Gareth Myburgh, Director of ETF Product Development at Citi Securities Services, discusses some of the unique aspects of the European ETF market that new entrants should be aware of and provides insights on potential for ETF conversions happening in Europe. What are some of the unique nuances to the European ETF ecosystem that US managers should be aware of before entering the market? The biggest difference between the European and US ETF ecosystems is market structure. Compared to the US, which is relatively straightforward, the European market is extremely fragmented which presents operational and liquidity challenges. In the US there are only a handful of inter-linked trading venues and a centralized clearinghouse. By contrast, Europe has over 20 unrelated exchanges and clearinghouses. This fragmentation is partly due to European investors’ historical preference to trade and settle ETFs in their local market, despite the ability to trade ETFs cross border, but also by regulation. Furthermore, unlike the US where the majority of ETF trading is done via exchange, approximately 70% of the volume of the European ETF market is traded Over-the-counter [OTC], making it difficult for investors to monitor market liquidity through a single lens. How does the European market structure create operations challenges and how do they address them? The multiple exchanges create operational challenges because they are not inter-linked for settlement purposes. Instead they are connected to the local Central Securities Depository, which can create an impression of liquidity issues. This is why most ETF managers now use the International Central Securities Depository settlement model that allows the ability to settle an ETF centrally, regardless of the local exchange that it was traded on. In order to take advantage of this improved settlement model, a Common Depository is appointed which is another aspect that will be new for US Managers. To compensate for the liquidity challenges caused by the OTC nature of the market, firms often use paid for contractual market makers, which is another unique aspect of European market. This means that managers will directly pay market makers to ensure that there is adequate depth of book and tight spreads for their products throughout the trading day, since large institutional orders are often not on exchange. This is in parallel to any exchange spread requirements and presence rules and is a competitive edge Issuers have over one another in terms of market coverage. These challenges make it important to develop a comprehensive listing strategy when entering the market. This strategy helps managers to determine the exchanges for trading their ETFs and is typically driven by their target market. It can also help to mitigate any liquidity issues that can arise from ETFs being listed unnecessarily in too many markets. When developing a listing strategy, managers also need to understand the relevant local country rules around marketing and distribution in each target market and this often requires having a physical local presence. Given the complexity and challenges that the European market structure presents, it’s important for non-European managers to partner with providers who can help navigate them through the nuances of the European ETF market. What are the key components in successfully launching an ETF in Europe? Beyond understanding the nuances of the marketplace, when drawing up their European plan managers should focus on the four “Ps” ― Product, Place, Promotion, and Price. First, you start with what product you are looking to launch and determine your target market. This will drive the place or domicile of your ETF. To grow business, you’ll need to focus on promotion and engage a dedicated sales team, as well as a capital markets function and a fully engaged marketing presence. Finally, you need to ensure that you price your ETF strategically, keeping in mind the competitive landscape. Looking at potential developments, in the US there’s an emerging trend of converting mutual funds to ETFs. Is this something that we can expect to happen in Europe? There is precedent in Europe for an ETF conversion but it differs from what has happened in the US. In the US, managers have opted for a direct conversion approach, where existing mutual funds convert directly to ETFs. In Europe, we have only seen an indirect conversion approach, where a new ETF shell is established and then merged with an existing mutual fund into the new ETF structure. Practically speaking, the indirect approach is more akin to a fund merger than a conversion, which means that a newly created ETF cannot carry forward the legacy fund’s performance history. Still, while not the same as the US direct conversion model, the indirect conversion can help mangers launch ETFs with scale. Do you think that we’ll see the direct ETF conversion come to Europe? There’s definitely increased interest in the idea. However, there are some key regulatory and practical challenges that would need to be overcome. On the regulatory side, a key hurdle would be getting approval from the relevant local regulators. It’s unclear whether the regulators would approve a direct conversion, and it’s important to remember that it took the US regulators several years to get comfortable with the idea. More practically, European funds tend to be widely distributed across multiple countries, and it’s not uncommon for the funds to have dozens of share classes, often in multiple currencies. The process of rationalizing this for an ETF model would be a considerable operational challenge. So, for the foreseeable future the indirect conversion approach will remain the only option.

