Settling Fund Shares in T2S

Transcription

1 /2011/ Brussels, 17 December 2010 Settling Fund Shares in T2S What are the outstanding Issues? A list of questions raised by the EFAMA T2S Working Group

2 Background Representatives from the European investment fund industry discussed with the ECB T2S Team the impact of T2S for the settlement of investment fund shares at two workshops: on 27 April in Luxembourg and on 30 June in Frankfurt. The two meetings were very useful to clarify a number of issues. Still, it was agreed that further work was needed to understand better the most important problems facing the fund industry. EFAMA took the initiative to create a T2S working group to seek the feedback of fund industry stakeholders, including fund managers, investment fund associations, transfer agents (TAs), CSDs and ISCDs. This presentation summarizes the conclusions reached by the working group. 2

3 T2S benefits The requirements for settlement of shares of funds are fundamentally different from those of other securities in T2S. The asset servicing processes provided by TAs and some CSDs to the fund industry are very much intertwined with the settlement processing of fund shares. Hence, the analogy with the corporate actions work is of limited relevance. If the T2S functionalities cannot address the special requirements for funds settlement, we have doubt that T2S would bring benefit to the fund industry. Against this background, we would appreciate it if the ECB T2S team could present a document explaining the expected benefits of T2S for European fund managers and investors, and highlighting the conditions that would need to be met by the fund industry and the CSD community for maximizing the benefits. Along the same line, it would be useful if the ECB T2S Team could prepare a user guide to explain how T2S could be used to settle fund shares. We would be pleased to contribute to the preparation of this guide. 3

4 Distribution of funds outside the EEA/euro area UCITS has become a global brand with worldwide recognition. Recent estimations show that APAC-based order givers generated 31% of incoming order volumes in Luxembourg during H1 2010; the percentage of orders from Americas-based order givers reached 5% See Many distributors outside the EEA/euro area are not familiar with CSDs nor willing to accept the cost of trading and settling investment funds in this manner. The success of UCITS outside Europe is highly dependent on the capacity of TAs to offer maximum flexibility to foreign distributors, especially in terms of currency of denomination and non EUR settlement. The business reality will require that TAs continue supporting various settlement routes and complex processes. We would welcome hearing the view of the ECB T2S Team on the role T2S could play to support TAs by replacing some of these inefficient and costly routes. 4

5 Transparency of holdings One of the biggest issues for fund companies is transparency as to who is holding the share of their funds, and to ensure that the eligible investors are invested in the proper share class. Consideration needs also to be given to transparency of distribution for the purpose of distributors remuneration. Although transparency is already a problem today for omnibus a/c s held at ICSDs, this problem will be more complex in the future if CSDs hold a/c s with other CSDs (thus creating an omnibus-in-an-omnibus a/c situation), especially in the case of single Issuer CSDs. We understand that this issue is being considered by the Shareholders Transparency Task Force. We would welcome to contribute to the work of this Task Force to facilitate the adoption of a solution that would allow identification of the eligible investors and the fund share distributors in cross-csd arrangements. 5

6 Settlement costs The impact of the reduction in settlement costs should not be overestimated. According to industry calculation, the reduction in settlement costs will only represent a small fraction of the cost of a DVP transaction. Furthermore, some domestic markets are already very efficient; hence, it is unclear whether T2S will lead to lower settlement cost in those markets. T2S adds in an additional player (Central Bank) in the settlement process and potentially additional cost, such as the cost to access central bank money (intra-day liquidity costs, daytime/night-time settlement costs, no pre-payment settlement possible (as per today with pre-advice notifications through the ICSD). Overall, it is unclear if the savings in settlement will outweigh the cost of using CeBM. We would welcome receiving the view of the ECB T2S Team regarding the potential net reduction in settlement costs. 6

7 Settlement risks For cross-border transactions, there are currently 2 counterparties and the ISCD. With T2S, there will be at least two parties added to the process: the NCBs and T2S (and potentially sub-csds submitting the transaction to the Issuer CSD). It is unclear who will take the responsibility in case of failed transactions. We would welcome receiving the view of the ECB T2S Team regarding the potential increase in settlement risks. There is a conflict between the legal transfer of ownership which occurs on Trade Date, whereas settlement finality in a CSD environment occurs on Settlement Date. We recognize that this type of risk is not unique to the funds world. Still, we would appreciate to get the ECB s opinion on the risks inherent to the existing gap between the Trade and Settlement Dates, and the solutions proposed by T2S to mitigate the risk involved. 7

8 Restrictions on transferability For certain funds/share classes, the fund needs to monitor the transfer of positions and restrict transfer on certain ISINs. This raises a number of questions: To what extent can restrictions on transferability within T2S be supported in T2S? Under what conditions can a fund request to restrict transfer? To what extent will the restriction be absolutely binding for all CSDs and all types of transactions? How can the funds/tas ensure a timely execution of transfers through the register? We would welcome clarifications on these questions. 8

9 Other issues Decimals/Fractions CSDs use different number of decimals. This would produce share rounding differences between CSDs and the TAs. We welcome the feedback received from the ECB T2S Team that the number of decimals is a parameter that can be defined in the T2S IT system. We would welcome that the ECB T2S Team takes an initiative to foster an agreement with CSDs to use the same number of decimals and rounding rules Currencies The main currencies required to facilitate cross-border settlement and get most of the volumes are USD, CHF, GBP and YEN. We would welcome any initiatives the ECB could take to accommodate the settlement of fund share classes in multiple currencies, including non-european currencies, notably USD and Yen. Coordination of issuance and delivery ISINs in issuance need to be communicated and made available to all CSDs We would welcome the ECB T2S Team view on how will this communication take place 9

10 Other issues Key information about funds Funds will normally not be represented by an Issuer-CSD in T2S, but only investor-csds. Who will then be responsible for the basic information about the funds in T2S? And who will be willing to take on that responsibility? 10

11 Concluding remarks We hope that the ECB T2S Team will clarify the issues addressed in this presentation and agree to discuss with the T2S Advisory Group changes in the changes in functionality that would allow to address the special requirements for funds settlement and ensure that issuers of funds and investors of funds benefit from T2S. We recognize that some coordination and harmonization issues should be dealt with the CSDs community. EFAMA will address questions and proposals CSDs. Still, the T2S-CSD- community is not a closed environment. As it will be the ECB T2S Team authorizing further CSDs to joint T2S community and closing contracts with CSDs, we hope that the ECB T2S will act as catalyst for harmonization of market practices in the CSD environment. We hope that the questions raised in this presentation, and our suggestions and questions, will offer the basis for a follow up workshop with the ECB T2S Team in early

12 Brussels, 17 December 2010 Contacts Bernard Delbecque Director of Economics and Research EFAMA Square de Meeûs, 18/2 B-1050 Brussels, Belgium Tel. +32 (2) Fax + 32 (2) info@efama.org Vanessa Grueneklee Chair of EFAMA T2S Working Group Head of cross Border Client Operation Management AXA Investment Managers Deutschland GmbH Bleichstraße 2-4 D Frankfurt am Main Tel.: Fax: Vanessa.GRUENEKLEE@axa-im.com