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

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‘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 .g. 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. Calastone around 25%.g. STP rate almost 100% in the States. Funds are products and not assets and are relatively complex 2. 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 . e. Funds are not assets they’re products Funds are complex to process . NSCC system originally built by bond distributors US STP is much easier .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. • • • • • • • • • • • • • • • Summarise 3 key points: 1.big broker dealers . rebates Funds are highly regulated. SDRT. Group 1 and 2 units Asia just 40% STP US. E. fundsettle and vestima about 10% and file transfer the remaining 10%.Legal title on register.FTP file transfer.initial and trail commission. Ireland • • • • • In the UK EMX has about 55% of the STP market. 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. Automation has come a long way over the last 15 years . 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. not within a central securities depositary Crest originally produced paper in 1999 – but had problems with forward pricing.

. and trail is calculated daily. settlement is contractual and netted to a single payments as is the payment of distributions on fund manager pay date.Cofunds The industry has one foot in 20th and one in the 21st century. unit trust industry is in C20th. Compared to the equities market.3. holdings can be reconciled daily. Director Institutional Accounts . are providing C21st funds processing: Witness: When dealing with Cofunds 99. intermediate bodies. off market transfers complete in 24hrs in many cases. Young. Cofunds has days of 750. Is the fund industry still in the 20th century? Hopefully I’ve shown it’s not.8% deals in funds are STP. such as Cofunds. vigorous fast growing organisations with more agile development can bring and have brought change to the industry faster than the incumbents institutions.000 transactions. . 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. It’s up to Distributors at least as much as the fund managers to make automation happen So to answer the question. but I would suggest that some distributors and regulators still are! • Points from Hamish Rowan-Hamilton. Costs of processing are many fold higher than an equivalent book of equities. To compensate for the lack of progress at the core of the funds industry. 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. Messages are ISO compliant but other formats are also available.

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