Summary of key points discussed at the 9 March 2011 joint IT/Operations

Forum meeting on:

‘STP & Fund Administration:

This house believes that the fund industry is still in the 20th century’
Points from Peter Gregory FCSI, Operations Manager, The Share Centre
From the perspective of a high volume, CREST orientated, execution only broker:
• >80% of our equity trades are electronic with STP using the internet, RSPs,
CREST and BACS.
• Customers can trade from their homes and bargains can settle with no
intervention from us
• The advent of CREST was a big leap into the unknown for those of us with a
traditional background
• We did not welcome CREST, especially after the TAURUS disaster
• Looking back, it was a revolution that brought massive efficiency
• The Funds landscape is still littered with inefficiencies
• These result from non-uniform procedures and paper in some instances
• Reconciliation with fund managers is problematical
• The fund groups either in concert or via the IMA should taken a lead to
address these inefficiencies and done more to aid STP
• There is a CREST solution but although it has been in place for many months,
it is yet to be used
• The CREST solution in its present form is not ideal as there are shortcomings.
• Had the issues been addressed earlier by the funds industry we might have a
fully working CREST solution
• This has resulted in the advent of alternative solutions such as CoFunds and
Calastone
• We use Cofunds to resolve most of these issues but we still have duplication
and two systems.
• Ideally we would want to maximize our CREST investment by including
funds.

Points from Mark Seaman, Chartered FCSI, Independent Consultant

• Systems used in the UK are:
- EMX, uses FIX standard messaging, introducing ISO standard, settlement
through Crest just been introduced
- Calastone accepts broader range of messages and produces a net settlement
message
- Fundsettle from Euroclear & Vestima from Clearstream, actually keep
 custody of the assets
- FTP file transfer. E.g. Ireland

• In the UK EMX has about 55% of the STP market, Calastone around 25%,
fundsettle and vestima about 10% and file transfer the remaining 10%.
• Funds are not assets they’re products
• Funds are complex to process - initial and trail commission, rebates
• Funds are highly regulated, e.g. KYC and AML obligations
• KIIDs requirement (Key Investor Information Document) as part of UCITS IV
will make STP more complicated

• Automation has moved a lot over the last 15 years

• For order routing, Efama estimate in Europe75% automation but only 36%
ISO messages
• But fund servicing and settlement still long way to go
• Crest is not ideal – designed for secondary market
• Funds are primary market – units bought & sold directly with issuer
- Legal title on register, not within a central securities depositary
• Crest originally produced paper in 1999 – but had problems with forward
pricing, SDRT, Group 1 and 2 units
• Asia just 40% STP
• US, STP rate almost 100% in the States. NSCC system originally built by
bond distributors
• US STP is much easier - big broker dealers
- big fund distributors with big market share

• How to automate in the UK? The problem is not transfer agents or promoters –
all have invested heavily in systems. There are plenty of solutions
• The problem is getting the distributors to use them
• In the UK we have a variety of distributors – stockbrokers who prefer Crest
and smaller IFAs who are much less keen to automate
• Distributor systems (such as 1st Software or Adviser Office) need to be linked
in to automated solutions, but too many small IFAs are not prepared to make
the investment
• At the end of the day the bodies that will drive automation are the distributors
not the product providers.

• Summarise 3 key points:

1. Funds are products and not assets and are relatively complex
2. Automation has come a long way over the last 15 years
 3. It’s up to Distributors at least as much as the fund managers to make
automation happen

• So to answer the question, Is the fund industry still in the 20th century?
Hopefully I’ve shown it’s not, but I would suggest that some distributors and
regulators still are!

Points from Hamish Rowan-Hamilton, Director Institutional Accounts - Cofunds

The industry has one foot in 20th and one in the 21st century.

Compared to the equities market, unit trust industry is in C20th;

Witness: a year’s worth of UT trades for an average broker (100 UT trades per
day) could be executed/fulfilled in a few seconds using equities
technology/platforms.
Costs of processing are many fold higher than an equivalent book of equities.

Why? Although there are industry standard protocols for funds (messaging and
processing) they have not been adopted as they could have been by the industry.

Young, vigorous fast growing organisations with more agile development can bring
and have brought change to the industry faster than the incumbents institutions.

To compensate for the lack of progress at the core of the funds industry, intermediate
bodies, such as Cofunds, are providing C21st funds processing:
Witness: When dealing with Cofunds 99.8% deals in funds are STP; settlement
is contractual and netted to a single payments as is the payment of
distributions on fund manager pay date, off market transfers complete in 24hrs
in many cases, holdings can be reconciled daily, and trail is calculated daily.
Messages are ISO compliant but other formats are also available. Cofunds has
days of 750,000 transactions.
.