As part of Calastone’s ongoing focus on driving efficiencies within the ETF ecosystem, I recently had the opportunity to join a webinar hosted by ETF Stream, exploring the challenges and opportunities in the ETF primary market, building on insights from recent research conducted by Calastone and ETF Stream. Together with industry leaders Dorcas Phillipps, Robeco and Andrew Craswell, Brown Brothers Harriman, we delved into the complexities of the primary market and how the industry can evolve to support continued growth amid rapid expansion to over $12 trillion in assets under management.
Navigating the Evolving ETF Ecosystem
The European ETF market has expanded rapidly over the past two decades, with the surge in active ETFs standing out as a significant driver of this growth. However, this expansion has also brought increased complexity. As my fellow panellist Dorcas Phillips highlighted, while the basic processes of ETF creation and redemption have remained largely unchanged, the volume of products and the number of participants have grown substantially. This shift requires the industry to rethink how processes are integrated to keep up with new demands.
One of the key insights from our discussion was that, while the secondary market for ETFs is highly efficient, the primary market lags behind due to manual processes and fragmented systems. For the ETF wrapper to truly fulfil its potential as a cost-effective and scalable investment vehicle, the industry needs to streamline operations.
The Role of Automation, Real-Time Data, and APIs
A recurring theme in our conversation was the urgent need for automation and standardisation within the primary market. Currently, many processes are still manual, leading to inefficiencies that are costly and time-consuming. By leveraging APIs instead of batch processes, we can significantly reduce reliance on manual interventions and batch data processing.
The panel stressed the importance of real-time data availability for authorised participants (APs). Providing APs with instant access to data, including trade confirmations and order statuses, through APIs can streamline the creation and redemption process. This is especially critical in the context of the upcoming transition to a T+1 settlement cycle. As Andrew Craswell noted, the move to T+1 in Europe will require APs to have timely access to information, ideally before market opens, to facilitate seamless settlement and reduce the risk of fails.
Standardisation: A Path to Scalability
Another critical insight from the panel was the need for consistent data standards across the ETF ecosystem. Dorcas Phillips highlighted that standardising elements like contract notes and confirmations would significantly reduce friction. The current lack of uniformity in formats makes it challenging for APs and issuers to efficiently process transactions. Standardising these can enhance scalability, particularly as the industry continues to expand with the introduction of more complex strategies.
Building on this, Andrew Craswell emphasized the potential benefits of a centralised data repository for key information such as PCF (portfolio composition files), AP order flows, and fund data. This centralisation could eliminate data silos, enabling faster and more transparent interactions among all market participants.
Embracing T+1 Settlement in a Fragmented Market
The panel also explored the complexities of moving to a T+1 settlement cycle in Europe. While the US market successfully transitioned to T+1 earlier this year, Europe’s diverse market structure—with multiple currencies, settlement systems, and regulatory frameworks—presents unique challenges. However, the experience of the US market provides optimism that, with the right level of industry collaboration, Europe can achieve similar efficiencies.
Achieving T+1 will require real-time confirmations and eliminating reliance on end-of-day batch processes. By introducing more automated workflows, especially through API connectivity, firms can align with T+1 settlement requirements, reducing the risk of penalties under CSDR (Central Securities Depositories Regulation).
Addressing the Complexity of Active ETFs
Active ETFs are becoming an increasingly popular vehicle, yet they introduce new challenges, particularly in managing information transparency and rebalancing schedules. Unlike passive ETFs, active strategies often lack fixed rebalancing schedules, which creates challenges for APs in terms of pricing and liquidity management. As discussed during the panel, offering flexibility around rebalancing and providing real-time data can help the ecosystem better support active strategies, ensuring efficient execution.
The discussion also highlighted how technology can support active ETFs, with a focus on leveraging APIs to provide real-time visibility into portfolio changes. This is crucial as active ETFs move toward high conviction strategies with more frequent turnover, necessitating dynamic data flows for better market pricing and risk management.
Exploring the Future: Tokenisation and Advanced Technologies
Beyond immediate improvements in automation, the panel touched on the future potential of technologies like tokenisation and AI/ML. These innovations could pave the way for even shorter settlement cycles—potentially T+0—thereby eliminating settlement risk altogether. Tokenising ETFs could transform liquidity management and reduce friction in cross-border trades.
Furthermore, the adoption of machine learning algorithms could optimise data processing, reduce errors, and enhance decision-making capabilities for APs and issuers alike. By investing in these technologies, the industry can unlock new efficiencies, ensuring ETFs remain a competitive and scalable investment vehicle.
Collaboration as the Key to Unlocking Efficiency
Throughout the webinar, the importance of collaboration was a recurring theme. The relationships between ETF issuers, APs, and servicers are the lifeblood of efficient primary market operations. To reduce friction, all parties need to work together to align on processes, data formats, and technology adoption. By fostering a more cohesive ecosystem, we can ensure that ETFs continue to deliver on their promise of accessibility and cost efficiency for investors.
At Calastone, we are committed to driving this transformation. By leveraging our expertise in automation, data integration, and new technologies, we aim to support the ETF industry in becoming more efficient, scalable, and resilient. The future of ETFs looks bright, but it’s clear that embracing automation, standardisation, and collaboration will be essential to unlocking the next phase of growth.
