks.
In the review and validate phase, we evaluate accuracy of the service library, benchmarks and the proposed method of measurement with our client.
Once this occurs, we can measure the levels of service.
And finally, we present the results and a recommendation to our client.
If benchmarking must be completed using a selection process, the service library and benchmarks are used to define the statement of requirements and key selection criteria. Various options are evaluated with a long list of potential custodian candidates identified. A request for proposal (RFP) is then sent to the candidates and received responses will then be consolidated, analysed and rated. This process yields a short list of prospects with further due diligence including verification and review of draft service level agreements. Following this, contracts and fees are negotiated, custodians are retained, contracts are signed and assets are transferred.
Finally, a post-implementation review process is put in place to qualitatively and quantitatively monitor actual performance against what was committed and expected.
Do you still see a prevalence of manual corporate actions in traditional domiciles such as Luxembourg?
Temmerman: Corporate actions handling remains a labour intensive process (in the STP world of securities handling). Most financial service providers must continue to manually process at least 20 percent of the total of all income and non-income events, with the manual part mainly linked to non-income events.
Further automation of the corporate actions handling process requires significant investments (to make the IT systems more flexible and/or to implement new rules to cope with lack of standardisation in the market).
However, building a strong business case is a challenging exercise (since new market innovations are ever-developing and advancing). Consequently, in a post-subprime crisis climate where the focus is on cost containment and risk mitigation and significant investments must be made by financial institutions to ensure compliancy with new regulations, corporate action automation is not at the top of the agenda. Consequently—and unfortunately—we can expect that a significant percentage of corporate actions will continue to be done manually in the coming years. The result can be an increase in financial risk and an impact on reputation.
Do you support the push towards 100-percent STP, and do you think faxes will ever be eliminated?
Josée-Lynda Denis: I believe STP should be more about ‘straight through progress’ than straight through processing per se. STP as a hot topic is becoming more and more redundant when you consider all of the standardisation and automation related initiatives across many fund markets throughout the world. The fund industry has made great strides in championing cross-functional standardisation and automation in the fund processing value chain over the last 10 years, particularly following the publication of the infamous Heinemann report in May 2003—Towards a Single European Market in Asset Management—which provided the impetus in various fund associations to push for automation and standardisation endeavours, specifically those supporting cross-border funds.
Using the biannual EFAMA – SWIFT Fund Processing Standardisation Report as a reference, this report primarily tracks the fund industry’s progress and trends in standardisation and automation of fund orders received by transfer agents in Luxembourg and Ireland. The analysis is based on Luxembourg and Ireland as sample markets, as both fund domiciles have the most global cross-border fund transactions processed to/from the two domiciles. For instance, Luxembourg-domiciled funds are sold/distributed in over 60+ countries across the world. The latest analysis covering the first half of 2012 is an ongoing effort undertaken by EFAMA (European Fund and Asset Management Association) and SWIFT to highlight the advancement of automation and standardisation rates of orders of cross-border funds. Thirty-two transfer agents in Ireland and Luxembourg, representing more than 80 percent of the total incoming third-party investment funds order volumes, participated in the survey.
The mid-year 2012 EFAMA – SWIFT Fund Processing Standardisation Report that was published in October 2012 highlighted the following:
In Q2 2012, the total automation rate (ISO and proprietary files) of orders received by Luxembourg and Irish transfer agents reached 77 percent, compared to 75.6 percent in Q4 2011.
The total number of orders has stabilised at 11.9 million orders for the first half of 2012
In Luxembourg, the total automation rate increased 2.9 percent to reach 73.1 percent compared to Q4 2011.
In Ireland, the total automation rate increased 0.4 percent to reach 84.6 percent in Q2 2012.
The number of manually processed orders decreased 7 percent to 2.8 million received faxes (against 3 million in H2 2011). This still represents a daily average of some 25,000 incoming faxes.
Peter de Proft, EFAMA director general, noted: “In the 2011 yearly edition of the report, we set the goal for the industry to move closer to the 80 percent threshold for total automation rate in 2012. The mid-year 77 percent rate is an achievement to applaud and a very positive step in this direction. This shows the priority that the industry sets to itself to continue to strengthen efficiency in fund back-office activities for the ultimate benefit of the end investors.”