<h3>&nbsp;</h3>
<h3><img style="float: left;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/61a8ad5997209b4bf98523fd.png" width="250" height="375" /></h3>
<h3>&nbsp;</h3>
<h3>Gareth Myburgh, Director of ETF Product Development at Citi Securities Services, discusses some of the unique aspects of the European ETF market that new entrants should be aware of and provides insights on potential for ETF conversions happening in Europe.</h3>
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&nbsp;
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<h3>What are some of the unique nuances to the European ETF ecosystem that US managers should be aware of before entering the market?</h3>
The biggest difference between the European and US ETF ecosystems is market structure. Compared to the US, which is relatively straightforward, the European market is extremely fragmented which presents operational and liquidity challenges.
In the US there are only a handful of inter-linked trading venues and a centralized clearinghouse. By contrast, Europe has over 20 unrelated exchanges and clearinghouses. This fragmentation is partly due to European investors&rsquo; historical preference to trade and settle ETFs in their local market, despite the ability to trade ETFs cross border, but also by regulation.
Furthermore, unlike the US where the majority of ETF trading is done via exchange, approximately 70% of the volume of the European ETF market is traded Over-the-counter [OTC], making it difficult for investors to monitor market liquidity through a single lens.
<h3>How does the European market structure create operations challenges and how do they address them?</h3>
The multiple exchanges create operational challenges because they are not inter-linked for settlement purposes. Instead they are connected to the local Central Securities Depository, which can create an impression of liquidity issues. This is why most ETF managers now use the International Central Securities Depository settlement model that allows the ability to settle an ETF centrally, regardless of the local exchange that it was traded on. In order to take advantage of this improved settlement model, a Common Depository is appointed which is another aspect that will be new for US Managers.
To compensate for the liquidity challenges caused by the OTC nature of the market, firms often use paid for contractual market makers, which is another unique aspect of European market. This means that managers will directly pay market makers to ensure that there is adequate depth of book and tight spreads for their products throughout the trading day, since large institutional orders are often not on exchange. This is in parallel to any exchange spread requirements and presence rules and is a competitive edge Issuers have over one another in terms of market coverage. &nbsp;&nbsp;
These challenges make it important to develop a comprehensive listing strategy when entering the market.&nbsp; This strategy helps managers to determine the exchanges for trading their ETFs and is typically driven by their target market. It can also help to mitigate any liquidity issues that can arise from ETFs being listed unnecessarily in too many markets.&nbsp; When developing a listing strategy, managers also need to understand the relevant local country rules around marketing and distribution in each target market and this often requires having a physical local presence.
Given the complexity and challenges that the European market structure presents, it&rsquo;s important for non-European managers to partner with providers who can help navigate them through the nuances of the European ETF market.
<h3>What are the key components in successfully launching an ETF in Europe?</h3>
Beyond understanding the nuances of the marketplace, when drawing up their European plan managers should focus on the four &ldquo;Ps&rdquo; ― Product, Place, Promotion, and Price.
First, you start with what product you are looking to launch and determine your target market. This will drive the place or domicile of your ETF. To grow business, you&rsquo;ll need to focus on promotion and engage a dedicated sales team, as well as a capital markets function and a fully engaged marketing presence. Finally, you need to ensure that you price your ETF strategically, keeping in mind the competitive landscape.
<h3>Looking at potential developments, in the US there&rsquo;s an emerging trend of converting mutual funds to ETFs. Is this something that we can expect to happen in Europe?</h3>
There is precedent in Europe for an ETF conversion but it differs from what has happened in the US. In the US, managers have opted for a direct conversion approach, where existing mutual funds convert directly to ETFs. In Europe, we have only seen an indirect conversion approach, where a new ETF shell is established and then merged with an existing mutual fund into the new ETF structure. Practically speaking, the indirect approach is more akin to a fund merger than a conversion, which means that a newly created ETF cannot carry forward the legacy fund&rsquo;s performance history. Still, while not the same as the US direct conversion model, the indirect conversion can help mangers launch ETFs with scale.
<h3>Do you think that we&rsquo;ll see the direct ETF conversion come to Europe?</h3>
There&rsquo;s definitely increased interest in the idea. However, there are some key regulatory and practical challenges that would need to be overcome. On the regulatory side, a key hurdle would be getting approval from the relevant local regulators. It&rsquo;s unclear whether the regulators would approve a direct conversion, and it&rsquo;s important to remember that it took the US regulators several years to get comfortable with the idea.
More practically, European funds tend to be widely distributed across multiple countries, and it&rsquo;s not uncommon for the funds to have dozens of share classes, often in multiple currencies. The process of rationalizing this for an ETF model would be a considerable operational challenge.&nbsp;
So, for the foreseeable future the indirect conversion approach will remain the only option.

