Change the economics of fund settlement with a new future______

Impetus for change starts with asking ‘why’. For Australia’s managed funds industry, one big question stands out: ‘Why are we still stuck with so many hands-on processes?’

Most firms’ back offices have moved their trade processing online via Calastone, and they’ve seen great improvements in efficiency and automation as a result. But progress in digitising payments and settlements has been a whole lot slower.

At Calastone, with the help of our trusted partners, we have a clear vision of where the industry needs to go and how it can get there.

Today’s messy settlement process …

Today’s settlement process has a hit-and-miss quality to it. Deadlines are tight. End-buyers are expected to pay for subscriptions on trade date. Their payments are processed in batches overnight, which means firms don’t get to see the payment details until the following morning (T+1). That is the first time a problem – such as insufficient cash in the buyer’s account or an incorrect account number – can be spotted.

If a payment has missed a deadline, it might involve moving the trade date forward a day or completely resubmitting the trade – in which case the buyer will not get the value date they expected.

Matching payments to trades is also a complex business: overnight payments are low-cost but cannot carry additional data such as references that would help identify who has paid for what. Payments for redemptions normally take place on T+2 or T+3 but this is not guaranteed, and delays are not uncommon.

In both cases, operations and finance teams at distributors, fund managers and registries are all involved in physically sorting out payments. This is high-intensity manual processing.

These issues are widely recognised. In a survey we conducted in 2020 (Check), 60% of fund industry respondents stated the big administrative burden and poor client service were their primary concerns.

The Calastone vision

Why has this gone on for so long? Digital solutions have been available, but they failed to provide a complete solution where counterparties were not on the same platform or were using a different settlement bank.

The Calastone vision is different.

What the industry needs is a digitalised solution that provides three things:

1.  Flexibility: it must be able to accommodate any form of connectivity, any payment bank and currency, and all market participants. 
2. Certainty: it must ensure certainty of payments on the agreed date with a real-time view of payments as they build up. This will allow any issues to be identified and dealt with on trade date.
3. Clarity: orders and payments must both carry transaction references – something that is possible with the New Payments Platform.

We’ve created a solution that offers all of the above, bringing transparency, speed and robustness to the settlements process. And importantly, it is future-proof; scalable to accommodate the industry’s expected growth and capable of handling changes in settlement cycles.

Fund settlements reimagined

At present, the managed funds industry is largely settling on a trade-by-trade or gross basis. With a fully automated settlement service as described above firms will be able to net off payments in against payments out, cutting settlement exposures to a fraction of current levels.

This will take time. Netting can only happen where all parties are on the same network. But it is a desirable endgame to target for everyone.

Calastone has developed all these capabilities. We now offer automated settlements to complement order routing and provide an end-to-end, digitised trade-to-settlement service. Fund industry firms no longer have to put up with the costs, errors and delays that come with manual processes. My question at the start – ‘Why are we still stuck with so many hands-on processes?’ – becomes ever more pressing.