Calastone, the operator of an independent cross-border transaction network for mutual funds investors, has received backing from the asset management industry for its plans to develop an alternative settlement system for mutual funds.
Asset managers Schroders, Henderson, Nucleus, FNZ and Cofunds have signed letters of commitment to support Calastone’s project, which will be a direct rival to Euroclear UK and Ireland’s CREST system. Gartmore, IFDS and Capita have also pledged their support for the new system, which is due to be launched in Q1 2010.
Calastone has also consulted with a number of mutual funds to identify potential improvements to how CREST settles mutual fund transactions.
The firm claims that the cost of CREST membership can be prohibitive for small and boutique mutual fund firms and argues for a “more flexible” approach geared towards primary market activity, i.e. dealing directly with issuers, instead of secondary market activity, which deals with cash transactions.
Calastone’s intention is to develop a matching engine that will calculate counterparty net settlement positions together with automated notification of legal title in fund unit positions.
“The Calastone settlement approach will offer a cost-effective, transparent model designed to calculate net positions for each counterparty to settle accordingly,” said Dan Llewellyn, head of market standards at Calastone, in a statement. “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.”
Ken Tregidgo, business development director, said Calastone had been 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,” he said. “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.”
Mutual funds transactions involve the buying and selling of units – which carry equitable rights in the assets of a total fund – that are bought and sold directly with the issuer, instead of on exchange, with the legal title recorded on the register of the fund manager and not within a central securities depository. Settlement for mutual fund transactions is currently done on a bilateral basis and not netted.