Standardization of Funds Processing in Europe

Transcription

1 Standardization of Funds Processing in Europe A Report from FEFSI's Fund Processing Standardization Group [ 9 February 2005] European fund and asset management association 18 Square de Meeûs, B-1050 Bruxelles tel. +32(0) fax +32(0) info@efama.org

2 STANDARDIZATION OF FUNDS PROCESSING IN EUROPE ORDER AND SETTLEMENT A Report from FEFSI s Fund Processing Standardization Group February 2005

3 CONTENTS 1. PREFACE EXECUTIVE SUMMARY ROLES AND ACTORS - A GENERIC MODEL ISSUES AND RECOMMENDATIONS General recommendations Account opening and referencing placement acknowledgement and confirmation Message Standards BENEFITS AND INCENTIVES NEXT STEPS Implementation Future developments...15 ANNEX 1 - NATIONAL APPLICATIONS OF THE GENERIC MODEL...16 ANNEX 2 - RECOMMENDATIONS REGARDING XML FUND MESSAGES...23 ANNEX 3 - FUND PROCESSING PASSPORT...28 ANNEX 4 - ACCOUNT STANDING DATA...30 ANNEX 5 - GLOSSARY...33 ANNEX 6 - MEMBERSHIP OF THE FPSG...35 Standardization of Funds Processing in Europe: February 2005

4 1. PREFACE The EU Asset Management Expert Group highlighted in its final report, Financial Services Action Plan: Progress and Prospects, that cross-border processing of fund units is a key issue for the European investment management industry. Today, the European cross-border funds processing landscape is suffering from a high level of fragmentation at both trading and post-trading levels in the transaction value chain resulting in high operating costs and considerable operational risks. The operational problems of the European industry are mainly driven by domestic distribution and processing requirements. As a result, there is no such thing as a pan- European funds execution and processing life-cycle. In the current domestic fund markets, orders are typically placed through spaghetti-like bilateral arrangements between the distributors/aggregators and the fund-side institutions. In some markets this is also true of settlement, whilst in others (namely France, Germany and Switzerland) the settlement infrastructure is provided almost totally by CSDs. The CSDs differ from each other, however, and offer distinct components of fund transaction services from order execution through to settlement and custody of the fund units. Execution of fund orders and initiation of settlement processes are often manual and different in the large number of domestic markets. Cross-border distribution is less common but transactions are still effected bilaterally between the distributors and those acting for the funds. Here, settlement may be, although often is not, provided by the International CSDs. Fragmentation is also reflected by the huge variety of communication standards (eg. ISO, FIX, proprietary etc.), distribution channels and business practices (eg. different times of fund valuation in a market day, a different number of decimals for unit/share valuation, different settlement and delivery schedules, different policies regarding how public holidays impact the valuation of funds). Finally, in terms of regulatory and legal fund distribution, clearing and settlement frameworks, the European landscape is still largely fragmented along national lines. A pan-european investment fund market is developing Going forward, FEFSI expects that the funds industry in Europe will be facing increasing pressure to change its operating model. This change will be driven largely by the need to service an increasing number of distribution channels. In many countries, third party fund distribution is still underdeveloped today, but expected to increase rapidly, when volumes will pick up. Many fund distributors, especially banks, will implement an open architecture model to respond to increasing domestic and cross-border third party fund distribution requirements. Transaction volumes are expected to perhaps double over the next 3-4 years, with message volumes increasing accordingly. Processing volumes will not only expand in terms of the number of orders, but will also increase in terms Standardization of Funds Processing in Europe: February 2005

5 of reference or static fund data with the expansion of the number and type of funds available. FEFSI acts as a catalyst for change The lack of commonality in the handling of fund subscriptions and redemptions in Europe - particularly in the case of cross-border flows - exposes market players to inefficiencies. This situation represents a limitation for the future development of investment fund management in Europe. Progress towards more efficient funds processing procedures requires co-operation among market players and, possibly, but only where necessary, public action. It is generally agreed that this co-operation should focus in the short term on adopting funds processing standards. Convergence towards industry-wide standards would indeed contribute to overcome national differences in back-office procedures and thereby remove an important barrier to the development of harmonized processing of investment fund transactions in Europe. FEFSI is well placed to act as a catalyst to promote industry-wide coordination and foster a sensible private sector outcome. A FEFSI initiative in this area, the Fund Processing Standardization Group (FPSG), aims at identifying obstacles to efficiency in back-office procedures and outlining possible actions to remove those obstacles. The Group is comprised of expert practitioners representing the European investment funds industry, ie. fund management companies, custodians, transfer agents, fund processing hubs and existing standard setting organizations (see Annex 6). FEFSI believes foremost that the standardization of operational protocols and increasing the efficiencies of fund processing could bring significant benefits to fund investors across Europe. FEFSI aims to have developed the basis for a flexible EU wide fund processing model and the necessary standards by the beginning of The first step towards this goal is the recommendations made in this paper in the area of fund orders, confirmations and settlement. FEFSI hopes that these standards are widely accepted by all players in the fund market in the near future. Only if the necessary changes are implemented at the level of the individual firm will improvements in efficiency, cost and operational safety result for the EU fund market as a whole. FEFSI will continue its work in the area of fund processing standardization, especially with respect to treatment of reconciliations and commissions. FEFSI will monitor the implementation of these standards annually through its national association members, and consider appropriate steps going forward to improve acceptance by the market place, including distributors. Standardization of Funds Processing in Europe: February 2005

