U.K. vendor Calastone intends to deploy its “distributed market infrastructure” platform, or DMI, in May 2019, creating a new way for fund managers to access customer data via distributors and the service providers in the middle.
It is currently working in beta with global institutions to help digitize the funds industry, and intends to migrate its entire operation to DMI.
The firm is betting that by using technology inspired by blockchain, it can help the industry remove costs, creating space for fund managers or their service providers to create new products – ones that will let the traditional, active-funds industry compete against the relentless onslaught of low- or zero-fee passive products, such as exchange-traded funds.
The company says DMI is a blockchain solution, although it looks more like a Software-as-a-Service model: firms aren’t giving up their own recordkeeping to become a node. Rather, Calastone is hosting a centralized ledger that borrows DLT concepts to reconcile data from different participants.
It builds on top of Calastone’s traditional business, which is to serve as a bridge between fund managers, distributors, and registrars (also known as transfer agents) that track subscriptions and redemptions. These thousands of companies have their own systems and their own compliance requirements, and Calastone is a vendor that routes orders among them.
Now the company is looking to offer technology that isn’t just mutely routing fund buy-and-sell orders – but pulling data from the various providers to make that process real time, and thereby give industry players a chance to develop competitive products.
Leo Chen, managing director and head of Asia, says the potential use cases in Asia are different to those in Europe. For example, Taiwan is unusual in that B-share fund classes (back-end loads) are popular, but require manual work by TAs and fund managers. DMI could put such work on a global platform and let it be automated.
How? The reason so much data is hard to reconcile is that distribution in Asia is dominated by banks, who have the end-user relationship. They present fund managers with omnibus accounts: a fund house may record a “buy” for its mutual fund from a local bank, but beneath that, the bank is acting on behalf of hundreds of customers.
The distributor, the fund house, and the TA between them see different account information, and it takes a lot of manual work to make it all add up. Calastone’s DMI is meant to translate this, so fund managers can see the underlying accounts, without necessarily seeing other customer information. Distributors can retain their ownership of the end user, and local-market idiosyncrasies can be overcome.
(This implies benefits for global TA businesses, usually run by trustee companies or banks, but loss of business for domestic sub-agents.)
There is also the possibility of getting end users to grant permission for their data to be shared, similarly to open APIs in banking, which could give fund managers the ability to tailor new kinds of products.
“The data is packaged in nice little blocks,” Chen said. “When it’s in its most basic form, you can segregate it.” By doing so, product design teams at fund houses could do new things. Perhaps they can create funds that charge only performance fees, not management fees, or they can enter fiddly markets like Taiwan at lower cost.
For this to happen, though, the industry needs to agree on use cases – and on how much customer data distributors would be willing to share in return for what kind of carve-up of fees fund managers can allow.
Dean Chisholm, COO at Invesco in Hong Kong, said: “It will be necessary to have likeminded distributors, fund managers and TAs who can share the data. These groups will need to work through the challenges to find the value of the data. If adopted by all, there is scope for decreased costs; however, there is a lot of legacy [systems] within some complex ecosystems.”
Chen says by making fund transactions simpler, faster, and more transparent, it gives the industry a chance to develop products that are price-competitive against ETFs. “It doesn’t mean they will, but this gives fund managers a chance,” he said.
Citing a few other potential use cases – quick reconciliation of commissions, simple tax and other regulator reports – Chen said, “This is just what we can think of now, but I’m not a product designer. There’s more out there. We’re going to roll this out, and the industry will come up with use cases.”