Listening to to investors

Transcription

1 European Central Bank 2 nd T2S and Funds Workshop ECB - Frankfurt, 30 June, 2010 T2S and Cross-Border Investment Funds Listening to to investors

2 Agenda I. Introduction/Summary II. Global cross-border fund distribution III. The dynamics of trading & settling via T2S IV. The delta between primary & secondary market trades 2

3 Luxembourg T2SForFunds Delegation Josée-Lynda Denis (BNY Mellon): Chair ALFI TA Forum, Co-Chair T2SForFunds WG Gary Janaway (Schroders): Chair ALFI T2SForFunds WG Carlo Matagne (BCEE): Luxembourg T2S National User Group 3

4 I. Introduction/Summary The Luxembourg investment fund industry understands that the implementation of T2S will impact fund trading and settlement in two different ways: i) Directly as a fund management company/transfer agent will require access to Central Bank Money either opening an account it own name or via an intermediary (local agent or custodian bank etc). If a single point of settlement is possible through which to settle all trades executed on CSD s across the EEA then it is conceivable that by reducing the number of local intermediaries engaged to access central bank money in each market, costs maybe reduced. To the contrary, if with the implementation of T2S cross border funds are required to engage more local intermediaries in each member state, costs will increase by an equivalent multiple. It is therefore important to consider the possibility of rationalisation and the reliance this will place on the interaction between CSD s. ii) Indirectly as the manner in which CSD s will interact with respect to Issuer CSD s and Investor CSD s will change the landscape in terms of transparency of holdings and the associated beneficial owners. As cross border funds are traded in several EEA member states on the via CSD s, if the behaviour between the CSD s in terms of how accounts are set-up and registered changes, there will be significant implications for asset servicing in the broadest sense. So not only will events such as corporate actions & voting rights which are common in the equities and bond issuance need to be consideration but so will investment fund issues such as access to funds authorised for distribution and the gambit of issues associated with the payment of fee rebates. 4

5 I. Introduction/Summary It is therefore important that the extent of the direct and indirect changes are clear as they will have a significant influence on the timing, adoption and costs of trading settling funds via T2S. There are also a number of issues that are less clear and whilst not as material, clarification of how these points will be addressed post T2S going live will help establish the operating models of the agents of Luxembourg investment funds that are distributed cross border. These are set-out in sections 2), 3) & 4) covering topics that we broached upon in the meeting in Luxembourg in April of this year. In many respects that have been included to help define eligible funds and participants that could either avail themselves of the T2S settlement initiative or that do not qualify and are not likely to in the future. To finalise our discussion we hope to be able to reach a common view as to how to approach addressing some of the issues raised and a timeframe in which this could be carried out. Whilst this is our objective, we recognise that there is limited scope or for system development to be undertaken that would jeopardise the implementation of T2S in

6 II. Global cross-border fund distribution Dynamics International scope: Today, Luxembourg as a global cross-border fund distribution platform supports Luxembourg UCITS sold directly in over 55 countries in the world covered by 43,000 distribution agreements via large distribution networks maintained and/or serviced by Transfer Agents across Europe, Asia, Middle East and the Americas. Global Distribution the share of assets held by investors domiciled outside of Europe is growing and approaching 50%. T2S will not facilitate Distributors (and the underlying investors) domiciled outside of the EEA/Euro zone to settle in T2S. Impact Distribution outside the EEA/Euro zone - many funds are distributed outside of the EEA/euro zone. Distributors in many of these regions may not be familiar with CSD s nor be willing to accept the cost of trading and settling investment funds in this manner. Non-Euro/EEA currencies today, fund promoters/distributors offer funds denominated in a range of different currencies; accept settlement in non fund currency; offers share classes in other currencies to that of the funds denomination. This is an industry standard and understood concept for settlement via various settlement facilities. Distributors and their investors will now have to add yet another settlement route with T2S. Access - to a CSD and an account at the central bank to settle via T2S should not be overly restrictive whether directly possible or via an intermediary agent. Without adequate choice the cost of doing so may well outweigh the benefits. 6

7 II. Global cross-border fund distribution Legal & Regulatory Requirements Dynamics KnowYourCustomer - Some countries do request the identification of the end investors (e.g. Nordic countries, Greece). Data sharing between CSD s - Through T2S, CSDs have to make any ISIN issued available to other CSDs if an enquiry is made. Fund registration - Funds require fund registration approval to be distributed in certain countries. Distribution might be reserved to certain type of investors. Settlement through T2S may in practice allow uneligible investors to access to the fund. Impact It is unclear how these regulatory requirements will be handled? Will segregation of accounts be ensured through the different CSD s? Will it be the responsibility of each CSD to check eligibility of their clients to the Fund? 7

