A paperless system of settling trades among managed funds is closer to becoming a reality, following a pilot of SWIFT messaging standards with which five of eight pilot participants have promised to go live by the third quarter this year.
The pilot, commencing in August 2007, aimed to demonstrate the potential value-add of adopting the SWIFT suite of managed fund messages, known as SWIFTNet, and identify the backoffice changes needed to implement them. The test also served to familiarise the organisations with the ISO20022 / SWIFT message standards and validate the industry-owned organisation’s claims that it could cater for the external communications between wholesale managed fund counterparties.
In the period from August 20 to September 20, a total of 549 messages were sent over the SWIFTNet Funds Test/Pilot service. Of the eight pilot participants, including funds managers, wrap operators, custodians and registrars, all reported they found the experience useful. Five organisations – Ausmaq, National Custodian Services, HSBC Securities Services, Vanguard Investments and Barclays Global Investors – have since said they plan to initiate an internal project to implement the automated communications system, and the remaining three are said to be adopting a ‘wait-and-see’ approach.
A further five which did not originally participate – Macquarie Wrap, RBC Dexia, Asteron, Oasis and ING – have subsequently registered. Tim Hamer, commercial manager at SWIFT, said he expected the organisations going ahead to be live by the third quarter of this year. The list of organisations using SWIFT messages is likely to grow rapidly, according to Hamer, as the business case for implementing the system grows with each new counterparty that joins.
In a post-pilot survey, the five participants planning to adopt the system said they would be encouraging their major counterparties to do so as well. It is understood that in a letter to its fund managers, Macquarie Wrap has already said it would offer fee discounts to any manager which also adopted the SWIFT messaging standards.
According to SWIFT’s Hamer, Macquarie are now moving rapidly forward with their implementation and are encouraging their counterparts to join them in automating these flows. “Macquarie is keen to be seen as a leader, and for them the benefits of moving to an automated, paperless system are obvious,” he says.
The automation of buy/sell orders has the potential to reduce the cost of a managed fund transaction from $20 to 20c, and reduce the processing time from hours to seconds, enabling organisations to dramatically scale-up the number of orders they can process without expanding the size of their employee base.
Hamer says that in Hong Kong the increased processing speed has already allowed Citigroup’s funds distribution arm to extend its deadline for managed fund applicants to receive that day’s closing price by four hours, well into mid-afternoon. But he believes the biggest benefit of SWIFT messages will be the reduction of errors. “At a conservative estimate, 2 to 3 per cent of all faxes go missing,” he says. “Some vendors have told us the figure is more like 4 or 5 times that. Automation brings the error rate to near zero, so for any institutions doing large transactions the savings on Good Value claims will be immediately apparent.”
To begin with, organisations will communicate information such as applications, redemptions and distributions using the current suite of 18 messages. There are a total of 68 different types of standard messages that can eventually be used. The standards evolved from market practice discussions with 15 institutions to determine the essential elements of each type of communication.
The messages use Extensible Mark-up Language (XML), enabling SWIFT to regularly review the content of the standard messages, adding or removing fields as needed. XML also has the benefit of being an industry standard format, which makes lower-cost connections to the SWIFT network possible through platforms such as Microsoft’s BizTalk Accelerator.