The £153bn settlements opportunity for funds

According to calculations based on analysis of UK trading data, £153bn (€196bn) of settlement payments are taking place needlessly within the UK funds industry.

This figure represents a potential liquidity wastage as high as 53%. Whilst managing intraday liquidity remains priority on the list of concerns confronting CFOs at the outset of 2016, £153bn worth of unnecessary settlement payments plainly illustrates continued inefficiencies within the market. How can CFOs and heads of Treasury seemingly close this gap, thereby reducing liquidity exposure?

Liquidity exposure and needless payments

Intraday liquidity has become extremely important for firms in the current capital climate due to the fact that the cost of credit has become much more expensive in recent years. CFOs are keen to minimise costs related to deficiencies in funding and, likewise, exploit positions of available liquidity for competitive growth.

Historically, settlement of mutual fund trades relied on gross payments across multilateral relationships and multiple positions in order to reconcile, resulting in a direct impact on liquidity flow and risk exposure. In today’s conditions it is preferable for firms to understand their financial exposure early on in the day and reduce all-day reconciliation and cash-monitoring processes. With intraday risk and client money protection remaining a top concern within the funds industry, it is startling to uncover large inefficiencies in the area of settlement payments. With £153bn[1] of unnecessary settlements taking place in 2014 over the UK retail markets, worth £290bn, it begs the question as to whether the different segments of the funds industry are fully appreciative of the role technology could play to alleviate this problem.

Solving settlements

With the onset and subsequent growth of digitalisation, the financial services industry is now in an unprecedented position to reap the benefits from models, processes and technologies designed for the specific requirements of the financial sector.

One area in which the progress of technology can be seen is the innovative development of a net settlement system designed specifically for the funds industry. An automated solution has been designed to enable the net settlement of matched trades. By aggregating net settlement positions, this system can automatically create a single participant-to-participant position for each settlement day. By using this technology, firms can better organise their cash flow due to Trade Date plus 1 matching and delivery of a full suite of reconciliation information. On settlement day all money movements are executed automatically between the parties first thing in the morning, resulting in a reduction of liquidity exposure, as well as the ability to meet treasury obligations earlier in the day. Not only will cash flow exposure be diminished, reducing liquidity and counterparty risks by reducing volumes and overall values, it also represents a practical means for firms to further reduce operational costs.

Waste not…

Even though firms are currently facing the cost of increased regulation and continuing pressure on margins, inefficiencies, such as 53% of UK settlement wastage, still persist within the financial services industry. Conversely, financial technology companies are simultaneously coming up with solutions to help the industry solve these shortcomings. By using a settlements service designed specifically for the funds industry, firms could eliminate much of this wastage thereby reducing intraday liquidity exposure and operational costs. 2016 may prove yet to swing the balance in favour of savings within the funds industry.

[1] By analysing its UK trading data between fund managers and distributors, Calastone calculated that a total of £69.5bn in settlement payments was made in 2014. Calastone similarly calculated the aggregate settlement position between subscriptions and redemptions, and has identified the total net settlement value between trading counterparties to be £32.5bn. This equates to an applicable industry average of 53% potential liquidity wastage and against £290bn gross payment flow gives £153bn or unnecessary payments. (This figure is calculated by analysing UK domestic trading data (UK Retail & Fund Market – source IMA) between fund managers and distributors.)


Jonathan Willis is chief commercial officer at Calastone


Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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