European Central Bank TARGET 2 SECURITIES - Funds Workshop Luxembourg, April 27th, 2010 Cross-Border Funds and T2S A Luxembourg TA Perspective 1
Agenda I. Introduction II. The Transfer Agent and Settlement Models III. Fund Features and Needs of T2S IV. Appendices 2
I. Introduction 3
I. Introduction Global Fund Industry - Worldwide UCITS assets under domiciliation 31.8% 2.7% 3% 0.39% 10.0% 48.3% 3.61% 1.42% 7.51% 1.3% 0.87% 1.3% 3.4% 4.7% 4.8% Source: EFAMA Worldwide Investment Fund Assets, Trends in 3Q2009 4
I. Introduction European Fund Industry UCITS & non-ucits market share UCITS & NON-UCITS Assets Country millions Market share Luxembourg 1 840 993 26.2 France 1 426 395 20.3 Germany 1 017 356 14.5 Ireland 748 629 10.6 United Kingdom 631 000 9.0 Italy 249 952 3.6 Spain 194 520 2.8 Switzerland 157 247 2.2 Austria 138 603 2.0 Sweden 126 402 1.8 Others 508 130 7.2 33,664 Funds 9% 26.2% 10.6% 3.6% 20.3% 14.5% 2.2% Total 7 039 226 100.0 Source: EFAMA Worldwide Investment Fund Assets, Trends in 4Q2009, UCITS & non-ucits 5
I. Introduction The Luxembourg fund sector at a glance as at 4Q2009 No. 1 hub for global cross-border fund distribution Luxembourg-domiciled funds sold directly in over 55 countries TA service providers serve from 60 to 110 countries of distribution 43,000 distribution agreements attributed to Luxembourg UCITS Fund industry practitioners represent today 114 central administrations who mainly support fund accounting and transfer agency activities 70 custodians 364 Management Companies 13% workforce directly in financial services - out of which more than 1/3 are working in the fund industry *Source: ALFI monthly statistics 31 December 2009 6
I. Introduction Context the Investment Management business model Sub-advisors Investment Fund ManCo / Promoter Portfolio Manager Fund Services Administrative Agent Paying Agent/Clearing Lawyers Broker Custodian Bank Communication Agent Fund Accounting Transfer Agent Regulatory Authorities Investors Distributors Auditors Global Fund Distribution Support Source: ALFI TA Forum 7
I. Introduction The Luxembourg fund sector at a glance as at 4Q2009 3,498 funds - 12, 425 units (traditional funds + sub-funds) 1 840.993 billion euros AuM Leading cross-border UCITS and fund administration centre No.1 in Europe, No.2 in the world Fund transaction volumes EFAMA-SWIFT Survey* conducted in Luxembourg with 21 TAs representing close to 80% of total Luxembourg order volumes 13.2 million orders were processed by 21 Luxembourg-based transfer agents (10 in-house TAs and 10 3rd party TAs) Automation rate of orders reaching 69.5% STP APAC-based order givers representing 35% of incoming orders *Source: EFAMA/SWIFT Fund Automation Survey 2009 Luxembourg market 8
I. Introduction The Luxembourg fund sector at a glance as at 4Q2009 A number of funds are suited to settlement within a CSD as they do not follow a conventional trade first settle later process based on trade confirmations issued by the Transfer Agent.. Type of Fund No. of funds / units Value Billion Money Market 543 328.987 17.8 % Settlement Terms Trade date or Trade date+1 Equity & Bond 6 221 1 027.114 55.8 Hedge Fund (incl FoF) ** 1 154 86.351 Private Equity (incl FoF) 76 5.805 0.3 Venture Capital 27 0.649 0.1 Real Estate (incl Fof) 150 18.965 1.0 Typically trade date +3 No common practice, cash is often received before subscription orders are priced. Irrevocable cash commitments are made by investors. The fund makes calls on investors to raise cash to settle the funds investments. Irrevocable cash commitments are made by investors. The fund makes calls on investors to raise cash to settle the funds investments. Irrevocable cash commitments are made by investors. The fund makes calls on investors to raise cash to settle the funds investments. Source CSSF: Data as of 31 December 2009 ** Source ALFI Hedge Fund Survey, data as of 30 June 2009 9
