Towards a European transfer agency service
A number of interrelated market conditions are speeding the evolution of a multi-domicile, single-system service solution for Europe’s rapidly developing mutual funds markets. Demand for cross-border investment opportunities, the appetite for equities, related products and e-commerce promise continued market growth and will require more sophisticated technology solutions.
As the world’s second largest mutual fund market and Europe’s largest cross-border investment centre, Luxembourg has the infrastructure and combined industry advantages that appeal to global financial entities. In the past two years, regulatory agility has allowed Luxembourg to ‘mainstream’ financial services formerly geared towards the offshore market. This shift has brought portfolio pricing, fund administration and internet reporting in line with US, UK and German processing capabilities, and attracted large sponsors seeking a full-service domicile from which to distribute and manage innovative fund products for Europe, Latin America and Japan.
Behind these dynamic trends, information technology is closing the gap between cross-border trade date and settlement. Nations’ pursuit of progressive pension legislation continues to strengthen capital markets-based finance as well as give individuals choice over their long-term financial security. These advances bode significant increases in already skyrocketing securities trading volume.
Ten years ago, State Street arrived in Luxembourg with 75-years experience in the US mutual fund market, including pioneering roles in exchange traded funds and automated multi-currency fund accounting. With the market’s recent ‘mainstreaming,’ demand has increased for the expertise that can deliver the highest standards in automation, controls and daily processing of consistently precise, high volume, net asset valuation (NAV). Established third-party providers of accounting and compliance, custody, financial reporting and shareholder services naturally offer a multi-lingual, consultative approach as well as scalable global processing technology that afford institutional investors a full range of outsourcing solutions at a predictable cost.
Distributors’ clear preference for a multi-domicile, single service solution is driving the current plan to standardise a regional European platform once the regulatory framework evolves to support it. In the interim, automation and internet-based solutions alleviate the complex and cumbersome transfer agency functions that investment managers currently maintain in-house.
Technology imperative for transfer agency
Requirements for transfer agency are increasing as more US and UK companies introduce products in Europe and more European companies offer them in addition to their own products across borders. Cross-registration of funds is rising with a growing number of foreign fund vendors deploying European retail asset-gathering strategies based on offshore fund complexes. In March 1997, there were just over 440 funds in Europe cross-registered for sale in five jurisdictions or more. Within a year, that number reached 740 controlled by 120 fund groups.
In the past two years, Luxembourg’s mutual fund market grew at a compound annual rate of approximately 8.7% to 1,753 funds and 5,991 sub-funds (E924bn) as of October 30, 2000. Most of the growth occurred in 1999 with 53% due to net capital inflows and 47% to market appreciation. Clearly, investors want more and immediate access to non-traditional products and are willing to shop fund supermarkets, broker-dealers and other intermediaries for the most attractive package.
Today, transfer agency is still predominantly manual across Europe. However, in the next three to five years, the exchange of paper statements, fax and phone communications will become archaic.
Technology solutions keep investment managers independent from unpredictable volume fluctuations, while giving them flexibility to service the full array of new products and strategies. Electronic work distribution systems support local professionals servicing customers in their own language and eliminate operational redundancies by channelling functions appropriately to either customer service desktops or to the central processing area for controlled electronic multi-currency accounting, settlement, reconciliation and related functions.
Given the scale of its mutual fund market, Luxembourg is likely to leap the e-commerce development curve and host the launch of aggregated one-stop shopping for personal financial planning this year.
Certainly European distributors and investment managers will begin accessing Web-based products this year. They will be able to log on to a dealing screen at their desktop and place secure orders that will go straight through to the transfer agent. The operator will return e-confirmations via the internet or provider network. Settlement will be targeted within 24 hours with lessening difference between domestic and multi-national funds.
Over the next five years, more shareholder and distributor services will be outsourced on an electronic basis to third-party providers able to service high volumes for functions including:
q transaction processing, settlement and confirmation
q 24-hour access to account information
q consolidated account statements
q automatic investments and exchanges, withdrawals, dividend reinvestment
q money transfer privileges
q investor information and shareholder communications
q distributor servicing
Ultimately, a European transfer agency platform will take electronic deal instructions from fund distributors (supermarkets and broker/dealer websites), aggregate and forward them to fund managers, settle all deals and handle the reconciliation of all units/shares, cash and dividends. The US has such a platform. Europe needs an equivalent.
Timothy Caverly is managing director at State Street Bank in Luxembourg