Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

FUND DISTRIBUTION MODELS & PLAYERS

The majority of orders in Luxembourg are placed by appointed distributors or aggregators. The process is nearly the same for pure institutional investors or private investors dealing directly, but volumes are generally lower.

The transfer agent keeps the official register of the fund and is the only entity appointed by the fund to receive and process the orders and issue confirmations. This model is well adapted to the specific needs of fund management companies regarding distributor activity monitor- ing and trailer fee management as it allows distributors’ and investors’ positions to be easily identified. It is to be noted that, to the contrary of the French CSD model, the distributor is not required to open neither a security nor a cash account with the fund’s tranfer agent. Having received confirmation of the order from the TA, the client or client-side institution instructs the bank or custodian to credit the fund account (for retail investors, the cash payment is a prerequisite to the order processing). This account is generally maintained directly with the fund custodian, al- though in certain cases the TA may hold dedicated accounts at an intermediary bank. In either case, the TA reconciles the cash flows with the transactions they have executed. As opposed to the CSDmodel, cash settlement is made through the normal banking system, separately from the settlement of shares. There is no DVP process. On the contrary, France with its large domestic market for fund distribution, decided to take the other approach and develop a domestic model. However, in an environment where cross- border fund distribution has become increasingly important, the current French CSD model is reaching its limits and must adapt in order to be able to offer the following three factors: • The inherent security of its model - DVP settlement, • The efficiency of a single automated routing platform, and • The tools and organisational structure necessary for handling fund distribution efficiently, such as the ability to mark orders and match them with distributors to simplify commission calculation. The routing platform and the follow-up of stocks and flows are just the first of many steps that need to be taken in the development of the cross-border distribution of funds domiciled in France. Although TA models, such as the one in place in Luxembourg, offer more flexibility and greater efficiency in fund distribution management, they also need to adapt in the following ways: • Standardise and automate process flows, • Provide greater levels of security in settlement procedures. Comparative analysis of both models Historically, Luxembourg had no choice but to develop a cross-border model for fund distribu- tion as its domestic market was too small.

2.1

2.1.3

In an environment where cross-border fund distribution has become increasingly important, the current French CSD model is reaching its limits.

The current wave of standardisation initiatives at a European level is a positive indication that both the TA and CSD models are moving in the same direction.

Cross-border distribution of UCITS | page 35