The ETF market has for decades been at the forefront of innovation, empowering investors to access and diversify portfolios with asset classes ranging from low cost equity index trackers to commodities, emerging market currencies, bonds and equities; corporate credit, equity market volatility, and much more besides, such as cryptocurrencies and carbon emissions recently. It has also been innovative in terms of strategies, which could include playing factors such as growth, value or quality. Beyond traditional long only there are ETFs including short selling or market neutral approaches.
Diversity of thinking in product and strategy design is the lifeblood of the industry, but some more harmonization on the operational side would be welcome – and need not in any way hamper the creativity on the investment side. Some areas are seeing healthy and useful harmonization initiatives in terms of settlements and exchanges. Many ETF providers have already adopted the streamlined and centralised international central securities depositary (ICSD) in Europe, so that ETFs listed on multiple venues can be settled in one location without the need to manually move shares between CSDs. After years of discussion, ambitions to build a consolidated tape in Europe could be coming closer, with 14 exchanges supporting a proposal.
Though global ETF assets are approaching USD 10 trillion, automation of the primary market has been surprisingly slow. The operational frameworks and routines behind the scenes are lagging a long way behind the growth and innovation that dominates the headlines. The culprits are multiple and inter-related weaknesses. Transaction processing infrastructure is not Straight Through Processing (STP) and is therefore prone to human error. This is extraordinary when STP for equities started in the early 1990s. ETF creation and redemption processes are fragmented, can involve 30 or more portals and ad hoc messaging, emails, phone calls and even that 1960s invention - fax messages. The automation of creation and redemption can be challenging due to different interfaces.
This is just one example of how many players are not plugged into platforms that can coordinate and streamline processes. Newly launched ETFs therefore do not always have the best operational support, which might lead to glitches and hiccups.
Fragmentation
Part of the problem lies in fragmentation on many levels: between APs/market makers, ETF sponsors, and security services providers; between competitors in the same business line and between geographies. There is also the babble of many tongues: not everyone speaks the same language because some firms in space are more technically sophisticated than others.
On the face of it there might seem to be little incentive for each individual player to push forward coordination, harmonization and standardization for the greater good of the industry. Some platforms are investing in optimizing their own processes, but are overlooking the “network externality” benefits of an industry-wide improvement. No central utility or industry body exists to foster positive change in this regard. Changing routines runs up against the inertia factor but the time has come for the industry to get up to speed with modern
best practices operationally. Ultimately everyone, including end investors, benefits if smoother operations can increase volumes and liquidity and further tighten bid/offer spreads, and this begets a virtuous circle that helps the whole industry.
Harmonisation
The good news is that old ETF operating landscape of fragmented and disparate portals, systems and processes, is giving way to centralized, standardised aggregation solutions that expedite and coordinate the operational machinery and routines of the ETF
ecosystem.
For instance, asset servicer IQ-EQ, which works with a wide variety of asset managers and asset owners, including ETF providers, has selected ULTUMUS’ Creation/Redemption
solution to replace its existing providers and handle the lifecycle of ETF related operations, from approving new creation and redemption orders through to settlements.
ULTUMUS UI/API is already used at most Tier 1 trading desks, APs and Market Makers, for creation and redemption and reference data. ULTUMUS is the largest PCF calculation and distribution agent globally covering all asset classes, and has a broad range of
relationships with ETF issuers.
The ULTUMUS solution boasts automated processes, user interfaces (UIs) and handy dashboards, and application programming interfaces (APIs), all housed in the cloud, which enhance efficiency, while smart programs also flag up potential validation errors. All of this provides an audit trail and fully auditable transaction log of steps and stages, which is helpful for UCITS, ICAV and other compliance as well. This all builds on ULTUMUS’ extensive dynamic library of near real time global data on ETFs, their underlying portfolios and portfolio composition files, provided for leading ETF managers globally. It is natural and logical to plug these into order flow and work flow management to complete the operational jigsaw. ULTUMUS centralized Creation/Redemption portal engenders a virtuous circle for the entire ETF ecosystem, accommodating all players in a single portal. Centralising order flow streamlines order placement, which generates cost, time and accuracy efficiencies for
APs, sponsors and transfer agents.
Automation and swift onboarding
The ULTUMUS solution is robust and automated, using FIX or Web based-interfaces. Most clients use the FIX interface as a more integrated solution, though the web interface can be used to check orders and status or download data and reports on a more ad hoc basis.
The existing UI extends seamlessly into the C/R platform, which has a zero deployment footprint – no new software is needed. Everything is housed in the cloud so there is also no need for new hardware, servers or installations.
ULTUMUS uses a flexible, low-code framework to replicate and enhance existing workflows. Ready-made modules can be used as building blocks to roll out swathes of functionality without having to actually code anything from scratch, which saves a lot of time.
Flexibility
It is very flexible for order management. Orders can be automatically accepted within different time-zones. T+1 orders can be submitted after cutoff times. Different trading and settlement holidays can be programmed into the system. Directed trades can be inputted. Switchable funds can be handled: by redeeming from one ETF and creating into another ETF in one
smooth process. It also plugs into the asset servicing side: the output file and email meet transfer agents’ requirements. Tax and distribution rules in different countries can also be
accommodated.
This important addition to the ULTUMUS client roster comes hot on the heels of other recent client wins in Europe including BNP, CoinShares, JTC Group, CACEIS Investor Services, Circa 5000 and Virtune, as well as NBC in Canada.
ULTUMUS has a presence and support in Europe, Asia and the US. ULTUMUS is a pure play ETF specialist owned by SIX Group, the Swiss Exchange.
