When it comes to post-trading there seems little harmony across Europe, with different models in different countries. Heather McKenzie looks at ways in which these processes might be improved

With the introduction of the Markets in Financial Instruments Directive (Mifid) in November, a major step was taken in harmonising pre-trade and trade processes in Europe. The post-trade world, however, remains resolutely disharmonious.

A recent study published by consultancy Deloitte and international central securities depository Clearstream highlighted the operational inefficiencies and risk exposure present in the trading, settlement and custody processes of the European investment fund industry.

This is not the first time the problems in the fund industry have been set forth and it will not be the last time either.

The study estimates that up to €307m could be saved by transfer agency and fund distribution players if they adopted more efficient process flows for cross-border distribution. These efficiencies would benefit investment funds, transfer agents and distributors alike.

At present, straight through processing (STP) levels - whereby transactions are undertaken automatically without human intervention - are only at 47% in
the industry, very low compared to other parts of the securities markets where processing rates are in the high 90%.

The study says total annual processing costs for cross-border fund distribution in the Luxembourg and Irish industries is just above €1bn. The main source of these costs is order routing processes, which represent 63% of the total cost, followed by errors, queries and reconciliation processes at 24%.

"The routing process includes costs such as the handling, transmission and booking of orders," says the report.

"Within the €635m of order routing costs, the manual processing of orders at the distributor and the transfer agency levels constitutes the biggest portion with €308m; the remainder being composed of transmission costs such as Swift or telephone lines for fax, paper confirmation costs, order fees charged by transfer agents, etc."

The impact of operational risk reduction on regulatory capital under Basle II requirements was also calculated in the study. Around 20% of regulatory capital required for players such as transfer agents and distributors could be saved if operations were streamlined,

The two firms point up four main inefficiencies in the distribution of investment funds in Europe:
Different models for trading and settlement, including transfer agent model, CSD, Luxembourg/Ireland, France/Germany; Large amounts of manual intervention in subscription and redemption order transmission and execution; A lack of standardised trading solutions or interfaces, forcing players to interface with a multitude of participants; and The processing of subscriptions and redemptions payments via different channels, which raises risk and multiplies the number of intermediaries. The fact that some players take advantage of these inefficiencies and have built a business model around them, while others are unable to measure with any certainty the cost of inefficiency, has created an environment where there are no real incentives to embrace the issue, says the report.

There is progress being made, albeit slowly. On the standards front, Brussels-based financial messaging co-operative Swift has worked for some time on investment funds standardisation. Its SwiftNet Funds messaging product enables investors and
their intermediaries, such as distributors, distribution platforms, fund management companies and their service providers - including transfer agents or registrars, fund accounting agents, trustees, custodians
and portfolio managers - to standardise and automate a number of business flows.

These include account openings and maintenance, orders, statuses or cancellations of orders and order confirmations, transfers, statements - of holding and transactions - reporting on price, cash flow, commissions and prospectus static data.

There are other standards initiatives as well, including the European Fund and Asset Management Association's (Efama's) Fund Processing Passport, announced in June this year.

A fully harmonised document, the Passport, contains all the key operational information that fund promoters should provide on their investment funds in order to facilitate their trading.

Efama says the simplification of processing procedures would significantly facilitate dealing in fund units, reduce costs and operational risk and substantially support the implementation of open architecture solutions. Stefan Bichsel, Efama president, says:

"Bearing in mind the significant potential cost savings that could be achieved from simplifying fund processing, converging towards fund processing standards is at the top of Efama's agenda."

Deloitte and Clearstream say the market is being pushed by "external forces" to improve processing. For example, transfer agents are now expected to deliver additional services such as trailer fee computation and distribution support.

The report says this, combined with a shortage of staff in the industry, would force transfer agents to free up their existing staff (by streamlining processes) in order to support these additional services.

Indeed, most of the savings identified in the study result from less labour intensive tasks - up to 80% less staff could be used in a STP environment.

"This should be seen as an opportunity by the investment fund industry," says the report. "Firstly the human resources that are freed up can be used to develop new services or focus on quality enhancement. Secondly, and probably the most important aspect, the industry is today dramatically short of qualified human resources in fund administration and transfer agency departments. This would be an easy way to leverage the automation benefits and solve the human resource issue in one go with an additional resource pool freed up by transfer agents in Luxembourg and Dublin that could be redeployed."

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