What are the key considerations for managers that looking to launch a European ETF? 

Navigating the European ETF Landscape

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In the last 20 years Europe has established itself as a robust, reliable, and well-regulated funds market. Ireland and Luxembourg have developed into the world’s top cross-border funds centers and UCITS funds have become a gold standard among investors all over the world. However, the asset management industry is going through a period of upheaval as changing investor preference and industry consolidation promise to reshape the landscape. In the face of this upheaval, what will the European fund landscape look like at the end of the decade and what will asset managers need to do to adjust and succeed? In this survey, conducted in partnership with Funds Europe, we looked at how changes in product development, distribution, and ongoing industry consolidation could alter the European landscape. These are the five key takeaways: The Future is Green: More than half (51%) of respondents believe that having an ESG platform will be critical to asset managers’ success. Luxembourg and Ireland Lead the Way: 95% of respondents expect the two leading cross-border domiciles to maintain their dominance over the next decade. UCITS Faces Challenges: Increased regulatory and anti-money laundering (AML) burden was cited as the biggest challenge facing UCITS funds over the next decade by 40%, followed by limitations on strategies (30%). FinTech Disruption is Coming: Fund platforms are seen as most susceptible to disruption by FinTechs by 45% followed by advisors (32%). Consolidation Will Continue: 100% of the survey respondents expect asset management consolidation to stay at the same pace or increase over the next decade. Despite the inherent uncertainty in trying to predict the future, the one thing we know for certain is that the European fund landscape will continue to evolve. This evolution will present both opportunities and challenges for managers. Understanding what the trends are can help firms think about their strategy and better prepare them for any unexpected bumps in the road.

In the last 20 years Europe has established itself as a robust, reliable, and well-regulated funds market. Ireland and Luxembourg have developed into the world&rsquo;s top cross-border funds centers and UCITS funds have become a gold standard among investors all over the world.
However, the asset management industry is going through a period of upheaval as changing investor preference and industry consolidation promise to reshape the landscape. In the face of this upheaval, what will the European fund landscape look like at the end of the decade and what will asset managers need to do to adjust and succeed? &nbsp; &nbsp;
In this survey, conducted in partnership with Funds Europe, we looked at how changes in product development, distribution, and ongoing industry consolidation could alter the European landscape.
These are the five key takeaways:
<ol>
<li>The Future is Green: More than half (51%) of respondents believe that having an ESG platform will be critical to asset managers&rsquo; success.&nbsp;</li>
<li>Luxembourg and Ireland Lead the Way: 95% of respondents expect the two leading cross-border domiciles to maintain their dominance over the next decade.&nbsp;</li>
<li>UCITS Faces Challenges: Increased regulatory and anti-money laundering (AML) burden was cited as the biggest challenge facing UCITS funds over the next decade by 40%, followed by limitations on strategies (30%).</li>
<li>FinTech Disruption is Coming: Fund platforms are seen as most susceptible to disruption by FinTechs by 45% followed by advisors (32%).</li>
<li>Consolidation Will Continue: 100% of the survey respondents expect asset management consolidation to stay at the same pace or increase over the next decade.</li>
</ol>
Despite the inherent uncertainty in trying to predict the future, the one thing we know for certain is that the European fund landscape will continue to evolve. This evolution will present both opportunities and challenges for managers. Understanding what the trends are can help firms think about their strategy and better prepare them for any unexpected bumps in the road. &nbsp;&nbsp;

After a decade of unprecedented change, what will the next ten years bring the asset management industry? 

