Q&A On Calastone ETF Servicing with Dave McGuinness, Product Director______

Dave McGuinness, Product Director

How did the idea for Calastone ETF Servicing come about and why was it developed?

As anyone with an eye on the investment markets has noticed, the ETF industry is going through a tremendous period of growth – recent years have seen record numbers of  ETF launches. Compared to a traditional funds, the rise of the ETF is no surprise – these tools offer access to a wide range of targeted markets and indexes across various industries helping to improve risk exposure via diversification while offering a lower expense ratio. They are often easily traded over exchange with fewer broker commissions too.

However, this brings new challenges for ETF servicers. The tracking of an ETF order in the primary market is a complex process and has traditionally involved inputting data from multiple sources and using transfer agency, custody and accounting systems that were designed for other asset classes. There is then a patchwork of systems that require teams of people to process their ETF operating model using different data files during the acceptance, confirmation and settlement of an ETF order.

Naturally, this process makes getting status updates challenging. For instance, it can be difficult for servicers and issuers to give their Authorised Participants (APs) / ETF market makers transparent pricing information during the dealing lifecycle hindering their speed to market and forcing them to quote wider spreads for a new tranche of ETF shares on the secondary market.  

At Calastone, we realised that the answer was the end-to-end digitalisation of the ETF lifecycle. Connectivity is at the heart of our business. Our Distributed Market Infrastructure (DMI) works to streamline the flow of transactions and data for institutions at all levels. We realised that what needed to be solved with ETFs was primarily a data and process issue. 

That’s why we are working with the ETF servicers to design and build solutions that automate their business in a scalable way – ensuring our customers are ready for the ETF growth to come.

What Is Calastone ETF Servicing and how does it work?

Servicers are the glue for the primary ETF market, processing, tracking and instructing settlement of AP orders on behalf of the ETF Issuers. Our new solution is designed to give them the visibility, control and efficiency they need to support continued growth.

Calastone has a long experience connecting the world’s fragmented mutual fund market. This led us to become the largest global funds network, connecting most of the world’s leading financial organisations. Calastone ETF Servicing connects servicers to all relevant counterparties to enable instant digital communication, and an easy route to onboarding new partners. 

The solution creates a unified digital platform linking issuer and servicer in a straight-through process. Other key stakeholders such as APs, common depositories, fund accountants and custodians can connect to the platform and receive immediate updates as key tasks are completed. The solution allows servicers to demonstrate new levels of transparency to their clients and represents a material advantage in a competitive marketplace.

An automated platform, Calastone ETF Servicing provides touch-free processing for ETF servicers, delivering new efficiencies. They can take in requests to create or redeem ETFs from APs via any dealing system or portal. The solution is scalable, removing back office capacity issues as the ETF market grows.

Calastone ETF Servicing comprises four areas, each of which capture each phase of the creation or redemption process – ETF Order Capture ETF Order Management, ETF Registry, and ETF Settlement. These units then capture the full range of servicing tasks from portal integration; capturing of order/redemption instructions and PCF information; application of PCF, NAV and order information; live pricing and basket fulfilment updates to settlement calculations and counterparty updates. For more detail, our factsheet can be accessed here (URL).

Are there any product specifics that stand out for you?

The more Calastone ETF Servicing is used by the industry the more we can help the industry to standardise. This means servicers can give their issuers and APs a consistent experience and process while focusing on their own value-add to differentiate themselves.

There are two stand-out features of the solution in my view.

First, it’s the simplicity that comes with giving servicers and issuers the ability to connect with all their desired partners in real time without all the manual processes, third-party tools and excel macros that came with them.

Second is the ability to automate and provide visibility of the ‘Actual Cost’ price calculation method, tracking underlying trades and calculating market deviation, or slippage, in real-time. This means servicers and issuers are no longer limited to a NAV+ methodology. Importantly, it allows servicers to provide their APs with a real-time, more accurate view of how the ETF underlying trade book is filling. With end-to-end transparency, APs can have confidence in the decisions they’re making, driving out the need to build pricing risk into their spreads.

What are the benefits of Calastone ETF Servicing?

Calastone ETF Servicing enables firms to create an automated and standardised workflow for order management – including the application of different data sources to basket creation and fulfilment tracking – to settlement and reporting.

Calastone’s long experience in connecting diverse market participants is central to our solution too. By integrating the key stakeholders, data and controls through a single automated platform, Calastone ETF Servicing enables firms to start communicating in a real-time environment. Quite simply, ETF servicers can focus on growing their businesses in a scalable, cost controlled way while providing an unrivalled user experience to their issuers and APs at every stage of the journey.

Moreover, ETF servicers can use the real-time visibility over key elements of the ETF creation process to enable issuers to compete more effectively. For instance, complex tasks that required teams of people, such as actual cost pricing, can be automated. The benefits for APs could be immeasurable as a live view of the trade book lets them make quick and accurate secondary market pricing decisions. Naturally, tighter spreads helps build investor engagement which is important in bringing even more interest into the marketplace.

How do you see the landscape for ETF servicing developing in the future?

As the ETF industry continues to grow and evolve, we expect to see increased adoption of automated solutions such as Calastone ETF Servicing to the point where they become a standard part of the ETF lifecycle. 

By providing a transparent, data-driven, connected platform, Calastone helps firms build confidence in their systems, manage risk more effectively, and focus on delivering better experiences for their clients.

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