Euroclear UK & Ireland and EMXCo are eradicating the time-consuming, inefficient and unnecessarily expensive process of settling UK fund transactions. According to the HM Treasury, the UK funds industry could save GBP 70- 290 million per year by embracing processing automation in place of paper-based fund unit settlement. This potential saving is now a reality. Together, EMXCo and Euroclear have launched a fully electronic and integrated order routing and settlement solution for UK fund transactions - a first for UK fund investors. Clients can expect substantial savings on their current operational processing costs by moving from manual to automated order routing and settlement. A typical distributor settling around 10,000 transactions a month may today expect to pay up to GBP 50,000 per month for administering these settlements and subsequent reconciliations. Under the new automated service, the same distributor doing the same levels of business can expect a monthly bill for all balance reconciliation, transaction management and communication charges of less than GBP 8,000. Clients processing lower volumes of transactions can also expect to make significant savings.
In expectation of deriving meaningful benefits from the new EMX/Euroclear UK & Ireland service, firms such as Brewin Dolphin, Cardale, Charles Stanley, Direct Sharedeal and Rathbones have already signed up during the course of 2009.
Yannic Weber, Chief Executive Officer of EMXCo and Euroclear UK & Ireland, said: "Having worked closely with the 26 members of the UK Fund Liaison Group, representing all segments of the fund industry, we are confident that the end-to-end fund-processing service we are providing fully meets market requirements. What is more, we are live now. And firms active in UK funds are already testing our new processing arrangements. We are eager to share with them the advantages of substantial operational cost savings and protection from counterparty and settlement risks, in accordance with the IMA recommendations for greater use of electronic funds processing."
Peter Fleming, Head of UK Investment Administration at Skandia said: "This fully automated processing solution is great news for the industry and Skandia supports it. EMXCo and Euroclear UK and Ireland are in an ideal position to offer this service which we expect will remove operational risk and improve efficiency."
In addition to cost savings, the new service delivers other important benefits:
Decreased settlement risk and fewer errors in processing and transaction reporting, as manual intervention is eliminated.
Up-to-date fund balances based on processed transactions at Euroclear UK & Ireland which are reconciled with the fund register on a daily basis, in full compliance with FSA rules.
Settlement within four business days, as compared with up to ten days today.
Electronic exchange of key transaction information among all relevant fund market participants, including fund managers, promoters, distributors, third party administrators.
Back-office efficiency gains by settling UK fund transactions with a proven provider of primary and secondary trade services, where market participants already settle their UK equity and bond transactions.
Use of highly resilient infrastructure, with strong user/owner governance and a solid track record of operational stability.
The rationale for Euroclear acquiring EMXCo in 2007 is embodied in this joint initiative. Together, the two organisations are delivering end-to-end, straight-through processing of UK fund transactions, from order routing through to cash and unit settlement, and safekeeping. Initially, funds domiciled in the UK, Channel Islands and Isle of Man are eligible for this service. The coverage of funds is intended to be expanded in the future.
A retail client places an order with its IFA to subscribe to or redeem units in a UK fund.
The IFA routes the order to the EMX Message System via a platform or distributor.
EMXCo routes the order to the fund manager (product provider). The manager confirms the order by sending an electronic contract note to the broker (via EMX).
The settlement instruction can then be sent to Euroclear UK & Ireland, either bilaterally or via the direct input option through the EMX Message System.
Euroclear UK & Ireland processes the instruction (both the cash and unit aspects) and electronically confirms the details of the transaction with the fund manager and its TPA.
Confirmed receipt of the settlement instruction is sent from the fund manager to Euroclear UK & Ireland, which debits and credits the broker’s account, and reports the settled transaction to the IFA, who informs the retail client.
Saturday, November 21, 2009
Friday, November 13, 2009
POPULAR LONG-TERM CORPORATE BONDS ARE LICENSED TO SELL
One result of the past year's financial turmoil has been much greater corporate bond issuance in Thailand.
Circumstances have been favourable. Banks are more risk averse due to the economic slowdown and have not been actively extending loans. Meanwhile, lower yields and reasonable credit spreads mean that rates are appealing for borrowers. At the same time, very low bank interest rates make bond yields attractive to savers.
Already this year, corporations have sold more than Bt250 billion in longer-term bonds, not including short-term commercial paper, for an increase of 120 per cent from the same period last year.