6 2. EXECUTIVE SUMMARY In an effort to improve processing efficiency in European domestic and cross-border funds markets, FEFSI has formed the Fund Processing Standardization Group (FPSG), with the aim of identifying the obstacles that prevent such efficiency and making recommendations with regard to their removal. The Group is comprised of expert practitioners from fund management companies, custodians, transfer agents, fund processing hubs and standard setting organizations. This paper is the first deliverable of the FPSG and deals with the specific aspects of order processing and settlement. In it we describe a generic model of the roles that are played in these processes (Section 3). Whist the actors that perform these roles differ from country to country, the information and processing requirements are largely the same. The model has been validated specifically against a number of the major national and cross-border markets and its application in each of those markets is described in Annex 1. In Section 4 we describe the key issues to address that have been identified by the Group and make a number of recommendations, which if embraced by the industry will, we believe, serve to deliver the efficiency improvements that are our goal. At the heart of these are a move to Straight Through Processing (STP), with firms communicating electronically, using messages constructed to international open market standards (ISO 20022), and that universally recognized unique identifiers (eg. for funds, the actors involved etc.) should be used wherever possible. We also recommend that fund management companies summarize key information relating to their funds in a "Fund Processing Passport" in order to facilitate their trading. We make a number of further recommendations with regard to specific elements of the process. These include: Account opening and referencing - the adoption of a standard data set for account opening information (see also Annex 4). placement - the use of ISIN codes to identify the fund/class, supplemented where necessary by the specific currency in which the units are to be dealt. acknowledgement and confirmation - orders should be acknowledged to the order giver as soon as possible after receipt, indicating acceptance for execution or rejection; confirmations should be issued no later than overnight following pricing of the order and should include details of any associated foreign exchange transaction; and discrepancies should be referred back to the fund-side institution on the day of receipt. - settlement should be made electronically, by direct payment or via a CSD/ICSD, on the predetermined date for the transaction and should include reference to the order(s) to which they relate. Message standards - whilst various domestic message standards exist already, it is generally accepted that convergence with the ISO standards is a necessary goal. We recommend that this convergence should be progressed as soon as possible and that proprietary standards should be avoided. The specific messages that currently exist within the ISO standard are described in Annex 2. Standardization of Funds Processing in Europe: February 2005

7 The benefits of STP generally are highlighted in Section 5. These include the reduction of operational costs and risk, scalability of operations and improved customer service. Other incentives described include improvements in commission processing, lower fees and improved services (eg. reporting) to client-side institutions by their service providers. Finally, in Section 6, we consider the next steps in terms of implementation of these recommendations and further work of the FPSG. In terms of implementation, FEFSI plans to seek Europe-wide endorsement of the FPSG recommendations at national level and identify major players who would be prepared to be early adopters and, thus, lead the market forward. The FPSG then plans to examine post-trade activities such as reconciliations and commissions; then, in the longer term, to consider transfer of title and the processing of income entitlements and corporate actions. Standardization of Funds Processing in Europe: February 2005

8 3. ROLES AND ACTORS - A GENERIC MODEL The FPSG considers that order processing messages and standards across Europe could be viewed in the context of a generic model of the roles and actors involved (see Figure 1 below). Note that funds which are traded and settled in the same way as equities (eg. in the Danish and Dutch markets, as well as ETFs that exist elsewhere) are not within the scope of this paper. Definitions of some of the key terms used in this document may be found in the Glossary at Annex 5. Input Role Actor Client/ Intermediary Placement / confirmation acceptance/ execution Client-side institution dealing desk TA/fund provider dealing desk instruction instruction Client-side settlement Fund-side settlement Client custodian Depositary/TA or fund provider Figure 1 From the above, it can be seen that there are five discrete roles in the overall order and settlement process: Standardization of Funds Processing in Europe: February 2005

