Competition Springs A Better Mousetrap On Funds Settlement
November 30, 2009
The Mousetrap" holds a special place in the hearts of Londoners. The Agatha Christie whodunit at the St. Martin's Theatre has been playing for 57 years and more than 23,000 performances.
Now, a United Kingdom startup called Calastone says wedunit. It believes it's created a superior mousetrap for how orders in investment funds can be traded and processed in The City, London's financial center.
"We can offer a better order routing and settlement system than can Euroclear UK, the central securities depository, and its sister company, EMX," said Kevin Lee, managing partner for Calastone, a privately- held two year-old firm, last week.
Founded in March 2007 and backed by London-based venture capital firm Octopus Ventures, it wants to one up EMXCo. and Euroclear. EMXCo is the City's primary electronic trading system for investment funds and Euroclear UK & Ireland acts as the central securities depository for equities and bonds.
Calastone announced on Nov 16 that in the first quarter of 2010 it would extend its service from routing orders between U.K. investment fund distributors and managers to settlement of their transactions. The next day, EMXCo and Euroclear UK & Ireland countered, saying that their joint service has gone live.
Together, they will provide an automated means of executing and processing trades, to try and eliminate the paper morass that still pervades the U.K. investment funds market.
"The joint service of EMX and Euroclear UK is already being tested and is a first in the U.K. funds industry," says Yannic Weber, chief executive of Euroclear UK and EMXCo in London. That connection allows fund distributors and fund managers to communicate trade instructions over EMXCo and have the trades settled through Euroclear UK & Ireland, whose parent Euroclear SA purchased EMXCo in January 2007.
Although it had initially planned to become a "sponsor" in Euroclear UK and Ireland, so it could settle trades through the securities depository, Calastone has now opted to develop its own settlement platform.
While Euroclear and EMXCo want to beat Calastone to the punch, Weber declined to specify when live commercial traffic will be transmitted over the link between the two. Still, the two firms have time and size on their side. Founded in 2000, EMXCo processed 22.7 million messages between fund distributors and fund managers last year and claims to serve 97 fund management company customers, representing 6.300 funds and 339 fund distributors. In 2008, Euroclear UK & Ireland settled $300 trillion worth of trades in U.K. equities and bonds; its customers include fund managers and distributors of investment funds, such as broker-dealers and banks.
For its part, Calastone began routing orders between fund distributors and fund managers in May 2008. But, in announcing its plan to add automated settlement, Calastone would not disclose the number of transactions it processed or its number of users. London-based executives in the U.K.'s investment funds industry said in the wake of the dueling announcements that fund managers which already settle their U.K. equities and bond trades through Euroclear UK will favor Euroclear while distributors, namely independent financial advisers, might favor Calastone because of its ease of use. Some might split their business.
"We are agnostic as to which platform we would use," says Jon Willis, chief administration officer for IFDS, a London-based transfer agent and fund administrator servicing U.K. fund managers. However, despite EMXCo and Euroclear's stature in the U.K., Willis believes that Calastone's proposition has some merit. "If the market truly believed that EMX and Euroclear would provide the best solution, they would not have been the need for a less expensive alternative," he says.
