Euroclear has bought the UK mutual fund order routing network EMXCo. The Brussels-based ICSD, which also owns the UK CSD (CRESTCo) says that by combining mutual fund order routing with settlement services it can shave 50% off fund manager costs, primarily through the elimination of manual processing, especially in settlement and asset servicing.
Euroclear created and continues to own FundSettle, a European cross-border mutual fund order routing network that also requires users to custody assets with the ICSD. Its penetration of the domestic markets where the bulk of mutual fund business is conducted is limited, but the purchase of EMXCo – which has an operation in Luxembourg as well, servicing transactions between the UK and the Grand Duchy – will give Euroclear a powerful presence in the UK, and the opportunity to combine EMXCo messaging with the settlement capacity of CREST.
Euroclear promises a centralised mutual fund processing service in the UK that combines automated, standardised message processing for fund issuers and intermediaries; lower tariffs as a result of economies of scale and technological innovation; quicker cash payments; reduced operational risks; and a service that makes it more appealing for retail and institutional investors to invest in funds.
“We are taking a major step forward in transforming the operational infrastructure for the fund industry that will deliver real and meaningful benefits,” says Tim May, CEO of CRESTCo, who will now become chairman of EMXCo as well. “Processing for UK mutual funds is plagued with inefficiencies, high costs and risks largely due to manual intervention. Together, Euroclear and EMXCo intend to eliminate the operational burdens impeding the UK fund market’s ability to operate efficiently and cost effectively.”
Max Wright, Chief Executive of EMXCo, says becoming part of Euroclear will allow EMXCo to expand its service offering and geographic coverage. “Additionally, the combined group is ideally placed to respond to the recent comments in the European Commission’s White Paper on enhancing the single market framework for investment funds and develop a coherent strategy to phase in the necessary improvements to counter operational risks and fund-transaction processing delays,” he says.
The major shareholders of EMXCo (Fidelity International, Hargreaves Lansdown, Invesco Perpetual, M&G, Skandia and Threadneedle) say they support the acquisition and believe in the benefits that the combination of Euroclear and EMXCo can supposedly bring to the fund industry.
“EMXCo was formed because it was clear that the systems for dealing and settlement of investment funds were inefficient and expensive,” says Simon Davies, CEO of Threadneedle Asset Management. “EMXCo has been successful because it has been able to make great improvements to this process. This further step of integrating with Euroclear and CREST’s securities systems especially implementing settlement will provide another step forward for all market participants including our investors. We believe this deal will be positive for EMXCo and Euroclear, and will make investment funds easier to incorporate in the portfolios of discretionary asset managers.”
Charlotte Black, Director, Corporate Affairs of Brewin Dolphin, describes the acquisition of EMXCo by Euroclear as “really exciting news for our industry and investors in collective funds.” She says Brewin Dolphin’s costs for administering a unit trust holding for a private investor is presently around 15 times the cost of a similar investment in an equity, and that the retail industry generally counts the cost at 20 to 30 times. “Brewin Dolphin holds GBP 2 billion in collective funds on behalf of its clients (out of the GBP 19 billion we manage in total) and I expect this development to increase over time our efficiency, reduce our costs and expand this part of our business dramatically over time,” she says.
Upon completion of the transaction, Max Wright will become a member of the Euroclear Group Management Team. The existing EMXCo Management Team will continue to operate the business as a separate subsidiary of Euroclear SA/NV for the foreseeable future with transparent and unbundled tariffs.
Euroclear says the combined group (Euroclear and EMXCo) “intends to pursue its shared business objectives with active market consultation” and that the “introduction of a centralised fund-processing infrastructure in the UK is in accordance with the Investment Management Association’s principles, as published in January 2006.”