Calastone undertook an industry consultation process with a selection of mutual fund industry firms ranging in size with both retail and institutional coverage from buy and sell side participants and third party administrators. Throughout the process, Calastone was asked to develop an alternative to Euroclear UK&I’s CREST settlement system.
CREST settlement is essentially a secondary market solution, not deemed ideal for settling mutual fund transactions, a primary market activity where units are bought and sold directly with the issuer and where legal title is recorded on the fund managers’ register and not within a central securities depository. The costs of CREST membership can be prohibitive for smaller mutual fund firms and the industry is seeking a more flexible approach.
Calastone will develop a market model based on a matching engine approach, designed to calculate counterparty net settlement positions together with automated notification of legal title in fund unit positions. Currently, settlements are undertaken on a ‘many-to-many’ bilateral basis and the Calastone approach will enable firms to settle their transactions using a more efficient model. The Calastone model is anticipated to be launched by the end of Q1 2010.
Commenting on the plans, Dan Llewellyn, Head of Market Standards at Calastone said, “The Calastone settlement approach will offer a cost effective, transparent model designed to calculate net positions for each counterparty to settle accordingly. This model will be designed to be easy to adopt, scale and integrate into existing back office systems. The Calastone settlement solution will promote open architecture and therefore counterparties will not be required to be participants of Calastone’s transaction network; any member of the mutual fund community can participate and benefit from increased automation and reduction in settlement risk.”
Commenting on the industry support, Ken Tregidgo, Business Development Director at Calastone said, “Throughout the consultation process, we were surprised at the degree of discontent with the incumbent settlement model. We are grateful for the level of commitment from these firms and their eagerness to be involved with scoping out a more flexible and cost efficient approach. We believe this is in line with the regulators’ ambitions for greater cross-border transactions and harmonisation and our approach will be designed to be entirely interoperable with any regional settlement models. We firmly believe that the more efficient the approach, the greater the potential for growth in transaction and settlement volumes which can only benefit the mutual fund industry.”