Direct market access – efficient trade execution for fund strategies

Raphael Haldner
Blog posts

​Liechtenstein has a long-standing tradition in the fields of banking and asset management. Since joining the EEA in 1995, Liechtenstein’s financial centre has established itself as a professional point of reference for promoters of collective investment vehicles on the European financial market.

As a leading location for AIFs and UCITS funds, assets totalling around CHF 70 billion from a wide variety of asset classes are currently being managed. Assets under management (AuM) have thus more than tripled since 2013.

Assets under management Liechtenstein
Assets under management in Liechtenstein:

In order to comply with the increasingly stringent regulatory and operational requirements, during this time custodians and asset management companies have invested in particular in system solutions for accounting and investment compliance. However, over the same period, processes relating to order execution have experienced considerably less innovation. And yet this specific aspect is the main focus of fund managers, and in most cases plays a decisive role in selecting the fund location.

There are major challenges especially for trading strategies that involve liquid underlying assets. This occurs in particular where they are characterised by a very high transaction frequency or are executed on trading venues in other geographical regions in different time zones. Under these circumstances, in many cases it is extremely difficult to process transactions through the in-house trading desk and to acquire assets outside of opening hours.

In these cases, execution can generally be ensured by involving a prime broker. However, this is associated with high set-up and ongoing management costs. As a result, this option is generally not available to funds that have not reached a particular threshold in terms of AuM, above which such a special arrangement offers value for money.

In order to further increase Liechtenstein’s attractiveness as a fund location, custodians are also called upon to offer innovative, cutting-edge solutions that offer fund managers as much flexibility as possible when executing securities transactions. Under an ideal scenario, a high level of automation would also enable the user to benefit from a more efficient fee structure. This is a significant consideration in cases involving high transaction frequencies.

Direct market access through the custodian’s network

Within a financial world in which platform solutions are increasingly gaining in importance and modular services are becoming more prevalent, there is also a solution for this problematic aspect.

This “direct market access” (DMA) enables fund managers (as well as all other types of asset manager) to implement investment strategies involving liquid securities within the investment vehicles managed by them – without having to follow the circuitous route through the custodian.

Under this scenario, the custodian operates as a platform that specialises in booking transactions and holding assets in custody. Orders are actually placed directly via a network partner. This may for example be an online broker that has established a niche for itself due to its broad market coverage, efficient cost structures and easy accessibility (24/7).

Sub-accounts can be created as a basis for providing further services under the relationship. Sub-accounts are opened by the custodian in its own name, although are used for the respective end clients (e.g. funds) within its broker network. This may be used as a basis, amongst other things, for setting trading limits, geographical restrictions and limitations in terms of permitted financial instruments, which are tailored to the respective end client. Moreover, this also ensures that activities are allocated to one single client relationship and can be automatically fed in to the custodian’s systems at a later stage via an interface. This in turn ultimately serves as a “source of truth” for reporting to the end client.

There are a variety of benefits for asset managers. The custodian not only deals with the process of acquiring assets but also, as the account holder, attends to all tasks relating to securities management (collateral) and cash management. Acting under the terms of a limited commercial proxy, the user places orders conveniently through the online broker’s interface, whilst the custodian operates in the background, dealing with settlement and subsequent recording.

Ultimately, direct market access enables asset managers to focus on their core strengths, thereby deploying their resources more effectively. This leads not only to significant efficiency gains and lower transaction costs, but also increases the competitiveness of Liechtenstein’s financial centre and offers a highly optimised client experience.

Raphael Haldner
Raphael Haldner
Head of Fund and Capital Markets at Bank Frick