The Changing European Fund Landscape

The asset management industry is going through a period of upheaval that promises to reshape the to reshape the landscape. In our The Changing European Fund Landscape report we identified two contrasting, but related ways, that the European fund market landscape will be reshaped over the next decade – either through consolidation among the traditional players or disruption from new entrants. Distribution Disruption Distribution is at the core of any asset manager’s strategy and is a key challenge for European funds. Despite efforts to improve the cross-border distribution in Europe, it remains a fragmented and complex process – which is ripe for disruption. According to our survey, fund platforms and advisors are the two parts of the funds distribution ecosystem that are most susceptible to disruption this decade. There is perhaps an irony in fund platforms being seen as ripe for disruption given that the fund supermarkets that hit the market back at the turn of the millennium were then seen as the disruptors of the day. This survey finding also underlines how quickly innovation can move and how the disruptors of the past become the disrupted of the future. In recent years we have seen the onset of consolidation in the platforms sector both between rival platforms looking to build scale and from asset managers looking to broaden their own offering. A FundsTech panel debate in May 2019 looked at this very subject, asking if the same platforms that revolutionised fund distribution in the 90s now needed a technology reboot of their own. It could also be argued that advisors have already been subject to disruption from the growing robo-advisor market, however the survey results suggest that almost a third still believe there is room for further disruption from tech-enabled entrants. Perhaps we are only in the early stages of robo-advisory and the next wave of offerings will make greater use of artificial intelligence and machine learning, thereby ensuring a greater predictive ability and more advanced analytics rather than the bot-based offerings that simply automate the investment process. The Importance of TA Perhaps surprisingly, Transfer Agency (TA) was only cited as most susceptible to disruption by less than 20% of the respondents. However, when you see how important TA is seen as to firms’ distribution strategies it makes a more sense. Over 50% of the respondents viewed TA as a key cog in the fund distribution chain, sitting at the intersection of funds and investors. This suggests that the imminent demise of the TA through the rise of DLT predicted by so many may be some way off yet. This is not to say that transfer agency technology is not likely to change, just that we are likely to see the incumbents continue to dominate by upgrading their capabilities or partnering with FinTechs. In a December 2020 article, FundsTech spoke to a number of transfer agents about why they are unfairly held up as an example of the industry’s inefficiency, be that as one more intermediary on the processing chain or as a service provider reliant on legacy systems rather than digital technology. As Citi’s global head of transfer agency operations Owen Carroll told FundsTech, TAs have made great strides in reducing the number of systems they use. “I think we give ourselves a hard time in the TA market over the amount of consolidation we have done. Over the last ten years, I have seen a lot of progress in reducing the number of systems,” he said. This is not to say it will be without challenges, added Carroll. “We can get there, but in the interim, we’re trying to find how we can best add value to the investor experience.” The pandemic has helped TAs to move further away from the use of legacy systems and paper and embrace new, digital technology. “There is an opportunity to reimagine ourselves coming out of this latest crisis, said Carroll. “But if we can make systems more cost-effective as well as nimble, that might help to make the speed of change quicker over the next three to five years compared to what we have seen over the last ten years.” Continued Consolidation One of the most notable asset management trends of the last decade has been the increase in consolidation among the top tier of firms. In recent years we have seen Aberdeen and Standard Life join forces, as have Janus and Henderson as well as countless others. Consequently speculation mounts as to where the next mega merger will occur. Certainly our survey respondents expect the consolidation among European asset managers to continue to be a trend this decade, with 90% expecting the pace of asset management consolidation to increase over the coming decade and 10% stating that the rate of consolidation will stay the same. With no-one predicting a slowdown in consolidation, the only question is how big of an impact consolidation will have on the landscape. The survey also asked respondents to rank the major drivers of consolidation in order of importance. Unsurprisingly, the main driver for consolidation cited by was to gain scale, followed by cost reduction. Far less important were the ability to gain access to new investment capabilities or new markets and geographies. This suggests that a defensive mindset is propelling much of the consolidation, as opposed to a spirit of adventure of entrepreneurship. When interviewed by Funds Europe, JP Morgan Asset Management’s chief executive in EMEA Patrick Thomson highlighted the role that technology will play in deciding the winners and losers as the industry goes through the next round of consolidation. “Only the strong will survive – and the strong are people who’ve got scale and who can invest in the technology.” There are, he added, “probably too many asset managers... and clients want more from their asset managers at a cheaper price”. The focus on cost and scale also underscores the importance of prioritizing operations during a consolidation. “Without a solid operational foundation, firms face the risk of not being able realise the cost and scale efficiencies, which can derail a merger,” notes Pervaiz Panjwani Global Co-Head of Fund Services at Citi Securities Services. “This why it is critical that asset managers prioritize operations during a merger.” Finally, almost half of respondents think European managers are most likely to be bought by non-European (possibly US firms) managers, rather than the other way round. Which could reshape the industry by having more of key decision-making being increasingly located outside of Europe. In addition, there is a danger that consolidation will mean that the bar to entry for newcomers and disruptors will become too high. Navigating the Change There is little doubt that the European fund landscape will look very different at the end of the decade. Understanding the impact of the confluence of disruption and consolidation can help firms navigate the changing landscape and put them on solid footing for the decade ahead. This article is extract from the Changing European Fund Landscape report, done in partnership with Funds Europe, please click here to download the full report.