The two main distribution methods for bonds are selling directly to retail investors, or selling to institutional investors such as mutual funds or insurance companies, which in turn distribute them to the general public.
The current craze for corporate bonds is to sell directly to retail investors.
On the surface, this appears to be more efficient. However, direct retail sales have major limitations with two key concerns - credit risk and liquidity risk.
Years ago, retail sales of bonds started out with issuance by the government, or by the very best corporate names. However, it has since evolved into virtually any company selling bonds to the general public, significantly raising the potential credit risk.
This has several implications:
Retail bond investors usually have exposure to only a few names and underestimate downside risks, while lack of diversification raises the possible loss should any transaction go bad.
Retail investors often do not have the resources to monitor and analyse changes in corporate credit risk on an ongoing basis.
Retail investors may not be knowledgeable enough to demand appropriate pricing to match the risk involved.
The other key concern is that retail-oriented bond issues usually lack liquidity in the secondary market. Even if savers plan to buy and hold bonds until maturity, unforeseen circumstances could make them change their minds.
If sales are possible at all, bid-offer spreads are likely to be very large to the small investor. In case of a forced sale, there could also be mark-to-market losses that are difficult for retail investors to hedge, unlike institutional investors that may be implementing yield curve strategies.
For all these reasons, institutional investors theoretically have many advantages over individuals in buying and managing bonds.
At the moment, local financial institutions still have room for development. Bond mutual funds tend to be focused on short-term money market debt, rather than on longer-term corporate bonds. There is a lack of activity in the secondary market, while hedging is still not widely used.
Over time, however, the market should continue to develop. Greater issuance will lend depth to the market. Institutional investors will gain in scale and sophistication. And hedging tools such as interest rate futures and repurchase agreements will become available, or more widely used.
In the medium term, this would be healthy for the local financial system, and would be better for consumers as well.
Circumstances have been favourable. Banks are more risk averse due to the economic slowdown and have not been actively extending loans. Meanwhile, lower yields and reasonable credit spreads mean that rates are appealing for borrowers. At the same time, very low bank interest rates make bond yields attractive to savers.
Already this year, corporations have sold more than Bt250 billion in longer-term bonds, not including short-term commercial paper, for an increase of 120 per cent from the same period last year.
The two main distribution methods for bonds are selling directly to retail investors, or selling to institutional investors such as mutual funds or insurance companies, which in turn distribute them to the general public.
The current craze for corporate bonds is to sell directly to retail investors.
On the surface, this appears to be more efficient. However, direct retail sales have major limitations with two key concerns - credit risk and liquidity risk.
Years ago, retail sales of bonds started out with issuance by the government, or by the very best corporate names. However, it has since evolved into virtually any company selling bonds to the general public, significantly raising the potential credit risk.
This has several implications:
Retail bond investors usually have exposure to only a few names and underestimate downside risks, while lack of diversification raises the possible loss should any transaction go bad.
Retail investors often do not have the resources to monitor and analyse changes in corporate credit risk on an ongoing basis.
Retail investors may not be knowledgeable enough to demand appropriate pricing to match the risk involved.
The other key concern is that retail-oriented bond issues usually lack liquidity in the secondary market. Even if savers plan to buy and hold bonds until maturity, unforeseen circumstances could make them change their minds.
If sales are possible at all, bid-offer spreads are likely to be very large to the small investor. In case of a forced sale, there could also be mark-to-market losses that are difficult for retail investors to hedge, unlike institutional investors that may be implementing yield curve strategies.
For all these reasons, institutional investors theoretically have many advantages over individuals in buying and managing bonds.
At the moment, local financial institutions still have room for development. Bond mutual funds tend to be focused on short-term money market debt, rather than on longer-term corporate bonds. There is a lack of activity in the secondary market, while hedging is still not widely used.
Over time, however, the market should continue to develop. Greater issuance will lend depth to the market. Institutional investors will gain in scale and sophistication. And hedging tools such as interest rate futures and repurchase agreements will become available, or more widely used.
In the medium term, this would be healthy for the local financial system, and would be better for consumers as well.
Sunday, November 8, 2009
BEARISHNESS EXTENDED IN THAI BOND MARKET
Bearishness persisted in the Thai bond market last month with two- and 10-year government bond yields rising by abo7ut 20 and 40 basis points, respectively.