8 II. Global cross-border fund distribution Transparency of holdings - Distributors Dynamics Cross border distribution is primarily based on open architecture via distribution platforms where large distribution networks sell funds for remuneration in the form of fee rebates. It is essential that Distributors positions in shares are clearly identifiable. This is currently hardly working in a «CSD world», although initiatives have been taken in France for «order earmarking». In addition, transfers between CSD s participants are usually not reported to the Transfer Agent. This generates opacity and limited transparency in terms of holdings transferred to/from CSD s. Impact Settlement instructions in T2S should include standard communication in order to allow the various CSDs to vehicle information related to identification of distributors. Information related to transfers between CSDs participants should be available to the Transfer Agents. 8

9 III. The dynamics of trading & settling via T2S Dynamics With the introduction of T2S there will be a direct impact as Transfer Agents will require access to central bank money for trades transacted in the Luxembourg CSD. Unless there are no changes in settlement processes for ICSD s and CSD outside of Luxembourg, there will be an impact on Transfer Agents where trades settle via T2S. The cost of settling Luxembourg funds will increase if there is no rationalisation of settlement agents with the introduction of T2S. Impact Transfer Agents qualify for access to ICSD s today and employ local agents to maintain the issuance of shares and settle in markets such as France & Germany. The introduction of a national CSD in Luxembourg introduces the need for a new access to CBM via an intermediary or directly and the opportunity to reduce costs through the rationalisation of existing agents. If there is no rationalisation of the settlement process and the number of agents used to manage the settlement and issuance of shares in CSD s across Europe then the introduction of T2S will increase the costs of settlement for Investment Funds using CBM. 9

10 III. The dynamics of trading & settling via T2S Reducing cost & increasing efficiency through rationalisation Dynamics With the introduction of T2S there will be a direct impact as Transfer Agents will require access to central bank money for trades transacted in the Luxembourg CSD. Impact Unless a Transfer Agent qualifies to open account directly with an NCB then they are obliged to engage a local agent who has access. The local agent will perform settlement services, maintenance of the issuance account (local sub) & allocation of corporate actions and entitlements across the CSD. The local agent requires remuneration although the work performed is a repetition of work performed by the Transfer Agent. The cost of providing Transfer Agents access to Central Bank Money remains to be quantified. Whilst this may be incorporated in the cost of services provided by local agents, in Luxembourg Transfer Agents have direct access to ICSD s. It is therefore likely that the cost of access to CBM directly or indirectly, particularly intraday liquidity will incur additional cost. The opportunity of reducing Transfer Agents costs and increasing the number of funds electing to settle via T2S hinges on the ability to rationalise the number of local agents employed and leveraging off one or fewer access points to CSD s operating in EEA. 10

11 III. The dynamics of trading & settling via T2S Reducing cost & increasing efficiency through rationalisation Dynamics It is understood that T2S is a settlement system, however for each trade due to settle in T2S there is a matching trade in a CSD. With the introduction of an Issuer CSD and Investor CSD(s) when T2S goes live the handling of cross CSD settlements and FOP settlement for transfer will cast an opaque veil that will impede Transfer Agents. Impact Without guidelines and agreed protocol, the exchange of non standard trades settled FOP will mask the ownership of beneficial owners. The processing of FOP settlement instructions and the confirmation to Transfer Agents is not clear. Post trade the transparency of holding positions and transparency of holdings of the various participants in investor CSD (particularly where there is no agreement with a local agent) has not been addressed. 11

12 III. The dynamics of trading & settling via T2S Increasing the number of eligible funds settling via T2S Dynamics Alternative investment funds operate different settlement terms whereby the receipt of settlement (investor subscriptions) partially (commitments) or entirely before trade date. Accordingly there is not T trigger created before the movement of money that will allow the matching \ settlement of trades. Impact Without modification of the CSD s and how they interact with T2S it will not be possible to accommodate primary transactions for the majority of alternative investment funds. It is also probable that any secondary market trades will not settle in T2S as investors will have established existing accounts and procedures directly with Transfer Agents. In contrast it is clear and understood that provide there is a an agreed settlement date based on a given trade date, it is possible to settle trades in T2S where settlement is made in eligible currencies. 12