9 input - Initiation of the order by the end client and communication through to the placement stage, directly or through one or more intermediaries. placement - communication of the order to the fund-side institution by the dealing function of the client-side institution; includes the subsequent issue of client-side settlement instructions. acceptance/execution - receipt, acceptance and processing of the order by the fundside institution. Client-side settlement - arranging for payment to be made for units purchased or, where appropriate, for title to be given up to units sold. Fund-side settlement - making or arranging the settlement of transactions on behalf of the fund or fund provider. Note, however, that a single actor may perform more than one role in the process. The model has been reviewed against the operating practices in Belgium, France, Germany, Italy, Ireland, Luxembourg and the UK. The findings of these reviews are summarized in Annex 1. The FPSG recognizes that there is a huge potential variability with regard to the initial order input. Firstly, the input and placement roles may be performed by the same actor or they may be separate entities that either communicate directly or through one or more intermediaries. Secondly, if multiple entities are involved they might, for various reasons over which the fund-side institution may or may not have any influence, choose to use proprietary interfaces. Given this, the FPSG has focused on the placement and settlement stages of the process (shaded). Nevertheless, all parties involved in the input and placement roles should be encouraged to ensure that orders are input electronically as soon as possible in the order chain, using the standards proposed. 4. ISSUES AND RECOMMENDATIONS 4.1 General recommendations Client-side institutions performing the order placement role should encourage the electronic input of orders and other instructions as early as possible in the instruction chain so as to minimize or, preferably, eliminate the re-keying of data All electronic messages between client-side and fund-side institutions should be constructed to agreed international open-market standards (see 4.6 below) All actors and, where they exist, account holders should be referenced by way of unique identifiers, using international open-market standards. Standardization of Funds Processing in Europe: February 2005

10 4.1.4 Where possible, financial institutions should be identified, for the time being using their BIC/BEI code (ISO 9362 and ISO 8859, respectively). Work is progressing under the auspices of the International Standards Organization (ISO) on an international standard business identifier (IBEI), which in due course should be capable of providing standard identifiers for all client-side and fund-side institutions. When it is introduced, all financial institutions involved in the investment funds market should apply for registration under the standard and utilize the IBEI code that they are allocated in order-related messages and communications Fund providers should be able to accept and store account numbers or distributor references (where applicable) provided by client-side institutions, in order to allow proper identification of the holding. Uniqueness may be ensured by reference to the BIC/BEI/IBEI code of the distributor associated with the account. In the longer term, the use of IBANs (ISO 13616) or an IBAN-type approach (with codes being issued by the client-side institution) should be considered for the purposes of establishing a unique account holder reference Fund providers should request ISIN codes for all their funds at the lowest level (eg. share class) permitted by the ISO 6166 standard and should promote its use as the sole identifier for that asset instructions should include the client-side institution s unique order reference. The fund-side institution will, in turn, provide its own deal reference as part of its acknowledgement. All future messages regarding that order should contain both references in order that it may be correctly recognized by both parties Fund management companies should summarize key information relating to their funds in a "Fund Processing Passport" in order to facilitate their trading. This would include the dealing cut-off time. Other proposed content of this passport is provided at Annex 3, whilst further details and background are available in a standalone document, which may be found at the FEFSI website Where client standing data (address, income/settlement preferences etc.) is held by the fund-side institution, repetition of that data in messages relating to future transactions should be avoided, unless the data is to be changed, either for a specific transaction (when it should be identified as such) or for all transactions thereafter Where possible, the recommendations made in this section employ existing open market standards for message construction (see 4.6 below) and reference data. All institutions are encouraged to develop and promote the use of such standards Where legal or regulatory barriers or constraints to the implementation of these recommendations exist, national associations should aim to work with the relevant government or regulator to remove or alleviate them. Standardization of Funds Processing in Europe: February 2005

11 4.2 Account opening and referencing Issues Where client accounts are maintained by the fund-side institution, identification of the correct holder and holding, whether existing or new, is vital to the correct processing of an order. At present, no market standard exists for the determination and allocation of completely unique holder references - both the client-side institution and the fund-side institution will have their own code. There will be situations where the client-side institution does not know the relevant account reference, or where no holding exists at that stage. In such circumstances the intended account will be identified by reference to its registration details. The lack of a standard information set and format for these details can result in the creation of duplicate and incorrectly registered accounts, which in turn can lead to confusion and dealing errors in the future. Recommendations Where the transaction relates to an existing holding, the account (where relevant) should be identified by way of the client-side institution s reference as described in above. Otherwise a standard set of registration details should be provided (see below) The industry should adopt a standard data set of mandatory and optional information (see Annex 4), to be provided in relation to a new or existing holding for which the client-side institution does not have the holder reference. Where the client-side institution knows the account to be new, this should be specified The above information should be provided electronically. 4.3 placement Issues s are currently placed with the fund-side institution by a variety of means: post, telephone, fax, , electronic links. With most of these methods, manual intervention and re-keying is required. As well as being resource intensive, variation in the content of instructions increases the risk of error and has a negative impact on the service levels provided to market counterparties and, ultimately to end investors. Errors occur due to the misquoting or misinterpretation of client details, fund names and other transaction details, which are entered or provided manually, perhaps from abbreviated source information. The problem is made worse by the need for investors and their agents to communicate with different fund providers using a variety of communication methods. A further problem area is the variability in valuation points and the associated dealing cut-off times between different funds. This both makes asset reallocation between funds difficult to Standardization of Funds Processing in Europe: February 2005

