Why the current settlement world is like Formula 1

Working at International Fund Services and Asset Management (ifsam), a B2B fund platform for institutional investors, has granted me an inside view of the settlement world at both a macro and micro level. Institutional clients are seeking an intermediary or custodian that delivers the best service and tools for a timely qualitative transfer execution. And intermediaries are constantly chasing the best technologies and know-how to deliver an automated and scalable service at the highest technological level.

This situation is similar to a Formula 1 racing driver searching for a team that best shares the driver’s values to ensure a successful collaboration. To make this possible, teams focus on building the best car that complies with the Fédération Internationale de l'Automobile’s (FIA) regulations. They invest in cutting-edge equipment and choose the very best engineers and crew members. However, despite all this effort, teams can still struggle to realize their potential.

Similarly, despite regulations, directives and corresponding financial regulators being present in all markets, intermediaries still face issues in order execution, which in its turn influences the company’s entire service chain.

Last year, ifsam participated in a global transfer survey by Calastone¹ , which highlighted the pressure points causing delays in the industry. The main challenges of today’s transfer process are the mandatory use of original stock transfer forms, data input and rekey errors, forms lost in the mail with data necessary to place and execute the transfer, and wet signature requirements.²

From personal experience, the biggest delay is due to miscommunications in the first step—the exchange of standard settlement instructions (SSI) between parties to initiate the transfer. The exchange is made via email with a text file or PDF attachment or fax. As the parties involved use different formats to process information and different custody structures for their securities, the delivered settlement chain may differ between parties—the registration could be made directly with transfer agencies or clearinghouses or clearing via transfer agencies or external markets, or the SSI could use a name and address or an account number and name.

This can lead to clients submitting an instruction with a partial SSI to the custodian, which is used to process the transfer. Several days later, the transfer agent rejects the transfer or requests an amendment due to incomplete information. The clients are then back at square one and must initiate the process from the beginning.

During my recent Grand Prix (GP) experience in Monaco, I could see parallels with the settlement business. In the Formula 1 world, despite skilled racers, fast cars, defined constituents and enforced regulations, even the best teams can fail to reach the podium due to human error hampering communication.

For example, take the recent GP races in Monaco and Montreal. Despite Ferrari having one of the season’s most competitive cars, Charles Leclerc’s good qualifying results and Carlos Sainz’s steady performance, the team performed below expectations at Monaco.³  Ferrari’s double pit stop blunder was due to Sainz and Leclerc calling for a change of tires in quick succession, which caused the latter to lose his long-hoped-for podium spot. And, due to a similar communication issue in the McLaren team,⁴  the Montreal GP also saw a disastrous double-stack pitstop that cost both Daniel Ricciardo and Lando Norris their top spots.⁵

Double pit stops for Ferrari in Monaco and McLaren in Montreal meant the teams paid the highest price: time. Despite the best conditions, the delay influenced the entire race, performance and points gained. Frustration and disappointment reigned—if the information exchange had been smoother, the race (or, in our case, the transfer) would have run without delays, securing the best execution time.

Without standardized and systematic ways or tools to communicate between parties, high-value and high-quality offerings will not guarantee an efficient and fast result. Besides defining the strategy, investing in the best technology and choosing the most qualified professionals, the industry should focus on the most invisible layer on a global scale that binds everything together—communication. This is why ifsam decided to build an intermediary for automatic exchange of SSI between parties, known as FreeDel.⁶

¹ Henning Swabey, “Fund transfer delay remains a big issue across Europe,” 22 Oct. 2021. https://www.calastone.com/insights/fund-transfer-delays-remain-a-big-issue-across-europe/
² Calastone, “Research: Fund transfer delays caused by lack of industry collaboration and automation,” June 2022. https://www2.calastone.com/transfersresearchdownload
³ Formula 1, “Leclerc brands Monaco race a freaking disaster after dropping from pole to P4 in first finish at home,” 29 May 2022. https://www.formula1.com/en/latest/article.leclerc-brands-monaco-race-a-freaking-disaster-after-dropping-from-pole-to.1wwiFHvB9cBc2UXQhHtAqH.html
⁴ McLaren, “2022 Canadian Grand Prix,” 19 June 2022. https://www.mclaren.com/racing/2022/canadian-grand-prix/race-report/
⁵ Edd Straw, “What went wrong in McLaren’s double-stack Canadian GP stop,” 20 June 2022. https://the-race.com/formula-1/what-went-wrong-in-mclarens-double-stack-canadian-gp-stop/
⁶ ifsam, “Tech solutions,” June 2022. https://www.ifsam.lu/services/tech-solutions/