CLEARING & SETTLEMENT
Where Automation Lags
Although much of the securities industry has adjusted to automated processing, fund companies and transfer agents have been slower to automate. In the complex transaction life cycle, investors forward instructions to fund distributors, which pass them on to fund promoters and/or transfer agents that must then reconcile their records with those of fund administrators and custodian banks to ensure that the underlying investors have a correct valuation of their holdings and the correct cash and securities in their accounts. It can cost upward of $30 to complete a cross-border investment funds transaction in Europe manually.
At more than EUR5 trillion in assets under management, the European fund industry is smaller than the U.S. market, but it has a larger number of funds, and distribution channels are expanding beyond banks to independent advisers and broker-dealers.
Advocates of the U.S. infrastructure approach have touted the creation of a European version of New York-based De-
Continued on page 14
BY CHRIS KENTOURIS
Clearstream International, one of Europe’s two biggest international depositories, is improving its settlement process for investment funds through the phased introduction of its Central Facility for Funds (CFF) that it says will allow transfer agents for Luxembourg-domiciled funds to cut their transaction fees from an average of EUR12 to a flat EUR4 ($16.30 to $5.43).
Before CFF, which Clearstream calls a “less cumbersome” delivery-versus-pay-ment service, transactions in Luxembourg-domiciled funds were settled through the Creation platform that also settles equities and fixed-income trades. Because CFF is dedicated to investment funds, transfer agents will need to send only one instruction to Clearstream on the trade date, rather than multiple ones between trade date and settlement date, explains Philippe Seyll, director of investment funds for Lux-embourg-based Clearstream.
Units of investment funds change hands on the trade date and cash changes hands on settlement date; that differs from the
simultaneous exchange of cash and securities on settlement date for equity or bond transactions.
So far, only Pictet & Cie Europe and Schroder Investment Management have begun to use CFF, but Seyll says that the remaining 50 Luxembourg transfer agents should be on board by year-end. Though CFF applies initially to Luxembourg, Clearstream officials are convinced it will expand to other markets—namely Ireland—also by the end of the year.
“CFF replaces a many-to-many relationship between distributors and transfer agents, which is done mostly by faxes and phones,” says Seyll. “Such a process is difficult to manage and can lead to mistakes and delays.”
Market players say that the CFF functionality is similar to that of FundSettle, a dedicated investment fund settlement system from competitor Euroclear. Brussels-based Euroclear integrates order routing, custody and settlement in a single package, while Clearstream has decoupled its Vestima+ offering so that clients can send processing instructions to Clearstream but
settle where they wish, whether with Clearstream Banking Luxembourg or other local European depositories or even through electronic transfers on the books of fund distributors.
Clearstream says its
Central Facility for Funds
will allow transfer agents for Luxembourg-domiciled
funds to cut their transaction fees.
Neither Clearstream nor Euroclear discloses results or volumes for their fund settlement systems, but Euroclear’s volumes are reportedly greater. Euroclear has about 33,000 funds using FundSettle, along with 250 distributors. Vestima+ has 27,000 investment funds with 165 distributors.
Cusip Launches Free ID Lookup Service
International pressure prompts flexible pricing response
BY CHRIS KENTOURIS
Responding to calls from European clients for more free access to identification codes for North American securities, the Cusip Service Bureau (CSB) has launched a Cusip-ISIN lookup service for more than 3. 6 million securities and their issuers.
The Web-based service, available at www.cusip.com, allows users to search for or validate Cusip-issued international securities identification numbers (ISINs) and requires a one-time click-through agreement. CSB, which is operated by Standard & Poor’s (S&P), will not charge European users of the new service for the rest of the year but says it could subsequently charge on a “cost-recovery basis,” depending on market interest. CSB, which does not disclose its number of customers, did not precisely define cost-recovery, but it is a term often used by industry utilities to describe their pricing.
“We feel that the new service will address the needs of smaller European institutions, which have a limited use for North American identification numbers,” says Darren Purcell, director of CSB in Eu-
rope. “Larger financial institutions could are typically part of an exchange or secu-also benefit from such a service, although rities depository—also issue both local and they would likely be subscribing to our ISIN codes. However, unlike CSB, the re-other data feed products.” spective national numbering agencies col-
The new service allows users immedi- lect fees for ID codes from other services ate access to an unlimited number of rather than charging separately.
ISINs for North American CSB, covering North securities for purposes of America, is operated by S&P trading and post-trade pro- under contract to the Amer-cessing. However, users that ican Bankers Association wish to store ISIN codes and (ABA). The agency issues descriptive information on both nine-digit domestic more than 500 securities in identification numbers, their databases must pay known as Cusips, for trans-based on a tiered approach. actions within the U.S. and Those fees could be as high Darren Purcell Canada, and 12-digit ISINs as $84,235 for single-site usage for iden- for cross-border transactions. (The latter tification numbers and descriptive infor- contain embedded nine-digit Cusips.) mation on all of the stocks, bonds and municipal securities in the CSB database.
Securities identification numbers are critical to ensuring that the correct details of a transaction are recorded at the time of a trade and during post-trade processing, which includes their use in securities master databases. They are often redistributed internally or to external clients. Many other numbering agencies—which
U.S. Approach Differed S&P has always charged licensing fees to U.S. firms for the use of identification codes for North American securities, both in internal databases and for redistribution. However, it encountered resistance from European financial institutions in 2003 when it began to request the same fees for similar purposes. The Information
Providers User Group (IPUG), a London data management association, lobbied the ABA, the European Commission and the Association of National Numbering Agencies to have S&P either waive its fees for issuing ISINs codes for North American securities or charge on a cost-recovery basis. Just as important to the trade group, representing about 100 of the largest European institutions, was to gain a better understanding of the fee schedule.
S&P, which IPUG says could charge what it wished for domestic Cusips, has always argued that it was entitled to charge for ISINs because the ABA owns the intellectual property rights to the methodology behind creating them. In 2005, CSB responded to calls for greater transparency by publishing a new usage-based model for European clients. CSB does not publish fees for enterprisewide distribution or redistribution, which are negotiated separately with each client. A company’s subsidiaries operating under their own legal name are also charged separately.
A spokesperson for IPUG declined to comment on CSB’s new service, but an operations executive at a large London-based custodian bank told Securities Industry News, “While we appreciate the Cusip Service Bureau’s efforts, we don’t view the new service as changing the basic issue of the Cusip Service Bureau’s fee structure.” ■
References:
Archives