12 co-ordinate and causes confusion for client-side institutions who will need to meet different dealing deadlines depending upon the fund concerned. However, it is suggested that standardizing valuation points and cut-off times would create as many problems as it might solve - they are often set in order to avoid a concentration of activity at one point in the day and in some cases are determined due to the trading hours of the markets in which funds invest. However, client-side institutions should have easy access to information regarding cut-off points, which it is recommended be included within the Fund Processing Passport (see recommendation and Annex 3). Recommendations placement should be carried out electronically The fund/class concerned should be identified in the order using the relevant ISIN code supplemented, where a single fund/class is available in different currencies, by the relevant ISO currency code. 4.4 acknowledgement and confirmation Issues The majority of funds deal on a forward basis - the price of units is calculated at the next valuation point after the fund-side institution accepts the order. This means that confirmation of an order (including the unit price etc.) will not usually be possible until some time after it is placed. Some, but not all, fund-side institutions undertake to acknowledge orders prior to the relevant valuation point, thus providing an opportunity to confirm that they have been received and correctly understood before the prices are allocated. However, these acknowledgements are often in a form that is proprietary to one party or the other and may not easily facilitate automatic matching by the client-side institution with the original order. In addition, acknowledgement currently may or may not represent acceptance of the order for execution. Most fund administration systems generate confirmations at the end of the day on which the prices are calculated and allocated, for dispatch the following day. This means that the client-side institution will not receive formal confirmation of the transaction until that following day, or later if it is sent by post. Delays in receiving the confirmation may well delay the settlement process, incurring cost to one or other. Recommendations Deals should be validated and acknowledged (which would indicate acceptance for execution) or rejected by the fund-side institution as soon as possible after they are received. Acknowledgements and rejections should be provided electronically Except where complete fulfillment of an order is conditional, under the terms of the fund, upon other orders transacted within the same dealing period, cancellation or amendment of the order should be permitted only by prior agreement between the client-side and fund-side institutions. Only orders that have been executed incorrectly by the fund-side institution should be cancelled or amended after the dealing cut-off Standardization of Funds Processing in Europe: February 2005

13 point, with the fund being compensated as appropriate for any adverse impact that may occur as a result Client-side institutions should have mechanisms in place to identify any discrepancies in the acknowledgement and refer them to the relevant fund-side institution as soon as possible following receipt Fund-side institutions should issue confirmations electronically. These should be sent no later than overnight following allocation of the relevant unit prices Where a foreign exchange transaction is executed in connection with the transaction, details should be included within the confirmation message Client-side institutions should have mechanisms in place to identify any unmatched orders or confirmations and refer them to the relevant fund-side institution on the business day of receipt. 4.5 Issues The key issues with settlement are that various settlement media are used (cheque, electronic funds transfer, CSD/ICSD accounting) and that settlement timeframes can vary. Uncertainty as to the settlement date is frustrating for both institutional investors and distributors and can have a consequent effect on their ability to settle subsequent purchases on time. Recommendations As far as is permitted by national legislation or regulation, settlement should occur on a date that is predetermined by reference to the date of the transaction for both sales and redemptions should be made electronically between client-side and fund-side institutions or effected via a CSD/ICSD Payments should be accompanied by the relevant order reference(s). 4.6 Message Standards Issues One of the key issues in implementing standardized electronic communications is which messaging standards should be used. The use of ISO standards is already established within the back-office operations of many client-side institutions and TAs. ISO already supports many of the messages required for funds processing and this is a developing area. Whilst other standards are currently in use in certain domestic markets, it is generally accepted (and in some cases agreed) that these should converge with the ISO standard. Standardization of Funds Processing in Europe: February 2005