I. Introduction The Luxembourg fund sector at a glance as at 4Q2009.many conventional funds are not denominated and settle in other currencies and even denominated funds may have special non denominated share classes Currency No. of funds / units Equivalent Value Billion % Euro 8 481 1 127.250 61.23 USD dollar 2 543 561.103 30.47 Japanese Yen 229 31.448 1.70 Swiss Franc 328 45.852 2.49 GB Pound 276 37.545 2.03 Other currencies 375 37.795 2.08 Source CSSF: Data as of 31 December 2009 10
II. The Transfer Agent and Settlement Models 11
II. The Transfer Agent & Settlement Models Funds in Luxembourg Primary Market Investor Distributor Aggregator Technical Platform Fund Transfer Agent Transfer Agent undertakes: 1 1 2 3 4 2 5 Maintains all shareholder accounts and details Performs AML and KYC checks Settlement agent for all fund orders Calculates the number of shares to create or liquidate on each dealing day Allocates and notifies shareholders of all corporate actions Calculates and instructs payments of rebates to Distributors 12
II. The Transfer Agent & Settlement Models Model 1: "Direct settlement with the Transfer Agent" Funds Register Registered a/c 1 Final Investor 1. Order Order 2. Order Originator 5. Order conf. (Bank, Plaform, ) 4. Order Confirmation Fund Transfer Agent 3. Records Registered a/c 2 Registered a/c A Registered a/c n Total Registered Positions 6. Cash Payment 8. Cash Reporting OI Cash Correspondant Bank 7. Cash Payment Fund Cash Correspondant Bank - The most used model for the settlement of LU funds; - The fund register is the "record of reference" of any holding in the fund and its total outstanding; - Flexibility in terms of access: any type of counterparties (Banks, FoFs, Platforms, Institutions, Retail, ) as long as they comply with local AML \ KYC regulations; - Flexibility in terms of the complexity of different funds types and settlement and order processes it can handle; - Multi-currency, commercial bank money based model; - Allows maximum transparency of beneficial ownership; - Different settlement model from other common security types (bonds and equities); - Service levels may vary between Transfer Agents and the funds they service. 13
II. The Transfer Agent & Settlement Models Model 2: Settlement via an ICSD" Funds Register Registered a/c 1 Final Investor 1. Order 5. Order conf. Order Originator (Bank) 2. Order 4. Order Confirmation Fund Transfer Agent 3. Records Registered a/c 2 ICSD Omnibus ac Registered a/c n Total Registered Positions 6. Receipt vs Payment Inx 6. Delivery vs Payment Inx ICSD Order Originator Fund Agent 7.1. Shares Issuance in the ICSD accourt at the ICSD 7.2. Securities vs cash settlement account at the ICSD - A model that has evolved in the past years, mainly for cross-border flows with banking counterparties; - The Funds Register remains the primary record" of shareholders and records the total number of shares issued; - Multi-currency friendly settling in commercial bank, cannot process funds with non standard settlement and order cycles; - Mainly accessible to Banks; - Transparency provided by the ICSD in the form of reports; - Common settlement cycle for funds and equities and bonds, bringing scale for banking groups; - Uniform service level from a connectivity, settlement, asset servicing and reporting point of view.
