This is a question many in the funds industry are asking. How do I put a lid on costs, reduce prefunding needs or intraday overdrafts, cut out errors and get more certainty on the timing of payments?
Above all, how do I get scalability? How do I deal with a sudden surge in subscriptions / redemptions? How do I plan for growth? I hear reports from some firms that every step up in trading volumes tends to demand an increase in operations staff in order to cope. That comes with increased training and need to check and recheck key activities. There must be a way to get off the treadmill and mitigate the cost and risk.
While fund trading and reporting have been automated – something Calastone has had a big hand in achieving – payments and settlements remain a hands-on business within most fund industry firms.
Once the trade data comes back, there are reconciliations to do, settlement amounts to be calculated (and double-checked), payments to be uploaded to different bank portals, bank details need to be checked, and finally payments authorised by a range of teams. Any discrepancy in matching trades to incoming payments has to be investigated and negotiated with the TA or fund manager.
Manual processing predominates
Nearly all of this is done manually. And when it comes to making the actual payments there is often a cat-and-mouse game as firms wait for payments in before making payments out. Late, or late-in-day, cash settlements are by no means rare and can prove expensive.
Every firm approaches settlements in its own way. The CASS rules on protecting investors’ money are interpreted differently at different firms, often leading to a silo-type approach. There is no standardisation to fall back on.
Worse, the great bulk of fund industry settlements are done either on a trade-by-trade or gross basis. That amplifies the amount of cash firms have to pay out on a daily basis. For TAs and distributors there are major liquidity costs to factor in as the more cash firms need to pay out, the higher their liquidity exposure and the higher the amount of money being sent between counterparties each day.
A survey we conducted two years ago involving fund managers and distributors in the UK, Europe, Australasia and Asia focused on the many issues fund firms face – and some of the answers to dealing with them.
It highlighted fragmented processes, data input errors, processing delays and a lack of real-time visibility over what was happening in the settlements and payments processes. It pointed, too, to a number of knock-on effects.
Sometimes, firms were forced to accept unplanned and unwanted credit exposures, and deal with intraday liquidity issues. In some cases, delays forced firms to stall some of their own trading activity.
Automation is the answer
The same survey demonstrated a hunger for more automation, both within firms and between firms. In other words, what the industry sorely needs is a digital solution in settlements and payments that complements their existing fund trading solution – one that can link to any bank, support any currency and is capable of adapting to any settlement cycle.
Without that, firms will continue to be hamstrung by all the issues manual processing throws up and constrained by the lack of flexibility in resources.
Certainty and scalability
The vagaries of today’s manual workflows need to be replaced by certainty of timing and amount, and firms need to be able to check on what is happening in real-time. Payments need to be locked in. That way, firms can reduce their reliance on a float in the bank account or an agreed facility. They will be able to fund their settlement exposure earlier in the day. Moreover, such certainty is a big plus for liquidity management and any associated collateral requirements firms have.
Certainty is a big plus for liquidity management and any associated collateral requirements firms have. It is also a major step forward for fund managers who can have clarity over the amount of cash coming in and when. Naturally, this helps to forecast and plan ahead.
An industry-wide digital payments and settlements solution should also be able to accommodate expanding volumes without placing added demand on users – breaking the link between settlement volumes and the number of workstations required to handle them.
Finally, everyone in the funds industry needs to be thinking ahead. Settlement cycles are not set in stone. Without embracing more automation, any future move to reduced settlement cycles will be a challenge to manage.