Mutual fund settlement still hasn’t been cracked by many across the industry. When placing fund trades in the market, there is a well established and automated process. What happens after the contract note is delivered, however, is another matter. But the industry’s impending transition towards a T+1 settlement cycle presents both a need and opportunity for innovation – if firms have the right technology to enact it.
Currently, mutual fund settlements involve a complex web of largely manual processes, where humans still have their fingers on many of the buttons that need to be pushed to move an order from traded to settled. Duplication of tasks, different spreadsheets for different processes, some needing extensive manipulation to be suitable for different systems, and humans either uploading or manually keying details into banking portals. In other words, a lack of straight-through processing and little or no scalability. As the firm grows, so does the back office headcount.
This is not only inefficient but prone to errors, delays, and hidden costs. It means reconciliation issues, late trade confirmations, and many counterparty settlement queries – only compounded during peak trading periods, like the annual ISA season. It also creates a game of chicken between counterparties towards the end of the settlement date: each party trying to delay their payment until they’ve received a payment. Dealing with intraday liquidity issues may not have mattered so much when interest rates were at or near zero, but it’s a different story today.
In 2022, we conducted a survey with more than 50 global asset managers, transfers agents, fund platforms and distributors across the UK, Europe, Asia and Australasia, which highlighted the impact of the late cash settlements these inefficiencies cause. Unplanned credit exposures, administrative costs, damaged client relationships, and firms forced to stall their trading. When the back office has to tell the front office to slow down, something is badly wrong.
The industry’s reliance on manual processes, from data extraction and settlement aggregation to payment instruction input, and the problems it causes, makes the shift towards more automated, efficient, and transparent settlement processes a necessity. And now there’s a spur for it: the shortening of the settlement cycles in the securities industry.
The move to a T+1 settlement cycle, scheduled for late May this year in the US, with the UK set to follow in April 2026 and the EU some time later, presents an opportunity to redesign or remove poor practice, and move to a more automated and less risky trading model. Shorter settlement cycles offer numerous benefits, including enhanced liquidity, reduced exposure to market volatility, and a decrease in the time capital remains tied up in transactions. This move may be the push the industry has indeed to transition to a real-time settlement environment, where all number-juggling between systems becomes a thing of the past, to be replaced by an automated trade-to-payment process. However, achieving all this hinges on the industry’s ability to overcome its current operational challenges, and to start thinking of the back office not as a cost centre but as a catalyst for change.
Calastone’s settlement solution is designed to address these challenges, offering a seamless, automated trade-to-payment system. It provides real-time visibility into settlement positions, streamlines reconciliations, and enables the management of exceptions – all through a single dashboard or via STP integration with firms’ existing systems. It supports settlements on a trade-by-trade, gross, or net basis; supports all settlement cycles from T+0 upwards; is bank-agnostic, so you use the bank, or banks, of your choice with no disruption to existing banking relationships; and can handle global and domestic flows in any currency.
It’s also usable even before counterparties have been onboarded. For trade-by-trade or gross settlement, there are no automation dependencies on counterparts, meaning firms can settle all of their outbound payments even if none of their counterparties are live on the Calastone solution. Automated settlement is not just limited to trades that have been executed on the Calastone network. You can also push non-Calastone trades, such as those sent via FAX, EMX, or SWIFT into the settlements engine via API or an SFTP upload.
In short, it telescopes the settlement process, bringing speed and certainty. Once settlement rules have been agreed, they are locked into the system. Firms get certainty that what is due will arrive on the settlement date at a predefined time, meaning more control over day-to-day liquidity. It also eliminates the need for manual rekeying and processing, reducing operational risk and overheads. Automation ensures that trading volumes can be managed efficiently, without the need to increase back office headcount. Moreover, the system’s flexibility and ease of use, from setting up bank and crediting/debiting rules to managing payments and tracking their progress, facilitate a scalable and efficient settlement process.
This technology not only offers a way to navigate the challenges posed by shorter settlement cycles, but also represents a significant leap towards modernising fund settlements. Being able to standardise and automate settlements across currencies, banks, and settlement cycles is critical for firms looking to enhance operational efficiency, reduce transaction costs, and mitigate risks.
Already connected to over 25 banks, with significant money markets trade settlements processed daily, the solution has the potential to provide standardisation to the settlements world. By embracing automation, the industry can overcome long-standing inefficiencies and prepare for a future where settlements are simpler, faster, and more reliable. The transition to T+1 and beyond is not just an operational necessity but an opportunity to redefine mutual fund settlements for the better.