II. The Transfer Agent & Settlement Models Fund Register Model 3: "Domestic Settlement at a CSD" 1. Order 2. Order 3. Bulked Orders Local Final Local Bank Fund Agent Investor 7. Order conf. 6. Order conf. (Bank) 5. Bulked Confirmation Fund Transfer Agent 4. Records Registered a/c 1 Registered a/c 2 Local Agent ac Registered a/c n Total Registered Positions 8.1. Receipt vs Payment Inx 8.1. Delivery vs Payment Inx 8.2. Cash Payment 10. Cash Reporting OI Cash Correspondant Bank 9. Cash Payment Fund Cash Correspondant Bank 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 - Predominately used to settle cross border funds in Germany & France with domestic couterparties; - The Funds Register remains the primary record" of shareholders and records the total number of shares issued; - Single currency, central bank money based model (with few, limited exceptions); - Settlement at a CSD only accessible to Banks; - Limited level of transparency; - Increases Fund costs, as the appointment of an additional, local agent is necessary; - Common settlement cycle for funds and equities and bonds, bringing scale for banking groups; - Uniform service level from a connectivity, settlement, asset servicing and reporting point of view for banks; - Restricted transparency to Funds Transfer Agent. 15
III. Fund Features and Needs of T2S 16
III. Fund Features & Needs of T2S Key components and flexibility of the model Primary Market Register = Record of Reference Transparency of Information Choice of Settlement Route and CSD International Scope Access to CSD / NCB 17
III. Fund Features & Needs of T2S Key features Cross Border Funds (1) A cross border UCITS domiciled in Luxembourg will appoint a single Transfer Agent who will provide a range of services that cover the following: Large Distribution Networks covering Europe, Asia, Middle East and the Americas. Open Operating Model interacts with a range of order and settlement infrastructures across Europe and further a field, appointing local agents where required to trade via: Euroclear France, Clearstream Bank Frankfurt, SIPs (Italy), NSCC Fundserv US, Fundserv Canada etc. Local Agents are necessary to enable cross border funds to settle in Central Bank Money in several European markets where they do not qualify to join the local CSD. Open Architecture the commercial proposition of paying rebates to Distributors in exchange for access to their sales networks. The Transfer Agent typically performs the calculation and payment of Distributor rebates. Multi Currency offers funds denominated in a range of different currencies; accepts settlement in non fund currency; offers share classes in other currencies to that of the funds denomination. Alternative & Traditional Funds with a different sequence of the trade process are supported i.e. cash is received before trade date and confirmation details are several days \ weeks after trade date. Limitations of Authorised Activities the activities performed by Transfer Agents and Management Companies do not require them to seek authorisation as bank or financial credit institution, which precludes them from direct access to some exchanges and CSD s. 18
III. Fund Features & Needs of T2S Key features Cross Border Funds (2) Paying Agent the Transfer Agent will typically be the central paying agent using a commercial clearing bank (might be part of the same Group) as their cash correspondent. Secondary Market Trades the change in ownership of shares in cross border funds are reflected in the books of the Transfer Agent at the level of the contracting party (Distributor) or they are consolidated under one omnibus account in the name of the (I)CSD who provide equivalent reports and data extracts. 19
III. Fund Features & Needs of T2S Cross Border Funds Future Settlement via T2S (1) For the funds industry to adopt T2S as a preferred channel for settlement the following points & infrastructure issues should be considered. 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. Single Entry Point - the introduction of T2S should create the ability to settle all denominated cross border fund transactions placed via any CSD s in Europe from one settlement account. Transparency of holdings - cross border distribution is based on open architecture with Distributors sales networks selling Promoters funds in exchange for remuneration in the form of fee rebates. It is essential that Distributors positions in shares are clearly identifiable. Issuer CSD - industry best practice for eligible securities is to keep the totality of an issue within the so-called Issuer CSD. Cross border funds must have the option to maintain the whole of the shares in issue with the Funds Transfer Agent CSD Data Exchange a legal framework or equivalent facility is required to allow the exchange of data between CSD s and the Funds agents to allow the identification of holders to the level of the contracting party (Distributor) for the calculation of rebates. 20
III. Fund Features & Needs of T2S Cross Border Funds Future Settlement via T2S (2) CSD reporting - interfaces, reporting tools will be needed to allow the exchange of data between the various CSD s and the Funds agent. This is required for the identification of Distributors and organisations purchasing funds via CSD s for AML \ KYC purposes and for the calculation of fees based on holdings. Global Distribution the share of assets held by investors domiciled outside of Europe is growing and approaching 50%. Therefore T2S should facilitate Distributors domiciled outside of the EEA to settle in T2S. Alternative Funds the trading and settlement methods on T2S should be developed to accommodate alternative fund types that do not follow a standard equity model of trading and settlement. Cherry picking the simple traditional structures will reduce the adoption rate of investment funds settling in T2S. 21