If this latest survey dedicated to fund processing standardisation is anything to go by in terms of the STP landscape, the continuous progress towards ISO adoption by distributors and transfer agents should be applauded. The 77 percent ISO adoption is a great achievement and we, fund industry participants, are indeed confident that the 80 percent threshold that was proposed by EFAMA is at our doorstep. SWIFT, EFAMA and other industry associations will continue to support initiatives in the industry, so that fund actors can leverage the benefits of ISO standardisation. Doing so will allow the industry to further reduce the 25,000 orders that are still treated by fax.
Today, with all of the endeavours undertaken by EFAMA, SWIFT, ALFI (Association of the Luxembourg Fund Industry), IFIA (Irish Fund Industry Association), AFAC (Asia Fund Automation Consortium) and others, it looks like the 100 percent STP goal and the elimination of faxes is well under way.
Which regulation concerns your clients the most?
Temmerman: The T2S project was first proposed by the euro system (European Central Bank and central banks in the euro zone) in July 2006. Generally speaking, the securities industry went through the usual psychological process of denial, resistance and finally the acceptance that T2S will dramatically change the way that the European securities industry operates in the future. Assessing the impact of T2S is a very challenging task for securities service providers, because T2S only covers the externalisation of the settlement activity to a centralised European platform, while all other asset servicing activities such as tax and corporate actions processing will remain highly domestic; as is currently the case. The important task of defining how to adapt its business and operating model has subsequently increased exponentially in complexity by the subprime crisis. The crisis has reduced revenues and has created a lot of new regulations.
For the securities industry, now besides T2S, the effects of a whole host of other regulations all have to be assessed in combination with the usual post-crisis activities of cost containment and search for new revenue generating activities. Although each regulation in itself has its challenges, the main concern is not confined to one particular regulation, rather, it is the inability to incorporate the effects of all of these changes into one holistic view that takes into account all consequences and opportunities and fosters a winning business and operating model. More optimistically, these are very exciting times for strategists and consultants in an industry that ten to twenty years ago was called dull and boring.
Kayembe: The Alternative Investment Fund Managers Directive (AIFMD) brings some challenges to the industry and particularly the cash monitoring provision. The industry is in search of best practices on how daily reconciliation of cash will have to be executed.
What do you think the drivers behind outsourcing are?
Temmerman: The securities services industry is an increasingly specialised business that requires continuous important investments. Over-capacity, fierce competition, tough economic conditions, changing market infrastructures and new regulations have led financial services companies to reconsider their core securities services activities. As a result, many of the financial services providers are progressively transforming their securities services operating models towards more rationalised and specialised models. In this process, the possibility to outsource part of the process is taken into consideration. Outsourcing allows benefiting from economies of scale achieved by the third-party service provider. Outsourcing also has the potential to further adapt cost effectively to market evolutions and to comply more rapidly with the increasing number of regulations with which the financial sector and securities services industry is faced. Finally, the externalisation of non-core processes permits to concentrate on the key business competencies that generate revenues and growth.
Are you seeing any specific geographic trend in terms of distribution of funds vehicles?
Denis: With more than 9181 cross-border fund groups as of 30 September 2012, cross-borders funds and registrations for sale are here to stay and continue to grow across many countries and regions in the world. The hotspot target jurisdictions in the first nine months of 2012 had a strong focus in: Europe (the Netherlands, the UK, Germany, France, Switzerland and Sweden); Asia (mainly Singapore); and the Americas/Latin America (mainly Chile). Registrations totalled 5226 funds, primarily in Europe, Asia Pacific, Americas and the Middle East.
According to the latest EFAMA International Statistical Release and looking at the world-wide distribution of investment fund assets at the end of the Q3 2012, the US and Europe held the largest shares in the world market at 49.3 and 28.1 percent respectively. Australia, Brazil, Japan, Canada, China, South Korea, South Africa and India follow this ranking. For UCITS, across the world as a whole, the total number of mutual funds reached 73,458 funds with the net assets’ market share of USA (49 percent), Americas ex-U.S. (7.9 percent ), Europe (30.3 percent ), Asia Pacific (12.3 percent) and South Africa (0.5 percent).
An interesting trend that should be considered is Asian asset managers launching European UCITS for distribution across target EU countries. Let’s not forget that the UCITS-type Asia passport is a hot topic with Hong Kong and China having some discussions over the last few months.