The asset management industry is going through a period of upheaval that promises to reshape the to reshape the landscape. In our <a href="https://www.citigroup.com/global/insights/securities-services/the-changing-european-fund-landscape">The Changing European Fund Landscape</a> report we identified two contrasting, but related ways, that the European fund market landscape will be reshaped over the next decade &ndash; either through consolidation among the traditional players or disruption from new entrants.
<h2>Distribution Disruption </h2>
Distribution is at the core of any asset manager&rsquo;s strategy and is a key challenge for European funds. Despite efforts to improve the cross-border distribution in Europe, it remains a fragmented and complex process &ndash; which is ripe for disruption. According to our survey, fund platforms and advisors are the two parts of the funds distribution ecosystem that are most susceptible to disruption this decade.
There is perhaps an irony in fund platforms being seen as ripe for disruption given that the fund supermarkets that hit the market back at the turn of the millennium were then seen as the disruptors of the day. This survey finding also underlines how quickly innovation can move and how the disruptors of the past become the disrupted of the future.
In recent years we have seen the onset of consolidation in the platforms sector both between rival platforms looking to build scale and from asset managers looking to broaden their own offering. A FundsTech panel debate in May 2019 looked at this very subject, asking if the same platforms that revolutionised fund distribution in the 90s now needed a technology reboot of their own.
It could also be argued that advisors have already been subject to disruption from the growing robo-advisor market, however the survey results suggest that almost a third still believe there is room for further disruption from tech-enabled entrants. Perhaps we are only in the early stages of robo-advisory and the next wave of offerings will make greater use of artificial intelligence and machine learning, thereby ensuring a greater predictive ability and more advanced analytics rather than the bot-based offerings that simply automate the investment process.
<h3>The Importance of TA</h3>
Perhaps surprisingly, Transfer Agency (TA) was only cited as most susceptible to disruption by less than 20% of the respondents. However, when you see how important TA is seen as to firms&rsquo; distribution strategies it makes a more sense. Over 50% of the respondents viewed TA as a key cog in the fund distribution chain, sitting at the intersection of funds and investors.
This suggests that the imminent demise of the TA through the rise of DLT predicted by so many may be some way off yet. This is not to say that transfer agency technology is not likely to change, just that we are likely to see the incumbents continue to dominate by upgrading their capabilities or partnering with FinTechs.
In a <a href="https://www.funds-europe.com/fundtech-winter-2020/transfer-agency-look-into-the-future">December 2020 article</a>, FundsTech spoke to a number of transfer agents about why they are unfairly held up as an example of the industry&rsquo;s inefficiency, be that as one more intermediary on the processing chain or as a service provider reliant on legacy systems rather than digital technology.
As Citi&rsquo;s global head of transfer agency operations Owen Carroll told FundsTech, TAs have made great strides in reducing the number of systems they use. &ldquo;I think we give ourselves a hard time in the TA market over the amount of consolidation we have done. Over the last ten years, I have seen a lot of progress in reducing the number of systems,&rdquo; he said.
This is not to say it will be without challenges, added Carroll. &ldquo;We can get there, but in the interim, we&rsquo;re trying to find how we can best add value to the investor experience.&rdquo; The pandemic has helped TAs to move further away from the use of legacy systems and paper and embrace new, digital technology.
