Calastone’s Godins reveals plans to tackle ‘disconnected’ ETF ecosystem

The fund service provider partnered with HSBC in August

Theo Andrew

Brian Godins

Calastone chief commercial officer Brian Godins has revealed its plans to tackle the “disconnected ETF ecosystem” after it entered the market in August.

Speaking to ETF Stream, Godins (pictured) said the newly launched ETF offering will help reduce trading inefficiency and play a “fundamental role” in reducing asset managers’ total cost of ownership (TCO).

It comes after the service provider partnered with HSBC on an ETF order management system to deliver real-time processing and monitoring capabilities throughout the creation-redemption process by utilising its Distributed Market Infrastructure.

“We have a disconnected ETF ecosystem, whether it is the common depository, the authorised participants (APs), the custodians or the ETF administrator, our goal at Calastone is to reduce those manual processes and create a single united workflow.”

Godins, who joined Calastone from HSBC in March, said ETF servicers are starting to recognise the “restrictions and inefficiencies” of their legacy platforms which have been “retrofitted” with solutions to support ETFs.

“They have challenges including scale, risk and TCO and they are looking to streamline and modernise their existing solutions,” he said.

“The risk is they are left behind from an operational client service support and what they can charge versus their competitors.”

Until its entry, Calastone had only previously been offering solutions in the mutual fund space. The business currently has over 3,800 clients across 54 regions.

“One of our missions is to take some friction out of the operational processes and reduce risks. ETFs were a good opportunity for us to do this,” Godins said.

He noted the inefficiencies of the primary market, namely ETF issuance and the quality of the portfolio composition file (PCF), have a direct impact on widening bid-ask spreads which then feed into the TCO.

“There is a direct correlation on how this impacts bid-ask spreads, which varies widely across geographies,” he continued. “These inefficiencies all feed into liquidity costs and ETF asset services will play a fundamental role in keeping these down.

“It is about creating real-time processes that give visibility across all the participants. It magnifies pricing risks and achieves tighter spreads.”

Calastone’s ETF offering will focus on four main modules – order capture, order management, registry and settlement – of which potential clients will be able to select one or more.

“Order capture creates and maintains a record of every order receipt, it identifies the relevant PCF and allows for a much more efficient monitoring and tracking of our trade bills and flows,” Godins said.

He added this will feed into the order management module which allows for “automated and dynamic ETF pricing” and “actual cost price calculation methods” which aim to give a “much more accurate” settlement amount.

“It allows APs and ETF issuers to have a much more accurate view of their liquidity needs,” Godins said.

He added ETFs were likely to continue experiencing downward pressure on fees as issuers look to differentiate themselves from their competitors.

“Taking out costs will only result in a positive for the end investor. You would hope creating more efficiency through scale and processing would result in lower fees but I do not have a magic wand,” he said.

“That can be the bid-ask spread or the premium to discount levels of an ETF – anything that reduces TCO can have a more positive outcome on liquidity costs.”

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