T2S Investment Funds Workshop Frankfurt 30 June 2010

Transcription

1 T2S Investment Funds Workshop Frankfurt 30 June 2010

2 Introduction Clearstream s Principles and Objective Clearstream has been a strong advocate of T2S from the beginning. Although Investment Funds have characteristics that give rise to the need for tailored issuance processes, the services that Clearstream provides for Investment Funds are based on the principles that: investors want to be able to invest in funds in the same way as any other asset class. the fund industry can benefit from integration with other asset class infrastructure with high levels of STP / DVP settlement. Our objective is therefore to ensure that the funds industry is given the free choice to access the T2S investor base through the CSD that it considers provides the highest level of service compared to cost. Clearstream has carried out a validation of CSD service requirements with fund market players as part of its set up of the new Luxembourg CSD LuxCSD. Some key points are covered in this presentation. 2

3 Introduction Topics to be Covered 1. General T2S Framework operational implications 2. Information Needs of Fund Industry position disclosure settlement restrictions 3. Access to Central Bank accounts account eligibility 3

4 General T2S Framework Framework Discussed T2S Funds Workshop, 30 June 2010 The following points were put forward in the market validation for LuxCSD No compulsion for the Funds industry - one issue does not have to be held in its entirety with the CSD. The roles (not institutions) under T2S are : The issuer CSD for an instrument (an ISIN); has a direct relationship to the issuer and/or its agent of securities (e.g. the Register of a Fund). The investor CSD for a customer; holds the assets for its customers and has a direct or indirect relationship to the issuer CSD for each instrument. For T2S, there can be only one CSD responsible for securities maintenance so there is a single source for settlement data. 4

5 General T2S Framework Operational Implications T2S Funds Workshop, 30 June 2010 Adding funds to T2S will in principle lead to the proliferation of issues held across several CSD with a single Issuer CSD of reference (where issuer accounts have been opened). The general practice is for investment funds to process orders and calculate entitlements on a trade dated basis. This will lead to complexities in reconciling positions between the CSDs and also in ensuring adequate distribution of corporate action information which can be problematic to confirm. Discussion point : To what extent are additional reconciliation procedures required between CSDs to manage trade date accounting and specific rules and responsibilities required for the eligible Funds for finalisation and distribution of corporate action information? 5

6 Introduction Topics to be Covered 1. General T2S Framework operational implications 2. Information Needs of Fund Industry position disclosure settlement restrictions 3. Access to Central Bank accounts account eligibility 6

7 Information Needs of Fund Industry Position Disclosure Investment Funds sales are based on a network of distributors paid through various fee mechanisms. These mechanisms are both complex and also subject to frequent change as the Funds can seek to gain competitive advantage through motivation of the sales network. However, the basis for calculation of payments usually carried out by the Fund s agent- is full information on customers transactions and positions. To allow the sales process to work, the Fund or more particularly the Fund s agent needs information on positions. Clearstream s ICSD service for Investment Funds is legally entitled and currently provides this information on positions on its own customers accounts. The LuxCSD market validation confirmed that this reporting shall be available for the CSD. 7

8 Position Disclosure Position Management in LuxCSD T2S Funds Workshop, LuxCSD, June 2010 On LuxCSD s books, shares will be held in separate accounts for each customer. Shares held are recorded in the Fund Register in an omnibus a/c in the name of LuxCSD. LuxCSD Books Fund Register CSD Cust. A CSD Cust. B CSD Cust. C CSD Cust. A CSD Cust. B CSD Cust. C Registered a/c 1 LuxCSD a/c CSD Cust. X CSD Cust. Y CSD Cust. X CSD Cust. Y Registered a/c 2 Registered a/c 3 Total Registered Positions Position Reporting 8

9 Position Disclosure Position Management with another (I)CSD T2S Funds Workshop, LuxCSD, June 2010 Example settlement against ICSD customer accounts ICSD position will be held on one account in LuxCSD. Confirmed that each fund share (ISIN) will be issued through one entity only. ICSD Books LuxCSD Books Fund Register ICSD Cust. A ICSD Cust. A LuxCSD a/c 1 Registered a/c 1 ICSD Cust. B ICSD Cust. B ICSD Cust. C ICSD Cust. C CBL a/c LuxCSD a/c ICSD Cust. X ICSD Cust. X LuxCSD a/c 2 Registered a/c 2 ICSD Cust. Y ICSD Cust. Y LuxCSD a/c 3 Registered a/c 3 Total Registered Positions Position Reporting Consolidated Position Reporting 9

