It takes a special breed of consultant to use the stories of Ulysses, Gulliver and Merlin and link them to the current and future state of the European mutual funds market, in a document illustrated with works by Joan Miro.While it might be no surprise to discover that the consultants concerned, Promethee, are French, few would automatically associate such an artistic approach with those paragons of plodding efficiency, the Depository Trust & Clearing Corporation (DTCC).
Yet Promethee's July report on European mutual funds - Bridging the Funds Divide - has been sponsored by DTCC. As arguments over depository and central counterparty consolidation subside, the new anxieties mainly revolve around the fragmentation of the clearing and settlement infrastructure for mutual funds in Europe. In keeping with many others, DTCC is particularly keen to get this issue higher up the agenda, although some might say that it has a vested interest in the subject because of its expertise with FundSERV, the US mutual fund processing system operated by DTCC's subsidiary, NSCC.
The main issue is a simple one: there are few standardised electronic links between the investor, the distributor, the fund company and the transfer agent. Faxes predominate. Every fund and every jurisdiction has its own rules, regulations and conventions, making cross-border business an expensive and error-strewn nightmare. Some suggest that the direct costs of rekeying manual orders are somewhere around [euro]1bn ($971m) a year at current volumes. No one likes to talk much about what might happen if volumes were to rise rapidly, but that is what is on everyone's minds, and that is why so much attention is now being paid to the problem.
Ten years ago, the preferred solution would have been fairly straightforward. A group of like-minded souls would have got together to form a working group; after lots of industry consultations and conferences, a grand plan would have been drawn up and everyone would have chipped in a few million to get the project off the ground. But things have changed: no one has any spare cash for industry initiatives and, even if they did, their recent experiences with T+1 and GSTPA would almost certainly dissuade them from opening their wallets once more.
Perversely, this change of attitude is actually good news. The industry's reluctance to try and develop all-encompassing utilities means that competition and market forces will determine how the problem is solved. Two pioneers have already launched their products - Euroclear with FundSettle and Clearstream with Vestima - although neither has yet won the whole-hearted support of all the players in the processing chain. Encouragingly, however, both are talking about the need for interconnectivity with other systems, such as EMX in the UK, rather than reinventing the wheel for each European market.
In its capacity as a standards-setter, Swift was prompted by a heavyweight group of fund industry players - including Fidelity, Invesco, BNP Paribas, Clearstream and Euroclear - to develop special message types, which it hopes to launch next year. In the meantime, it has adapted existing securities message formats as an interim measure to try and stop the widespread deployment of proprietary standards.
But, as Swift well understands, message standardisation is only of any value if there is also process standardisation. …