13 IV. The delta between primary & secondary market trades Client Distributor Aggregator Platform 5 Fund Transfer Agent Transfer Agent undertakes: 1. AML (Anti-Money Laundering) and KYC (Know Your Client) 2. Opens client account on shareholder register 3. Undertakes deal and settlement processes on the register 4. Manages corporate actions with the shareholder 5. Calculates and remunerates Distributors with rebates 1. Account Opening and Dealing 2. Deal Confirmations and Reporting 3. Settlement 4. Corporate Actions and mailings 5. Rebates 13

14 IV. The delta between primary & secondary market trades Direct Settlement in the Fund Register: the most used model for the settlement of Luxembourg funds Final Investor 1. Order 2. Order 5. Order conf. Order Issuer (Bank, Plaform, ) 4. Order Confirmation Fund Transfer Agent 3. Booking Fund Register Registered a/c 1 Registered a/c 2 Registered a/c A 6. Cash Payment 8. Cash Reporting OI Cash Correspondant Bank 7. Cash Payment Fund Cash Correspondant Bank Registered a/c n Total Registered Positions - FUND REGISTER: "record of reference" for the issuance and cancellation of shares - ISSUANCE &SETTLEMENT: finality of settlement on trade date (contract note) - ACCESS & GLOBAL DISTRIBUTION: any type of regulated counterparties (Banks, FoFs, Platforms, Institutionals, retail, ) - KYC & AML: maximum transparency for regulatory and commission purposes - COMPLEXITY OF INSTRUMENTS: flexible solutions - MULTI-CURRENCY MODEL: commercial bank money 14

15 IV. The delta between primary & secondary market trades Settlement at an ICSD: flows with banking counterparties 1. Order 2. Order Fund Register Final Investor 5. Order conf. Order Issuer (Bank) 4. Order Confirmation Fund Transfer Agent 3. Booking Registered a/c 1 Registered a/c 2 ICSD Omnibus ac 6. Receipt vs Payment Inx 6. Delivery vs Payment Inx Registered a/c n Total Registered Positions ICSD Order Issuer account at the ICSD 7.2. Securities vs cash settlement Fund Agent account at the ICSD 7.1. Shares Issuance in the ICSD - FUND REGISTER: "record of reference" with the TA - ISSUANCE & SETTLEMENT: finality of settlement on trade date (contract note) - ACCESS & GLOBAL DISTRIBUTION : mainly to banks - KYC & AML: transparency through reporting by the ICSD - COMPLEXITY OF INSTRUMENTS: standard solutions as for other asset classes allow economies of scale - MULTI-CURRENCY MODEL: commercial bank money 15

16 IV. The delta between primary & secondary market trades Domestic Settlement at a CSD & use of T2S" Fund Register Registered a/c n Final Investor 1. Order 7. Order conf. Local Bank 2. Order 6. Order conf. Local Fund Agent (Bank) 3. Bulked Orders 5. Bulked Confirmation Fund Transfer Agent 4. Booking Registered a/c 1 Registered a/c 2 Local Agent ac 8.1. Receipt vs Payment Inx 8.1. Delivery vs Payment Inx 8.2. Cash Payment OI Cash Correspondant 9. Cash Payment Bank Fund Cash Correspondant Bank 10. Cash Reporting Total Registered Positions CSD Local Bank account at the CSD 11. Securities vs Cash settlement Local Fund Agent account at the CSD 11. Shares Issuance in the ICSD - FUND REGISTER: "record of reference" with the TA. Is there a need to manage an issuance account for the settlement at CSD level? - ISSUANCE & SETTLEMENT: will the finallity of settlement be effective with the issuance on trade date or on settlement date? Will T2S grant access to CSDs and banks with direct connectivity, only? If so, an addiitonal agent will have to be appointed by the promotor to give single access to T2S. - ACCESS & GLOBAL DISTRIBUTION : more cross-border distribution will emphasize access to counterparties for all types of funds & locations - KYC & AML: limited level of transparency as not part of the scope of T2S (shareholder transparency)? - COMPLEXITY OF INSTRUMENTS: «one size fits all» does not increase process efficiency for all fund types and is likely to generate higher costs for manual processing of increased crossborder distribution. The appointment of a settlement agent for T2S increases costs for the promotor? Will T2S be an additional settlement channel for funds, only? - MULTI-CURRENCY MODEL: central bank money in and main EEA currencies. How can the settlement in other currencies, e.g. USD, AUD, JPY, HKD, take place in T2S? Is there a conversion mechanism between central bank and commercial bank money at CSD level? 16

17 Listening to to investors 17