How did the idea for Calastone Settlements come about?
In the UK fund industry today, whilst most order-taking is currently performed electronically, the settlement of those orders were still being done manually. Not only that, often the settlement for those orders were done on an order by order basis. We realised there was an opportunity to develop a product that not only provides an STP service for settlements, but one that could also reduce the amount of traffic relating to the number of settlement payments sent significantly impacting liquidity for both senders and receivers.
We’ve created the only commercial settlement system built specifically for the funds management industry. In doing so, this makes it a much more efficient solution than other available settlement systems originally created for equities markets.
So how exactly does it work?
Calastone Settlements is made up of two parts. The first part is the Matched Netting system, which matches instructions between the fund manager and distributor, calculating and confirming a net settlement amount for both sides.
The second part of the solution facilitates timely trade settlement. To do this we’ve teamed up with Barclays, meaning Calastone clients have their netted settlements made through a dedicated netting service account at Barclays. This combined solution means that, on T+1, clients now know exactly what the settlements will be against different counterparties on the settlement date. These accounts can either be pre-funded or, subject to Barclays approval, intraday credit lines provided, helping clients significantly reduce their liquidity exposure. In fact, we estimate that if all of our clients had used Calastone Settlements in 2014, they would have reduced their liquidity requirement by around 52%.
What does Calastone Settlements mean for the funds industry?
What it means is the reduction in the amount of administration surrounding the settlements process, driving cost reduction to the industry as a whole. The payments ladder enables users to see their financial exposure in advance of the settlement date. Barclays processes settlement payments before 10:00am, thus enabling better management of the client money accounts by the Treasury teams. This one solution actually counters quite a lot of issues and fundamentally changes the transparency around the settlements processes.
What are the benefits Calastone’s clients have been seeing so far?
Client feedback to date has been extremely positive. They have cited the elimination of entry duplication and having full transparency and visibility of trades and account balances throughout the process of particular benefit. The addition of the net payment solution using Barclays is delivering value by significantly reducing liquidity exposure and facilitating net settlement rather than gross. I think this goes back to the heart of what Calastone does – solving industry problems by creating solutions by stepping back and identifying changes across the entire process in terms of better outcomes.
How does Calastone Settlements support the industry’s need to address the FCA’s CASS rules regarding client money management?
The FCA’s Client Assets Sourcebook (CASS) policy states that client money must be kept safe in an individual account and firms must be able to account for all client monies at any given point in time. That said, the DVP+1 exemption rule allows firms to net-off and hold onto client monies for a short period of time if they are not using a full client money solution. Calastone Settlements is an ideal solution and can be used by firms using the DVP+1 exemption or full client money model. Using the same matched netting methodology and single balancing settlement, we’ve ensured that firms can meet these requirements, so that all monies are segregated, accounted for, reconciled and reported.
How do you see the landscape for settlements developing in the future?
Working with a number of key clients, we are already exploring ways that we can support the industry on a global basis. Indeed, Calastone Settlements the core functionality is in place to serve the needs of other international markets.
We are also continuing to extend our UK market reach; by continuing to grow the base of service users we are helping realise the significant liquidity benefits to all.