16 November 2009 News

 

Calastone to rival CREST's full STP for funds

Calastone is to launch a settlement platform for mutual finds following complaints from the industry that CREST has failed to produce the goods after three years of discussion.

Cofunds, FNZ, Nucleus, Henderson and Schroders  have signed letters of commitment to support Calastone in developing a settlement alternative to Euroclear's UK&I CREST system. In addition, Gartmore, and others have voiced support for this initiative. IFDS and Capita have confirmed they will be supporting their client's developments for this service. The service will be available to the entire funds market.

"Calastone has planned to provide cradle-to-grave STP for mutual funds. Throughout the development of the company we have had our clients' needs in mind," says Kevin Lee, managing director for Calastone. "The funds industry has been in need of full STP for some time and so far we have been focusing on providing this for the trade itself, ignoring the register, moving cash and so on."

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 explains Lee, "We have been working with CREST on the STP offering it had been developing since its operator Euroclear purchased EMX in 2006 and began working on the system. We had been planning to offer the service it developed via Calastone. Since the service has not emerged we decided we would create the full service ourselves."

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."

Primary market activity involves units being bought and sold directly with the issuer with the legal title being recorded on the fund managers' register and not within a central securities depository, unlike secondary markets.

"The mutual fund industry has a challenge using CREST currently as it was developed for the secondary market.  The mutual funds industry deals with issuers, making it part of the primary market. The processes are very different, and so the funds have been trying to reach a compromise over whether they or CREST should change," says Lee. "Our principle is that the funds shouldn't have to make changes and so that is how we have developed our platform. We asked ‘What do you need?' and they originally said trading and execution which we have provided, secondly they asked for settlement, which we are now providing and in the future we will be looking at issues like re-registration."

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 could 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.