10 Position Disclosure Position Disclosure Under T2S T2S Funds Workshop, 30 June 2010 With the move to T2S and the increase in settlement between issuers in one CSD and investors in another, the issuance CSD will not be able to provide the level of position reporting requested by the Investment Fund industry unless the investor CSD provides details of its customer positions. Point for discussion : How can we best establish disclosure reporting requirements for investor CSD accounts in each issuance CSD so that the issuer CSD can provide the level of information needed for Investment Funds? 10

11 Introduction Topics to be Covered 1. General T2S Framework operational implications 2. Information Needs of Fund Industry position disclosure settlement restrictions 3. Access to Central Bank accounts account eligibility 11

12 Information Needs of Fund Industry Settlement restrictions The following points were put forward in the market validation for LuxCSD CSD must adhere to eligibility criteria set down by T2S which dictates that instruments must: Have an ISIN code as an instrument identifier Are held in a CSD in T2S Settle in book entry form Are fungible (from a settlement processes perspective) Fungible from a settlement perspective means that amounts/fractions of a certain security issue (designated by a specific ISIN) are interchangeable during the settlement process. This means that no additional security identifier relating to a specific balance or part of a balance is required to complete valid settlement. However, some securities may require prior or subsequent steps to the settlement procedure in order to register, to identify or to update additional codes (registration codes, reference numbers etc). CSDs shall execute these procedures as they do today. T2S shall only perform the settlement-processing layer associated with the ISIN. (Source: T2S User Requirements V3.1, European Central Bank ) The CSD (i.e. LuxCSD) will neither check nor validate the composition of a fund or its asset allocation scheme. 12

13 Information Needs of Fund Industry Settlement restrictions T2S Funds Workshop, 30 June 2010 As a general principle, all Funds eligible in the ICSD today are fungible. However, in order to allow customers to consolidate all holdings in a single place and to benefit from DVP processing for all Funds orders, Clearstream has the facility to restrict settlement to those where the counterparty is the Fund Issuance account normally managed by the Fund Agent. This allows the Fund to comply with restrictions that it may have on transfer of ownership in line with the investment policy or other legal restrictions on the Fund. Point for discussion : Will restrictions on settlement that may be requested of a CSD be applied by T2S? 13

14 Introduction Topics to be Covered 1. General T2S Framework Operational implications 2. Information Needs of Fund Industry position disclosure settlement restrictions 3. Access to Central Bank accounts account eligibility 14

15 Access to Central Bank accounts Account eligibility The are several ways of organising the different activities required for an Investment Fund. These include: The institution with responsibility to maintain the Fund Register and the related task of accepting and processing orders it can carried out by 3rd party agents dealing with several Funds. Responsibility for handling cash - can often be with the depository bank or with an appointed cash agent. The issuance account and record of positions at the CSD must be completely in line with the Fund Register managed by the Transfer Agent and normally that institution would be managing the issuance account at the CSD issuing settlement instructions based on the processing of orders. Issuing funds shares through a T2S CSD will mean consolidating all financial transactions so that the settlement is carried out in Central Bank Money with cash held at a central bank. 15

16 Access to Central Bank accounts Account eligibility For Investments Funds that are currently distributed without settlement through a settlement system or where issuance is through an ICSD, the move to T2S will involve an new condition on Fund organisation access to a central bank account. This new condition can lead to additional procedures with additional complexities and costs. Together, operational complexities and new costs can undermine the business case for issuing through T2S. For example, cash agents will be asked - particularly where there are 3rd party Transfer Agents needing to segregate or closely align cash receipt with order processing - to provide segregated cash management facilities leading to requests to open individual accounts with central banks for each Fund. Point for discussion : are account opening criteria aligned and at an acceptable level across all Central Banks to allow access to the appropriate institution for the Fund? 16