14 Recommendations ISO is recognized as the single European standard for funds messaging going forward and should be the basis for all electronic communications in this area Convergence of the various existing standards towards ISO should be progressed as rapidly as possible in order to ensure interoperability Proprietary message standards between client-side institutions and fund-side institutions should be avoided. 5. BENEFITS AND INCENTIVES There are a number of benefits and incentives relating to the use of STP generally. Even though some of the following points relate to post-trade processing, it is essential that the end-to-end process (starting with the trade itself) is automated if these benefits and incentives are to be realized fully. Benefits of fund distribution processing automation Automation of fund distribution processing is a win-win-win equation for (a) investors and their intermediaries (including distributors), (b) fund companies and (c) fund service providers. All will reap major benefits of automating their processes based on harmonized best practice principles in three main areas: Profitability Case studies have demonstrated that operational costs and risks can be reduced substantially by the elimination of mis-keying, erroneous data interpretation, delayed or duplicate processing, fraud and the efficient identification of the sender. Scalability STP helps to easily absorb volume growth or efficiently manage volume volatility, and quickly add new counterparties. Service levels Enhancement of service is demanded by investors, distributors and fund companies. Fund companies can strengthen investors brand loyalty, security and 'Know Your Customer' processes, while lowering their total expense ratios. To offer best of breed services to the end investors, distributors require better and longer selling windows, efficient processing, improved customer reporting and efficient commission management. Automation contributes to the achievement of these goals through improved cut-off times, accurate, prompt and more frequent reporting, secure sender identification and fully secured data transmission, efficient commissions reporting, reduced number of errors, lower costs throughout the whole chain, neutral audit trail of activity between counterparties and automated price capture and reconciliation. Standardization of Funds Processing in Europe: February 2005

15 Providing incentives to automate fund distribution processing While the industry shows more and more commitment to automating fund processing, the pace is still slow. A number of players are starting to grant or evaluate granting incentives to enhance momentum and ensure markets automate quickly before any major crisis arises, which would trigger strong regulatory intervention. It is a welcome move and it is recommended that fund industry players contemplate granting incentives to their clients / counterparties to promote rapid progress. Incentives can be contemplated for example in the areas of: commissions (better trail or transaction based commissions when distributor works STP) lower fees schedule for STP transactions and reporting at service providers (transfer agents, accounting agents, concentrators) additional services available when STP (eg. more frequent reporting,...) 6. NEXT STEPS 6.1 Implementation FEFSI will take a leading role in the adoption of the proposed standards at national level. To support this role effectively, FEFSI will carry out a communication strategy to disseminate the standards in the fund market and encourage industry-wide endorsement by all players involved in fund processing in domestic markets and/or cross-border distribution. A two-tier approach will be implemented to support this process. Endorsement the first goal of this strategy will be to seek a Europe-wide endorsement of the proposed recommendations. To achieve this goal, FEFSI member associations will seek consensus at national level to endorse the proposed recommendations. FPSG members have also committed themselves to encourage their organizations and their national standardization groups active in the field of funds processing to accept the recommendations. Implementation to accelerate implementation by the market place, FEFSI will bring together a number of key players with the objective of convincing them to implement the recommendations, thereby giving other players an incentive to agree on the standards. An Annual Review of the progress achieved towards endorsement and implementation will be undertaken in the fall of For this review to function effectively, FEFSI will conduct a Survey to establish the degree of acceptance of the recommendations and identify the barriers or constraints to the implementation of these recommendations. On the basis of the results of the Review, the FPSG will revisit, enhance and add to the proposed recommendations. Standardization of Funds Processing in Europe: February 2005

16 6.2 Future developments Straight Through Processing does not end with the settlement of an order. Full STP extends into post-trade activities such as commissions processing and client-side reconciliations etc., as well as the handling of transfer of title, income processing and corporate actions. In the immediate future, the FPSG intends to consider reconciliations and then commissions. ISO messages for the purposes of providing reconciliation data to client-side institutions are already under development. The role of the FPSG, therefore, will largely be to encourage their implementation in due course and, where necessary, make recommendations with regard to the service levels (response times etc.) that should surround their use. The area of commissions processing is a complex one and, although the required messages are scheduled for implementation under the ISO standard by the end of 2006, work has yet to commence in earnest in this area. The FPSG proposes to assist in that work, providing an advance platform for discussion of the issues and identification of the business requirements. In due course, its role is likely to become one of promoting their use. In the longer term, the FPSG proposes to consider other key areas, where a lack of harmonization is considered to present a barrier or constraint to the efficient processing of funds-related activities. The three areas identified at this stage are (i) transfer of title to fund units between one person or entity and another; (ii) the processing of income entitlements; and (iii) corporate actions. Standardization of Funds Processing in Europe: February 2005

