How the Danish CSD aims to help fund managers distribute their funds in Europe
VP SECURITIES is unusual among central securities depositories (CSDs). It wants to be judged by its use of technology, its capacity to innovate, and its willingness to "meet customers where they are," as Jan Vandendriessche, head of fund platforms at VP LUX, the Luxembourg subsidiary of the Danish domestic CSD, puts it.
As the statement and job title of Vandendriessche indicate, VP is a domestic CSD which has dared to venture outside its domestic market. VP LUX has enabled Danish issuers to issue Danish mortgage-backed securities (MBS) into a Luxembourg CSD since 2008.
Since June 2013, VP SECURITIES has also enabled Danish fund managers to issue shares in a mutual fund issuance service called vpFUNDHUB, and export these beyond Denmark.
So far, the traffic has proceeded in one direction only. Danish managers have issued €1.5 billion of mutual fund shares into vpFUNDHUB. But Jan Vandendriessche says VP LUX would like to be issuing Luxembourg funds as well.
"Issuing Danish bonds into a Luxembourg CSD was only the first step in the internationalisation of VP SECURITIES," he says. "We are connecting Luxembourg to the Nordic mutual fund markets, as well as the Nordic mutual fund markets to Europe, by virtue of using vpFUNDHUB."
In mid-September 2014, VP LUX added a fully automated mutual fund order routing and settlement service to vp.FUNDHUB. The service can be used by mutual fund transfer agents to settle mutual fund subscriptions and redemptions.Vandendriessche stresses that not all the features of vp.FUNDHUB have to be adopted by users. VP LUX is open to settling orders sent to it by any network. "We are interested predominantly in the fund issuance," he says. "If a bank is happy using another order routing system, we are not going to insist they use ours."
That opens the service to fund distributors using other networks, such as Calastone or FundSquare, and of course SWIFT. That is commendable, but ultimately the success of the vp.FUNDHUB service depends not just on the distributors but the willingness of fund managers and transfer agents to cede settlement of mutual fund transactions to CSDs.
On this front, vp.FUNDHUB can help. “vp.FUNDHUB helps transfer agents to make use of the Luxemburg Dematerialisation Law of 2014,” explains Vandendriessche. “Transfer agents can set up and operate their own issuing account in the VP LUX CSD.”
Vandendriessche adds that the success of vp.FUNDHUB will not come only at the expense of the transfer agents. "We stand shoulder to shoulder with the transfer agents," he says. "They are coming under cost pressure, and regulatory pressure. We are there, if they choose to engage with us, to capture elements of their business that they may wish to outsource, so they can get on with their higher margin, higher value business."
Although it can be hard to discern which value-added services transfer agents are best equipped to develop, Vandendriessche is not guilty of mere banter. First, users of vp.FUNDHUB do not have to settle in VP LUX. They can settle in any investor CSD connected to VP LUX or VP SECURITIES.
The platform is already linked to the two dominant investor CSDs in Europe - Clearstream and Euroclear - and London Stock Exchange-owned Monte Titoli, as well as VP SECURITIES back in Denmark, and transfer agents are already settling in all of these CSDs.
"We have a lot of fund managers as clients back in Denmark, serving the Danish market only, and we have created vp.FUNDHUB partly to help them export their services to the rest of Europe," says Vandendriessche. "VP LUX provides an ideal place to issue funds so that they can be bought and sold by investors throughout the euro-zone."
Secondly, unlike TARGET2-Securities - which aims to settle European mutual fund trades in central bank money – vp.FUNDHUB will settle fund subscriptions and redemptions in commercial bank money. "VP was originally a CSD, so it settled securities transactions in central bank money," explains Vandendriessche. "But our ambition is to grow our funds settlement business, which entails settling in other currencies, and we cannot access central bank money in other currencies. We retro-fitted VP LUX with commercial bank money precisely for that reason."
Settlement in commercial bank money means transfer agents retain control of the bank accounts by which fund distributors settle their orders. vp.FUNDHUB will merely check with the bank that holds the account of the transfer agent that the money is there before it issues shares in the fund into the account of the distributor at the CSD.
That said, vp.FUNDHUB is ready to take over the entire settlement process if that is what a transfer agent wants. "As I say, we stand shoulder to shoulder with the transfer agents," says Vandendriessche. "Given their cost and regulatory pressures, transfer agents may want to shed certain functions, and use us also as settlement agent. But it is the transfer agent who decides. We are not going to force them to use us. We are, in the true sense of the word, a partner to the transfer agents."
That partnership will include helping transfer agents cut the cost of connecting to T2S as it goes live in various European countries between 2015 and 2017, as well as Clearstream, Euroclear, Monte Titoli and VP SECURITIES.