A combination of selling by foreigners and a lack of demand from local players drove the sell-off over.
The primary market has displayed a mixed performance. The Bt13-billion, five-year (LB155A) auction in October returned a moderate bid/cover ratio of just 1.41 times, reflecting soft demand.
However, the longer-tonor B3-billion, 30-year (LB406A) and B7-billion 20-year (LB24DA) auctions performed better with their bid/cover ratios coming in at 3.38 times and 2 times, respectively.
The Bank of Thailand's economic report for September - released at the end of October - showed that economic conditions continued to improve from the previous month along with increased private and public spening, as well as a pick-up in external demand.
The central bank also noted that exports had contracted in year-on-year terms, but at a decelerating rate. Meanwhile, manufacturing production increased, both for domestic and overseas markets.
However, private investment remained subdued as producers' excess capacity could accommodate the increase in demand.
Even though we do not expect the Bank of Thailand to hike its policy rate through next year, bond sentiment should remain bearish in the near term.
Investors are reluctant to add long bond positions at this juncture given that regional central banks have been hawkish, with the Reserve Bank of Australia hiking by another 25 basis points on Tuesday to 3.5 per cent.
There is a lack of demand for bonds from local investors with most players favouring to keep duration short and exposure limited ahead of year-end.
Foreign investors have also generally been on the sell-side, paring positions in the local bond market.
DANNY SUWANAPRUTI is a rates strategist for Standard Chartered Bank in Singapore.
A combination of selling by foreigners and a lack of demand from local players drove the sell-off over.
The primary market has displayed a mixed performance. The Bt13-billion, five-year (LB155A) auction in October returned a moderate bid/cover ratio of just 1.41 times, reflecting soft demand.
However, the longer-tonor B3-billion, 30-year (LB406A) and B7-billion 20-year (LB24DA) auctions performed better with their bid/cover ratios coming in at 3.38 times and 2 times, respectively.
The Bank of Thailand's economic report for September - released at the end of October - showed that economic conditions continued to improve from the previous month along with increased private and public spening, as well as a pick-up in external demand.
The central bank also noted that exports had contracted in year-on-year terms, but at a decelerating rate. Meanwhile, manufacturing production increased, both for domestic and overseas markets.
However, private investment remained subdued as producers' excess capacity could accommodate the increase in demand.
Even though we do not expect the Bank of Thailand to hike its policy rate through next year, bond sentiment should remain bearish in the near term.
Investors are reluctant to add long bond positions at this juncture given that regional central banks have been hawkish, with the Reserve Bank of Australia hiking by another 25 basis points on Tuesday to 3.5 per cent.
There is a lack of demand for bonds from local investors with most players favouring to keep duration short and exposure limited ahead of year-end.
Foreign investors have also generally been on the sell-side, paring positions in the local bond market.
DANNY SUWANAPRUTI is a rates strategist for Standard Chartered Bank in Singapore.
Price rise raises concern
The International Monetary Fund said yesterday it shared the Hong Kong government's concern that the city could face sharp asset price inflation, as data showed home sale and purchase agreements nearly doubled in October.
"We share the authorities' concerns that a credit-asset price cycle could take hold, leading to a sharp run-up in prices for certain real and financial assets,"the International Monetary Fund said in an annual report on Hong Kong.
"While such asset price movements are part of the natural equilibrating mechanism of the Hong Kong economy, there is a risk that prices could become driven more by short-term liquidity conditions,divorced from fundamental forces of supply and demand."
Government data yesterday showed that sale and purchase agreements, with stamp duty paid, for residential property units in the city soared 97% from a year earlier to 9,300. But they fell 24% from September, indicating the announcement of tighter mortgage lending rules may have dampened sentiment.
The Washington-based IMF also said it had raised its GDP forecasts for Hong Kong following a recent improvement in the economy. It forecast a 2% decline in GDP this year, against a 3.5% decline previously, and 5%GDP growth in 2010,up from 3.5% previously.
Hong Kong Chief Executive Donald Tsang warned last month of the risk of a property bubble and said the government could release more land for residential property development.
"We welcome the consideration that is now being given to increasing the supply of land to the market as one of the possible means to help moderate potential property price surges," the IMF said.
Property prices have surged by 28%overall this year, and price increases for luxury property have topped 40%, as wealthy mainland Chinese have snapped up luxury apartments. Last month, a luxury flat sold for a world record HK$71,280(US$9,200) per square foot.