17 ANNEX 1 - NATIONAL APPLICATIONS OF THE GENERIC MODEL BELGIUM Input Role Actor Client s intermediary Invest. manager Placement / confirmation acceptance/ execution Investor Distributor Aggregator Invest. manager TA/fund provider fund order desk instruction instruction Client-side settlement Fund-side settlement Client custodian Fund custodian The majority of orders in respect of funds in Belgium are placed by appointed distributors or aggregators. The process is the same for pure institutional investors or when private investors deal directly, but the volumes are generally less significant. On the fund side, the transfer agent (TA) maintains the official register of the fund. However, the TA is not always the only entity appointed by the fund to receive and process the orders and issue confirmations, as the fund provider may also be appointed to operate a dealing desk. Having received confirmation of the order from the TA, for trades in third party funds the client or client-side institution instructs his/their bank or custodian to settle the trade with the fund custodian. With trades for in house funds, the fund provider dealing desk, the fund custodian and the client custodian are the same institution. As a result, the client-side settlement instructions are not needed, as the process to debit and credit the cash and security accounts is automatic. Standardization of Funds Processing in Europe: February 2005

18 ANNEX 1 (continued) FRANCE Input Role Actor Client/Intermediary: Investors Distributors Aggregators Inv. managers Placement / confirmation acceptance/ execution Custodian ( IF ) Centralisateur dealing desk instruction instruction Client-side settlement Fund-side settlement Custodian ( IF ) (member of EoC Fr) Centralisateur (member of EoC Fr) The main characteristic of the order processing for funds in France is that all orders are placed by a financial intermediary, the Intermédiaire Financier (IF), which is the custodian of the entity (end investor or investment manager, distributor or aggregator) for whom the order is being placed. The IF must be a member of Euroclear France (EoCFr). The IF may or may not identify the Distributor or Investor when placing the order. All of the roles on the fund side are played by the fund provider, known as the Centralisateur. In France, there is no register as such of holders in a fund as there is elsewhere in Europe. Instead, an "issuer account" is held in EoCFr reflecting the total number of shares in the market. The Centralisateur manages this issuer account. Once an order is executed and/or confirmed by the Centralisateur, both they and the IF instruct EoCFr to clear and settle on their respective accounts in EoCFr through a DVP process and the IF updates the custody accounts of the entity for whom they have dealt. The Placement and roles of the Custodian (IF) on the client-side are also grouped together in the diagram as although the responsibilities may be separated within the Custodian's operations, they belong to a single entity and are usually administered on a single integrated platform. The same is true for the Centralisateur. Note that whilst this process corresponds to the vast majority of fund order processing in France, it is still possible to have registers for a fund (ie. no EoCFr account). However, the overall principles remain the same, except for the settlement. Standardization of Funds Processing in Europe: February 2005

19 ANNEX 1 (continued) GERMANY Input Role Actor Depository bank of the client/ IFA Placement / confirmation acceptance/ execution Depository bank of the client Depository bank of fund instruction instruction Client-side settlement (Typically DVP in Clearstream) Fund-side settlement Clearstream Bank Frankfurt Depository bank of fund Fund order execution in Germany is mainly manual - meaning a fax from the client s depository bank or their IFA to the depository bank of the fund. Many trades (approx. 40%), however, are executed through Investro, an electronic order routing platform based on the order routing platform for the German stock exchange. Some orders are also routed through use Clearsteam s Vestima platform. One of the main characteristics of the German settlement model for investment funds is the fact that the settlement is mainly done though Clearstream Bank Frankfurt (CBF), as the Central Securities Depository (CSD) in Germany. The process is usually delivery versus payment (DVP). In the manual process both settlement parties enter their settlement instructions into the CBF settlement system. Where Investro is used, both client side and fund side settlement instructions are automatically sent to the CBF system and a Schlussnote (a special form of contract note) is automatically created within the back office systems of the banks concerned. It is also possible with Vestima for both sets of settlement instructions to be entered automatically to the CBF system. is then cleared via the central Bank. Standardization of Funds Processing in Europe: February 2005

20 ANNEX 1 (continued) IRELAND Input Role Actor Investor/ Intermediary Placement / confirmation acceptance/ execution Retail investors Distributors Paying agents Institutions Transfer Agent instruction instruction Client-side settlement Fund-side settlement Client bank/ custodian Fund custodian Fund trades can be received directly from retail shareholders, from institutional investors or through distributors trading on an omnibus or sub-accounting basis. Investment from retail shareholders tends to represent the minority in terms of both value and transaction volumes compared to other channels. s tend to be received a manually by fax, although there is increasing usage of interface files, SWIFT, NSCC and clearing houses in order to automate trade receipt. The transfer agent (TA) is responsible for accepting and processing the orders and subsequently for passing a summary of these trades to the fund accounting department and the fund custodian. tends to be on a contractual rather than an actual basis, with the exception of retail shareholder orders. Investors instruct their bank or custodian to settle with the fund collection account, which is typically held with the fund custodian. The TA is typically responsible for the reconciliation and instruction of cash movements across the collection account to the appropriate fund custody account, based on shareholder contractual trading. Standardization of Funds Processing in Europe: February 2005