Its technology is obviously robust, and the personality of the organization set fair. The platform has supported the issuance of Danish mutual funds, and settlement of transactions in them, for more than 12 months now. In principle, the model is the same as the Danish MBS issuance and settlement service, which VP LUX has offered since 2008. And the parent company, VP SECURITIES, has pursued commercial opportunities since 2000, when it first became profit-seeking.
That said, the opening of VP LUX in Luxembourg in 2008 was its first venture outside its domestic market. The purpose was limited to helping an existing client group, Danish issuers of domestic MBS, and for a limited purpose. Danish MBS issuers could not raise funds in euros. Although they could issue euro-denominated bonds in Denmark, euro-denominated Danish MBS held at VP SECURITIES were not eligible for financing at the European Central Bank (ECB) because Denmark is not a member of the euro zone.
However, with VP LUX acting as a global depository for the securities in Luxembourg, Danish MBS could be financed at the ECB. The effects on the liquidity of euro-denominated Danish MBS were commensurately pleasing. By the end of last year, a net € billion of the bonds were issued in VP LUX.
“The MBS business of VP LUX meant we were a pure issuer CSD," says Vandendriessche. "But we always wanted to be an issuer CSD for funds as well." Which is another reason why VP SECURITIES chose to base its non-domestic CSD in Luxembourg as opposed to, say, Frankfurt. The Grand Duchy is the largest mutual fund administration centre in Europe.
"In the 1980s, Denmark mutualised a lot of back office functions," explains Vandendriessche. "They created VP SECURITIES to do that, and we want to apply the same logic to the funds industry in Europe as a whole. Luxembourg, as a fund administration centre, prides itself on accommodating the needs of other markets, as an incentive to managers to domicile their funds in Luxembourg.”
Nor is it hard to see why VP SECURITIES thought it had something different to offer the Luxembourg funds industry. The Danish CSD reckons it has a competitive edge, honed in the unusually efficient €135 billion Danish funds market, where all mutual funds are traded (as opposed to just listed) on the Copenhagen exchange. They are genuinely liquid too, because all funds are supported by specialist market-makers.
Being listed and traded obviates the need for shares in a fund to be created and extinguished by a fund manager or their transfer agent, relieving them of the onerous and performance-sapping responsibility of maintaining sufficient liquidity to redeem shares at all times. Instead, tradable shares are issued into VP SECURITIES as the Danish CSD.
This model makes Denmark highly distinctive even among Nordic markets. In Norway and Sweden, by contrast, shares in mutual funds are issued and redeemed by transfer agents in the same fashion as the Anglo Saxon markets. However, as Vandendriessche points out, any adoption of the Danish listed and traded model by other markets will necessitate settlement in a CSD.
"The Danish system is best facilitated by having a CSD to settle the trades," he explains. "End-investors have the assurance that trades in the funds, which are priced up to three times a day by market-makers on the basis of indicative net asset value (NAV) calculations, will settle by delivery against payment of the exact number of shares they agreed to buy, as opposed to how many units their investment was able to purchase."
The use of a CSD to settle trades, which is already in place in France and Germany, may become a mutual fund industry standard in Europe for other reasons. Certainly, Vandendriessche thinks that European regulations now being implemented, such as TARGET2-Securities (T2S) and CSD-R, are among them.
"These regulations are coming together in a sort of Goldilocks scenario for the CSDs," he says. "At VP SECURITIES, we obviously have a lot of knowledge and experience we can bring to bear on this newly emerging world. Every market thinks it has the best system, but we really want to share our knowledge. We think we have an excellent opportunity ahead of T2S to become a fund CSD in Luxembourg. It is not yet a mature market in terms of CSD services for funds."
To illustrate that point, he notes that Luxembourg Dematerialisation legislation insists any fund listed on an exchange - whether or not it is traded, as opposed to listed purely for marketing purposes - must be issued into a CSD.
"As CSDs go global, it is important that national CSDs can host funds and securities from other jurisdictions," adds Vandendriessche."There is pressure on VP SECURITIES from Danish domestic fund managers to become an issuer and investor CSD in the markets where they wish to distribute funds. The ability of a CSD to survive depends on its ability to compete for issuances."
Clearly, Clearstream and Euroclear have a head-start in the competition to support cross-border distribution of mutual funds throughout Europe, because they are already settling mutual fund transactions in their own systems, but Vandendriessche thinks there is enough business to accommodate multiple service providers.
"The infrastructure which supports fund issuance, exchange and servicing has to become cheaper," concludes Vandendriessche. "Once you have manufactured a fund, getting it distributed as widely as possible is what matters, and CSDs have a key role in that process."