German exchange Deutsche Börse and Clearstream, the central securities depository (CSD) owned by Deutsche Börse Group, have launched a joint offering that enables 80,000 mutual funds – including almost all European cross-border funds – to be traded on the group's Xetra platform and then seamlessly routed for post-trade processing.
The joint offering allows intra-day price formation and simpler order routing and clearing than was previously available for trading fund units. Funds on Clearstream's order routing platform, Vestima+, can now be introduced for trading by specialist market makers on Xetra – according to market demand and pending certain regulatory preconditions – then settled through Clearstream's post-trade facility for mutual funds, the Central Facility for Funds (CFF).
Currently, when units of a fund are bought and sold it occurs in the primary market, the fund buys back the sold unit and sells a newly issued unit to the buyer. The value of an individual fund's share can only be identified the next day, once the net asset value has been calculated. But stock exchange execution will allow individual funds units to be priced and monetised immediately.
As well as increased operational efficiency and price transparency, Deutsche Börse claims market participants will experience cost reductions over existing fund trading practices.
“On the trading layer, an upfront fee might be around 300 basis points, which compares with an exchange-based execution cost of 10 basis points for a highly liquid exchange-traded fund (ETFs) and perhaps 100 bps for a fund, so you are taking a significant reduction in costs compared to traditional execution means,” said Rainer Riess, managing director of Deutsche Börse and head of market development at Xetra.
“The back-end of the system now works as if the fund were an equity,” said Philippe Seyll, executive board member and head of investment funds services at Clearstream.
In addition, customers trading investments funds on exchange and pooling them within Clearstream can use their funds' units as collateral to secure financial transactions involving counterparty risk. “By linking Vestima+ to a stock exchange, we create an additional distribution venue for investment funds for our clients. In an environment where almost no financial commitment occurs without being secured, the new offering will also create a new large source of collateral of around €700 billion that is currently immobilised,” said Seyll.