21 ANNEX 1 (continued) ITALY Input Role Actor Investor Placement / confirmation acceptance/ execution Transfer Agent instruction instruction Client-side settlement Fund-side settlement Intermediary Fund custodian The generic model operates as shown above for domestic fund dealt through distributors and fund platforms in Italy. For pure institutional investors the activities of Input and Placement are carried on by the investing institution. On the fund side, the transfer agent (TA) maintains the official register of the fund and is the only entity appointed by the fund to receive and process the orders and issue confirmations after the NAV and fund prices have been calculated. The fund custodian carries out settlement for the fund. For subscriptions the client, or clientside institution, instructs their bank or custodian to credit the fund collection account held by the custodian. For redemptions the fund TA instructs the custodian to remit the proceeds to the client or to the client-side institution. The cash collection accounts for the fund are reconciled by the fund custodian and the TA. Standardization of Funds Processing in Europe: February 2005

22 ANNEX 1 (continued) LUXEMBOURG Input Role Actor Client/ Intermediary Placement / confirmation acceptance/ execution Investors Distributors Aggregators Invest. managers Transfer Agent instruction instruction Client-side settlement Fund-side settlement Client custodian Fund custodian The majority of orders in Luxembourg are placed by appointed distributors or aggregators. The process is the same for pure institutional investors or when private investors deal directly, but the volumes are generally less significant. On the fund side, the transfer agent (TA) keeps the official register of the fund and is the only entity appointed by the fund to receive and process the orders and issue confirmations. Having received confirmation of the order from the TA, the client or client-side institution instructs his/their bank or custodian to credit the fund collection account. This account is generally maintained directly with the fund custodian, although by exception the TA might maintain dedicated collection accounts at an intermediary bank. In either case, the TA reconciles the cash flows with the transactions they have undertaken. Standardization of Funds Processing in Europe: February 2005

23 ANNEX 1 (continued) UNITED KINGDOM Input Role Actor Client/ Intermediary or investment manager decision Placement / confirmation acceptance/ execution Investors Distributors Aggregators Inv. managers Fund provider dealing desk instruction instruction Client-side settlement Fund-side settlement Investor or Client custodian Fund provider dealing administration Whilst distribution in the UK is more fragmented than is usual elsewhere in Europe, with significant dealing volumes being transacted directly with end investors or through the many regulated independent financial advisers, the same basic roles and processes exist, performed by the actors as indicated. On the fund side, all of the roles are played by the fund provider, who normally deals as principal in the sale and redemption of units. However, whilst this arrangement is not typical within Europe, the order and settlement process mirrors what happens in many jurisdictions, except that the fund provider is a direct counterparty to the transaction and it is they with whom the client settles rather than the fund. The order input and settlement functions of the fund provider are grouped together in the diagram simply to indicate that although the responsibilities may be separated within the fund provider's operations, they are usually administered on a single integrated platform. This integration means that, in reality, the "settlement instruction" on the fund side becomes implicit once everything required has been input to the system, rather than being the subject of a discrete communication between the transfer agent and fund depositary (or their equivalents), as happens most other jurisdictions. Standardization of Funds Processing in Europe: February 2005

24 ANNEX 2 - RECOMMENDATIONS REGARDING XML FUND MESSAGES Current scope of ISO fund distribution messages Account openings and maintenance s (subscriptions, redemptions, switches) and order confirmations* Transfers and transfer confirmations Status reports on orders and statuses on transfers* Statements of holdings Statement of investment funds transactions (for pending and for executed transactions) Price reporting* Cash flow reporting* Commissions reporting Static data reporting Requests for statements The ISO standards already available are identified by an asterisk (*). The remainder will be released gradually from March 2005 until end For more information, please consult Standardization of Funds Processing in Europe: February 2005

