The Calastone Settlements Service
The Calastone Settlement Service was launched on 23rd March 2010 with the co-operation and encouragement of the fund management
industry. It is an international service suitable for offshore and onshore funds which was developed with input from IFDS, FNZ,
Cofunds, Gartmore, Schroders and Old Mutual. The first trades were settled between Cofunds and Old Mutual and many thousand trades
have now been successfully matched and settled using the service.
Settlement of mutual funds in the UK is typically dependent on bi-lateral payments being made between the fund buyer and the fund
provider. Different levels of automation exist, but many mutual fund transactions are still settled manually.
Most fund providers and fund buyers settle buy and sell orders in three different ways:
- Payment is made for each trade between the fund provider and the distributor.
- Gross subscriptions to units are paid by the distributor and gross redemptions of units are paid by the fund provider.
- The net amount is paid by the fund provider or distributor depending on whether total redemptions exceed total subscriptions.
First of all, it is important to realise that Calastone does not ‘do’ settlements. Calastone enables distributors and fund providers
to automate their settlement processes without the need for a change in market infrastructure. Mutual fund trade matching,
calculation of net settlement positions and in the near future auto-generated settlement payment instructions over SWIFT allows
clients in the UK and in other domiciles to benefit from a more efficient, standardised settlement process..
Calastone’s free Execution Management System (EMS) permits fund buyers and fund providers to proactively manage any settlement
problems which may occur before settlement date. The EMS provides full transparency on your settlement flows over a rolling five
day period. It is fully customisable and configurable and we are not prescriptive about which fields are appropriate to you.
Calastone offers a fully-automated settlement process to every fund manager and fund buyer in the UK and can also be used in other
domiciles. Most participants today will use a number of different settlement processes including net payments to certain
counterparties, trade-by-trade by others, and they will use different systems to make payment depending on who they are dealing with.
The Calastone settlement solution offers genuine STP to all market participants, regardless of their size or their current payment
mechanisms. We also offer a whole of market solution which allows you to automate settlement with fund providers regardless of
whether or not they trade via Calastone. Because Calastone provides global interoperability in terms of messaging and communication
mediums we can also accommodate offshore funds.
No. We consulted with fund buyers, fund managers and Transfer Agents to determine what type of product the market wanted. One of the
specific requirements of the market was that they wanted settlement to be order router- neutral. Market participants did not want to
be tied to a specific order router because this meant that they could never achieve 100% straight through processing.
Settlement instructions can be sent to Calastone in a number of different ways:
- On CTN – the distributor has placed an order over Calastone and Calastone automatically creates a settlement instruction
from the order conversation.
- Off CTN – for orders not placed via the Calastone Transaction Network, participants can send automated settlement instructions,
use manual entry or use a file upload facility.
Pricing for fund buyers is different depending on whether or not they are settling an order that was dealt over Calastone.
No. In phase 2 of Calastone Settlements, we intend to use our SWIFT infrastructure to enable payments to be made directly between
participants. Clients will use their own BIC code , which Calastone will host for them free of charge. Our core clients asked us
to build a web-based GUI so that they could become comfortable with how the system works. After clients are familiar with the GUI,
it will be very straightforward to launch a message-based payment system. This is the approach which we have taken since Calastone was
founded in 2007.
Distributor clients are able to over-ride the injected settlement instructions for price. Because the price at which a fund is dealt
relies on a number of moving parts (rounding issues, NAV + adjustments, manual calculation), if you over-ride the price field with
your own calculation, the trade will remain unmatched unless the fund provider’s calculation is exactly the same. T
No. Calastone provides the fund buyer and fund provider with the information they need to make seamless net payments and in phase two,
payment will be auto-generated.
No. Clients send payment instruction to their bank to make payment using Calastone’s Transaction Network.
Calastone does NOT hold hold a central register like a traditional Central Securities Depository (CSD). We took this decision after
much consultation with the industry for a number of reasons. Unlike equities, unit trusts operate on a primary market model basis.
Fund buyers can not buy a fund from anyone other than the fund provider, which means that the fund provider is obliged to maintain
the register of holdings. In a secondary market like equities, delivery versus payment makes absolute sense because legal title
to stock has to move through the CSD. In the funds world however, it is the fund provider who maintains the register: our clients
told us that they did not want to duplicate the register. The costs and infrastructure associated with providing daily register
update requests (RURs) was seen as an unnecessary and undesirable procedure.
No. If payment for units is not received by the fund provider, the fund provider has a choice: they can either remove the fund
buyer’s units from the register (unlikely in practice) or they will chase the fund buyer for non-payment, which is what happens
universally today.
Because we do not maintain the register, there is no reason for our settlement service to record whether the units purchased are
Group 1 or Group 2. However, we regard this as a real strength of our system: because we are not replicating the register, we do
not face the same problems which a CSD model which replicates the register faces. In order to reconcile Group 1 and Group 2 units,
we provide a Reconciliation Service which is described in a separate document. Group 1 and Group 2 units are easily handled via
ISO 20022 statement of holdings and statement of transactions.
Because we calculate the net payment amount which is owed between participants, internal funding risks are reduced. We also provide a
single unique net settlement reference each day, which was a feature requested by our clients’ Reconciliation departments. If you are
netting payments but not using Calastone, the Reconciliation department has no way of knowing why their expected payments do not
match their actual payments. Finally, the cash ladder function allows fund managers to see their day-by-day exposure to all of
their counterparties.
Calastone is a messaging utility for the fund management industry, not a software vendor. We do not charge an annual membership fee,
we do not require you to purchase any hardware or software, we do not require you to perform daily reconciliation between the CSD and
the register and we do not charge for implementation or training. We estimate that our STP settlement solution is significantly cheaper
than any other automated solution and it went live on 22nd March 2010 with the first trades being settled on 25th March. Our clients
only pay for each settlement message sent; there is no infrastructure to install and no annual membership fee.
This can not happen if you route orders via Calastone. No matter how many accounts are held by the fund buyer, and how many
designations are held within these accounts, you can configure the GUI to match at an account or designation level.
No. Provided the security has a a security identifier, you can use Calastone to settle, even if it is a security which has never been
traded on the network before. You can also configure your own settlement instructions, so if an instrument needs to settle in 3 days
(or less), you can specify this.
No. The coverall agreements which are common in the fund management business remain in place. Calastone allows you to resolve
problems before they result in failed settlement, cutting your costs, reducing your operational risk and improving your relationship
with your key clients. We store 2 weeks’ worth of trades which are downloadable to Excel and we also store all trades for seven years,
and make no charge for client requests for older trades.
Please call Alexander Hofmann or Anna Graziano on +44 20 7367 5920 for further information. For offshore, please call Sebastien Chaker on +352 691 888 813.
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