European capital markets should look to the telecomms industry for a model framework for improving cross-border transaction processing, according to a study conducted by French think tank Promethee and sponsored by the US Depository Trust and Clearing Corporation.
Titled 'Bridging the Funds Divide', the study identifies some of the key issues impeding expansion of the European investment fund business. These include a lack of connectivity and standardisation to streamline processing, as well as the absence of legal, regulatory and tax harmonisation.
The study finds that European investors see their choice limited to only a fraction of the best performing funds due to a diverse range of barriers from tax legislation to selective distribution. It notes that only 10 to 20 per cent of the 4.7 trillion euros invested in funds in Europe are in cross-border funds, although this segment has the potential to grow exponentially, offering investors wider choice and higher rates of return.
"We’ve sponsored this research because it’s essential to find ways to help our customers who are increasingly global players in the investment fund business," says Jill Considine, chairman and CEO of DTCC. "We’re already processing a significant volume of cross-border fund transactions, with more than half of it directed toward investment funds domiciled in Europe. However, our customers are telling us that a lack of connectivity, along with high operational costs and risk, are major barriers to further growth."
The lack of a pan-European market infrastructure able to support seamless cross-border transactions is preventing European funds from achieving the economies of scale available to their US counterparts, say the report's authors. They point to research by interbank network Swift which estimates that re-keying 50% of the current 50 million orders annually is costing the industry EUR1 billion. And the cost of rectifying errors and managing the risk of a non-secure processing environment is another EUR5-10 billion
As a potential model, the study points to the highly successful co-operative framework pioneered in Europe for mobile telephones, which allows users to seamlessly connect from more than 170 countries. The think tank recommends industry-wide co-operation around common principles and open architecture to enhance investors’ freedom of choice and improve distribution networks, while preserving competition in the European investment fund market.
Ann Bergin, DTCC’s managing director for mutual fund services, says: "If there were adequate support among funds and the distributors of those funds in Europe, DTCC is prepared to partner with European firms and leverage its experience and technology to help create a solution capable of serving our customers’ needs for connectivity and a streamlined global infrastructure."