IV. Appendices 22
Appendix I - Players in the investment fund industry Key players overview Portfolio management Portfolio Portfolio manager manager Domiciliary Domiciliary agent agent Promoter Promoter Investment fund Broker Broker Fund accounting Custodian bank Paying agent Transfer agent Regulatory Regulatory authorities authorities Investors Investors Distribution network Distributors Distributors Auditor Auditor Supervisory environment 23
Appendix II - Players in the investment fund industry Transfer agency in a nutshell Directly dealing with the investor money The Transfer Agent administrates the fund capital from investors while the Custodian safe-keeps the fund assets. Fund accounting administrates the fund books. Administrates Administrates the the fund fund investment investment and and capital capital transactions transactions Fund Fund accounting accounting Assets Fund balance sheet Liabilities Administrates the fund investments (Securities) Administrates the fund capital (Investors) Custodian Custodian bank bank Transfer Transfer agent agent 24
Appendix III Transfer Agent Definition Definition and obligations of the transfer agent in Luxembourg Transfer agents and registrars are professionals engaging in the receiptand execution of orders...execution of the orders shallinclude the keeping of the register for the issuer. Extract of the Law of 5 April, 1993 on the financial sector amended by the Law of 2 August, 2003 Article 24 (G) is required to apply the customer due diligence procedures not only to all new customers but also at appropriate times to existing customers on a risksensitive basis,.to keep the documents and information below for use in any investigation into, or analysis of, possible money laundering or terrorist financing Extract of the Law of 12 November 2004 A transfer agent has to implement a risk-based approach to the management of its AML compliance operations, matching the degree of risk presented by each customer with an appropriate and variable level of monitoring activity, investigation and prioritisation The Third EU Directive on AML 02/60/EC required to keep secret any information confided to them in the context of their professional activities. Extract of the Law of 5 April, 1993 on the financial sector amended by the Law of 2 August, 2003 Article 24 (G) Transfer agents and registrars shall be automatically authorised to act, in addition, as financial sector administrative agents and as client communication agents. Extract of the Law of 5 April, 1993 on the financial sector amended by the Law of 2 August, 2003 Article 24 (G) professional obligations: obligation to know the customer; obligation to scrutinise certain transactions with special attention; obligation to continuously monitor customers according to risk; obligation to keep certain records; obligation to establish an adequate internal organisation; obligation to co-operate with the authorities and obligation to report. Extract of the CSSF Circular 05/211 25
Appendix IV - The Luxembourg TA business models TA Value Chain Servicing the Fund, the investors and the distributors Fund Business Direction Product Strategy, Strategic Intent & Direction Client Relationship Management, Fund Distribution Framework FUND / INVESTOR / DISTRIBUTOR CLIENT FACING PROCESSES FRONT OFFICE Client Services Central point of contact Client information and enquiries Deal acceptance Fullfilment Call Center Customer Relationship Management Correspondence BACK OFFICE EVENT DRIVEN FUNCTIONS Fund Maintenance Call Centre Registration Cash Fee Management Processing Transaction Processing REPORTING Shareholder Fund/Investor /Intermediary /Distributor Contract note Statement: account, tax, dividend, commission, trailer fee, etc. Fulfilment welcome pack Fund Fact Sheet Marketing materials Client Investor and Business Fund Value Business Value Complaints handling Fund Communication Support Functions Human Resources IT Depositary Custody Bank / Custody Fund Accounting Proprietary Sales Intermediaries Distributors Legal & Compliance Marketing Product Development Source: ALFI TA Forum Luxembourg TA Services Surveys 2003 and 2007 26
Appendix V Cross Border Investment Managers Top 50 cross-border management groups Source: GFD2010 - Lipper Hindsight, PwC and management groups information as at December 31, 2009 27
Appendix VI Fund Currencies T2S context - Denominations.many conventional funds are not denominated and settle in other currencies and even denominated funds may have special non denominated share classes.. USD EUR CAD GBP JPY CHF SEK SGD DKK NOK AUD PLN CZK HKD NZD Grand Total Luxembourg 5660 11556 27 959 434 780 149 167 27 65 40 23 35 28 3 14 19967 France 198 6876 2 23 9 9 2 4 2 2 2 3 3 14 7149 UK 164 84 1 3803 2 0 4054 Ireland 1453 1150 1 563 88 36 12 13 16 6 7 4 1 1 3351 Spain 1 2539 0 2540 Germany 20 1989 1 4 3 1 0 2018 Austria 79 1872 2 1 3 2 55 0 2014 Belgium 151 1370 4 9 2 13 103 2 1654 Switzerland 249 223 2 20 36 1106 0 1636 Italy 1 909 0 910 Sweden 3 5 596 0 604 Denmark 12 28 2 1 2 450 1 0 496 Finland 5 476 12 3 0 496 Portugal 396 0 396 Norway 1 1 2 326 0 330 Netherlands 14 301 1 2 1 1 320 Poland 2 2 291 0 295 Greece 2 0 2 28
Listening to to investors 29