Savings and Investment Union: what the file means for cross-border distribution

Anyone who has actually registered a UCITS for distribution in several member states knows that the barriers are rarely legal. Passporting works. What does not work smoothly is everything around it: local marketing requirements interpreted differently by different supervisors, documentation translated to different standards, local paying-agent arrangements that persist for historical reasons, and reporting obligations that require the same data to be assembled in a slightly different shape each time.

The Savings and Investment Union file is, in substance, an attempt to attack that operational layer. Whether it succeeds will not be visible in the legal text but in the marginal cost of the next market a promoter adds. That is the number worth tracking.

The economics of the twenty-seventh market

Fund distribution economics are dominated by fixed costs. Registering in a large market with a receptive investor base pays for itself quickly. Registering in a small market usually does not, which is why so many cross-border funds are in practice distributed in five or six countries rather than in all of them. Every incremental registration carries a one-off cost and a recurring compliance tail, and both are largely independent of the assets raised.

Supervisory convergence attacks exactly this problem. If local interpretation converges, the incremental registration becomes a predominantly administrative act, and the calculation changes for the smaller markets. The prize is not a marginally cheaper large market; it is making the long tail of small markets viable at all.

The barrier to cross-border distribution has never really been the passport. It is the cost of the twenty-seventh registration, and that cost is almost entirely operational.

China Everbright Bank Europe — Public Policy

Where the depositary sits in this

A wider distribution footprint raises the operational bar on the service providers behind the fund. A depositary supporting a vehicle sold in three countries and one sold in fifteen are not doing the same job: the second requires oversight of a larger and more heterogeneous set of sub-distribution arrangements, more granular investor-level reporting, and the ability to absorb new local reporting formats without a project each time.

In our Luxembourg depositary and custody business we have consequently been steering new mandates towards a design that assumes expansion. It is materially cheaper to build a vehicle for fifteen markets and launch in three than to build for three and retrofit. Retrofitting a transfer-agency arrangement mid-life is one of the more expensive exercises in fund operations, and it is almost always avoidable.

Post-trade: the strand that will take longest

The file’s post-trade ambitions — greater consolidation of settlement, clearing and reporting infrastructure — are the most economically significant and the least likely to be resolved quickly. Settlement infrastructure is embedded in national market practice and in commercial arrangements with long lives. Progress here should be measured in years and read as a direction rather than a plan.

That is not an argument for ignoring it. Promoters designing a vehicle intended to be sold for a decade should assume the post-trade landscape will change during its life, and should avoid operating models that depend on today’s arrangements persisting unchanged.

• Design new vehicles for a broader distribution footprint than the day-one launch plan requires.
• Ask service providers to price the marginal registration explicitly, not just the initial set-up.
• Keep the transfer-agency and depositary architecture flexible enough to add markets without a change programme.
• Track supervisory practice, not only legislation: convergence will show up in practice first.