25 ANNEX 2 (continued) Overview of ISO message functionalities and related best practice recommendations M = mandatory O = optional NA = not applicable s Element Comments s (subscriptions, redemptions, switches) confirmations FPSG best practice recommendation Type of order is part of the message type M M giver is the sender of the message M M Investment Account details reference Deal reference Financial instrument identification The account impacted by the fund order Unique & unambiguous identifier for an order as assigned by the instructing party Unique & unambiguous identifier for an order as assigned by a confirming party Unique identifier of the security (ISIN is highly recommended) M M use of standard codification M M unique and unambiguous reference NA M unique and unambiguous reference M M ISIN (Dis)Investment amount in number of units, in cash amount (trading currency/amount) or for redemptions and switches % of the portfolio M M Physical delivery indicator Y/N; if yes, address is mandatory M M Trade date & time Date & time at which a price is applied NA M date AND time (default time:00:00:00) Price details Type of price (M), currency & value (M), amount (M); NA M Partial execution indicator Yes / no indicator NA M Cum dividend indicator indicates whether the dividend is included (Yes/no indicator) NA M Master reference Pool reference reference" assigned to a set of orders or trades to link them together collective reference identifying a set of messages O O unique and unambiguous reference O O unique and unambiguous reference Standardization of Funds Processing in Europe: February 2005

26 Element Comments s (subscriptions, redemptions, switches) confirmations FPSG best practice recommendation Previous reference reference to a linked message that was sent previously O O unique and unambiguous reference Related reference relates to a linked messages previously received NA M unique and unambiguous reference Place of trade Market in which the advised trade transaction was executed. O O date & time date and time at which the order was placed by the investor NA O date AND time (default time:00:00:00) Cancellation right investor's right to cancel O O Account owner identification legal owner of the account holding O O BIC/BEI Account servicer identification to identify Power of Attorney on investment account O O BIC/BEI type bed & breakfast orders, can be specified O (NA for switch) O(NA for switch) Gross amount indicator allows to indicate if the cash amount is gross (including charges, commissions, ) O O Security class type identifies the fund class O O should not be required when all ISINs are allocated at class level Security form bearer or registered O O Security distribution policy income policy (cash retained or paid out) O O Income preference dividend option chosen by the investment account owner O O Letter of intent reference mainly used in the US market - relates to the granting of reduced sales charges based on intent of future purchases O (NA for redemptions & switches) O (NA for redemptions & switches) Accumulation right reference mainly used in the US market - relates to the granting of sales commissions based on current and previous purchases O(NA for redemptions & switches) O(NA for redemptions & switches) Charge/commissi ons details type, basis, amount, rate, recipient ID, commercial agreement reference, waiving details O O recommendations to be published in 2005 Tax details type, basis, amount, rate, recipient ID, exemption indicator & reason O O Standardization of Funds Processing in Europe: February 2005

27 Element Comments s (subscriptions, redemptions, switches) confirmations FPSG best practice recommendation & custody details Intermediary details settlement date (O), settlement place(m), safekeeping place (O), securities settlement system (O), receiving parties & accounts (O/M), delivering parties & accounts (O/M), requested settlement currency (O), requested NAV currency (O), cash settlement details (O) - gross/net; date, payment instrument choice: credit transfer, credit card, debit card, direct debit, cheque, investment account; investment account; physical delivery details if relevant (O) up to 10 intermediaries; identification, account, role O O cross-referencing between cash payment and original order/order confirmation to facilitate reconciliation O O BIC/BEI G1/G2 indicator (UK) O (NA for subscriptions) O (NA for subscriptions) Additional cash in / Resulting cash out O: only applies for switch O: only applies for switch Type of pricing calculation method NA O Interim profit amount part of the price deemed as accrued income or profit rather than capital NA O Forex details buy & sell amounts (O), unit currency(m), quoted currency (M), exchange rate (M), quotation date & time (O), quoting institution (O) NA O Refund return of cash that has been overpaid for a subscription NA O (NA for redemptions & switches) Subscription interest interest received when a subscription is paid in advance and then invested by the fund NA O (NA for redemptions & switches) Standardization of Funds Processing in Europe: February 2005

28 M = mandatory O = optional NA = not applicable Status messages Element Comments Instruction Status Report FPSG best practice recommendation Type of order is part of the message type M Issuance of status reports by the transfer agent giver is the sender of the message M BIC/BEI Reference choice between Related or Other reference (Other Reference = reference of a linked message sent by proprietary way or reference of a system) M unique and unambiguous reference Status of the order and reason possible statuses: order is already executed, accepted and ready for execution when the price is applied next, received, sent to the next party; cancelled status; conditionally accepted status (awaiting cash, funds or documents); rejected status (32 different reason codes available); suspended status (fund overflow or price suspension); in repair status; repaired conditions M Public codes for status and for reasons; reason of status code to be specified Master reference reference assigned to a set of orders or trades to link them together O unique and unambiguous reference Status initiator party initiating the status messages O Identification by BIC/BEI Switch order leg identification only when status is for a switch O reference reference assigned to the individual order M mandatory reference of original order Investment account or financial instrument O ISIN / standard account codification New details information added to the original order (e.g. expected trade date and/ or settlement date) O Standardization of Funds Processing in Europe: February 2005