That prompted the central bank, the Hong Kong Monetary Authority, to raise the downpayment to buy luxury property and cap mortgage loans for mass-market property.
"We share the authorities' concerns that a credit-asset price cycle could take hold, leading to a sharp run-up in prices for certain real and financial assets,"the International Monetary Fund said in an annual report on Hong Kong.
"While such asset price movements are part of the natural equilibrating mechanism of the Hong Kong economy, there is a risk that prices could become driven more by short-term liquidity conditions,divorced from fundamental forces of supply and demand."
Government data yesterday showed that sale and purchase agreements, with stamp duty paid, for residential property units in the city soared 97% from a year earlier to 9,300. But they fell 24% from September, indicating the announcement of tighter mortgage lending rules may have dampened sentiment.
The Washington-based IMF also said it had raised its GDP forecasts for Hong Kong following a recent improvement in the economy. It forecast a 2% decline in GDP this year, against a 3.5% decline previously, and 5%GDP growth in 2010,up from 3.5% previously.
Hong Kong Chief Executive Donald Tsang warned last month of the risk of a property bubble and said the government could release more land for residential property development.
"We welcome the consideration that is now being given to increasing the supply of land to the market as one of the possible means to help moderate potential property price surges," the IMF said.
Property prices have surged by 28%overall this year, and price increases for luxury property have topped 40%, as wealthy mainland Chinese have snapped up luxury apartments. Last month, a luxury flat sold for a world record HK$71,280(US$9,200) per square foot.
That prompted the central bank, the Hong Kong Monetary Authority, to raise the downpayment to buy luxury property and cap mortgage loans for mass-market property.
Risk-level labelling a must
Securities regulators have launched new regulations aimed at helping retail investors better understand the potential risks of mutual funds.
Thirachai Phuvanatnaranubala, the secretary-general of the Securities and Exchange Commission, said the Association of Investment Management Companies have agreed to support the new rules as a means of simplifying information for investors.
Mr Thirachai said given the growing complexity of the financial markets and fund products, it is vital that investors understand potential risks.
Under the new rules, asset management companies will help classify the potential risks of a fund in an eight-step scale. Sales agents will be responsible for explaining the potential risks involved of each fund, with investors obliged to sign disclaimers stating that they understand the risk level before making an investment.
For money-market and fixed-income funds that permit daily redemptions,fund managers must manage investment assets to ensure sufficient liquidity to cope with redemptions. Fund managers must also ensure that investments are in top-quality bonds with suitable durations, and for foreign investments, full hedging against currency risk is required.
AIMC chairwoman Voravan Tarapoom said the rules were expected to be finalised by the first quarter of 2010.
"We will have to discuss how to standardise risk-measurement procedures.Each company has a different set of indicators," she said.
Mrs Voravan, also managing director of BBL Asset Management, said the rules were in line with the basic principle of "know your client", including their risk profile and investment goals.
"If [fund managers] understand the risk level that investors can accept, then one can make the right recommendations and help reduce any misunderstanding in communications," she said.
Thirachai Phuvanatnaranubala, the secretary-general of the Securities and Exchange Commission, said the Association of Investment Management Companies have agreed to support the new rules as a means of simplifying information for investors.
Mr Thirachai said given the growing complexity of the financial markets and fund products, it is vital that investors understand potential risks.
Under the new rules, asset management companies will help classify the potential risks of a fund in an eight-step scale. Sales agents will be responsible for explaining the potential risks involved of each fund, with investors obliged to sign disclaimers stating that they understand the risk level before making an investment.
For money-market and fixed-income funds that permit daily redemptions,fund managers must manage investment assets to ensure sufficient liquidity to cope with redemptions. Fund managers must also ensure that investments are in top-quality bonds with suitable durations, and for foreign investments, full hedging against currency risk is required.
AIMC chairwoman Voravan Tarapoom said the rules were expected to be finalised by the first quarter of 2010.
"We will have to discuss how to standardise risk-measurement procedures.Each company has a different set of indicators," she said.
Mrs Voravan, also managing director of BBL Asset Management, said the rules were in line with the basic principle of "know your client", including their risk profile and investment goals.
"If [fund managers] understand the risk level that investors can accept, then one can make the right recommendations and help reduce any misunderstanding in communications," she said.
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