&ldquo;There is an opportunity to reimagine ourselves coming out of this latest crisis, said Carroll. &ldquo;But if we can make systems more cost-effective as well as nimble, that might help to make the speed of change quicker over the next three to five years compared to what we have seen over the last ten years.&rdquo;
<h2>Continued Consolidation</h2>
One of the most notable asset management trends of the last decade has been the increase in consolidation among the top tier of firms. In recent years we have seen Aberdeen and Standard Life join forces, as have Janus and Henderson as well as countless others. Consequently speculation mounts as to where the next mega merger will occur.
Certainly our survey respondents expect the consolidation among European asset managers to continue to be a trend this decade, with 90% expecting the pace of asset management consolidation to increase over the coming decade and 10% stating that the rate of consolidation will stay the same. With no-one predicting a slowdown in consolidation, the only question is how big of an impact consolidation will have on the landscape.
The survey also asked respondents to rank the major drivers of consolidation in order of importance. Unsurprisingly, the main driver for consolidation cited by was to gain scale, followed by cost reduction. Far less important were the ability to gain access to new investment capabilities or new markets and geographies.
This suggests that a defensive mindset is propelling much of the consolidation, as opposed to a spirit of adventure of entrepreneurship. When <a href="https://www.funds-europe.com/july-august-2021/executive-interview-the-veteran-ceo-who-wants-to-demystify-jargon">interviewed by Funds Europe</a>, JP Morgan Asset Management&rsquo;s chief executive in EMEA Patrick Thomson highlighted the role that technology will play in deciding the winners and losers as the industry goes through the next round of consolidation.
&ldquo;Only the strong will survive &ndash; and the strong are people who&rsquo;ve got scale and who can invest in the technology.&rdquo; There are, he added, &ldquo;probably too many asset managers... and clients want more from their asset managers at a cheaper price&rdquo;.
The focus on cost and scale also underscores the importance of prioritizing operations during a consolidation. &ldquo;Without a solid operational foundation, firms face the risk of not being able realise the cost and scale efficiencies, which can derail a merger,&rdquo; notes Pervaiz Panjwani Global Co-Head of Fund Services at Citi Securities Services. &ldquo;This why it is critical that asset managers prioritize operations during a merger.&rdquo;
Finally, almost half of respondents think European managers are most likely to be bought by non-European (possibly US firms) managers, rather than the other way round. Which could reshape the industry by having more of key decision-making being increasingly located outside of Europe. In addition, there is a danger that consolidation will mean that the bar to entry for newcomers and disruptors will become too high.
<h2>Navigating the Change</h2>
There is little doubt that the European fund landscape will look very different at the end of the decade. Understanding the impact of the confluence of disruption and consolidation can help firms navigate the changing landscape and put them on solid footing for the decade ahead.&nbsp;
&nbsp;
This article is extract from the Changing European Fund Landscape report, done in partnership with Funds Europe, please <a href="https://www.citigroup.com/global/insights/securities-services/the-changing-european-fund-landscape">click here to download the full rep</a><a href="https://www.citigroup.com/global/insights/securities-services/the-changing-european-fund-landscape">ort.</a>

What will be the impact of disruption and consolidation on European asset management?

Reshaping the European Funds Landscape

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