M&G is set to become the first fund group in the UK to offer its fund range via electronic settlement on Euroclear’s Crest system, making fund transactions as efficient as buying shares.
The move marks a watershed moment as it could pave the way for other fund groups to make fund dealing in their ranges simpler, while providing a central counterparty for settlement between funds for the first time, mitigating credit risk.
Until now, the multi-billion pound UK fund industry has settled trades manually, making it expensive, time-consuming and open to errors. Documentation is created by mail, while cash instructions can be delayed, missed or sent to an incorrect counterparty.
These issues have been a significant burden for many fund buyers, particularly wealth managers, who welcome the move by M&G.
‘Switching between funds should get easier if both are dealt on a T+3 basis, than it is when the fund sold pays me in five days, or four days plus forward pricing, and the fund bought wants paying in three,’ he added.
Another industry source added: ‘The complexity and scale of daily effort required for settlement makes understanding current cash positions and predicting future cash flows a very difficult task. Even if the dealing itself is automated, settlement instructions are not.’
The move by M&G follows an agreement with Euroclear, which has worked closely with fund registrars to allow the system to accommodate funds.
As part of this process, IFDS Group has built an electronic link to Crest in order to exchange fund holding details in real time, with daily reconciliations of positions.
The settlement banks that will form part of the service will make and receive payments based on electronic instructions. Should any of them fold, their obligations will be met by the Bank of England, mitigating counterparty credit risk.
Furthermore, once the funds are registered on Crest, they can be moved between investors almost immediately, allowing for automatic re-registration.
As M&G is one of the biggest fund groups in the UK, managing over £200 billion as of last September, the move sets a precedent for fund providers and opens the way for other large groups that have expressed interest in the electronic settlement process.
M&G was unable to comment.