Attilio Veneziano is the founder of Veneziano & Partners Ltd, a London based boutique consultancy firm leader in providing asset managers and hedge fund managers with solutions for fund passporting, private placement, KIID production, facilities agency in the UK and service provider selection.
UCITSindex.com: You recently published an article about listing UCITS funds on the stock exchange could be an alternative way to sell funds in Italy. Could you please explain the current situation in Italy and changes enabled this?
Luca Bruni: The choice of the title of our article has been intentionally a bit provocative to differentiate this new channel from the existing and well established ones. Indeed, historically, the marketing of foreign funds in Italy – UCITS and especially non-UCITS – has been constrained by the absence of a private placement regime, so that any offer of such funds required to be locally authorised. Even with the recent implementation in Italy of the Alternative Investment Funds Manager Directive, which well represented – at least in our view – an opportunity to reshape the existing regulatory framework, private placement remains today not an option. Specifically within the “harmonised” fund world – hence UCITS – the Italian Market can be accessed through a notification process that may vary according to the typology of investors targeted. In fact, there is an option to obtain authorisation to offer a UCITS only to professional investors or to the broader retail market. In a nutshell and just to remind the key elements:
- If a fund is intended to be marketed only to Professional Investors, the so called “light registration regime” applies and the requestor has to go through the usual UCITS IV “Home to Host Regulator” process (i.e. 10+5 working days). This is indeed a light process in terms of administrative burden, but allows for targeting of a much narrower range of investors.
- If the fund is intended to be sold to Retail Investors (so called “full registration” regime), then there are a few more steps to take in addition to the classic registration process “Home to Host Regulator”, i.e.
- appointment of a local paying agent to act as a) intermediary in subscriptions, redemptions and conversions; b) entity in charge of the offer with Italian investors; c) Italian withholding tax agent, and
- production of the Subscription Form, to be used by Italian investors to subscribe, redeem and convert shares of foreign passported UCITS.
In terms of distribution options there are a several available, such as traditional brokerage houses, banks, fund supermarkets and insurance companies. Banks, traditional brokerage and insurance companies sales channels tend to dominate fund distribution in Italy. Figures-wise, according to the latest available data published by Assogestioni (http://www.assogestioni.it/index.cfm/1,143,10962,49,html/mappa-mensile-del-risparmio-gestito-giugno-2015), in June the Italian Fund industry collected 7.8 billion EUR (hence (+95.5 billion EUR since beginning 2015). Open-ended funds (+6.8 billion EUR in June) recorded the 12th successive positive quarter in terms of net sales. The overall AuM reached 1,714 bio EUR. A booming market which explains the reasons of the attractiveness of the Italian Fund market and the importance of properly selecting the way to access it.
Now, getting back to our recent article, one of the most important events in the Italian market during 2014 was certainly the opening of the new segment of the ETFplus market, managed by the Italian stock exchange Borsa Italiana and devoted to the listing of open-end UCITS funds. The launching of the initiative and opening of the new market segment in late 2014 – which concluded a long and intense period of works amongst Borsa Italiana and the various Italian authorities lasted for years – has been certainly welcomed by some, because it entails the opening to Italian investors of a broader range of investment products and the creation of a more competitive environment, where costs of distribution are employed efficiently. Interesting to note is that Borsa Italiana, which has been part of the London Stock Exchange group for a while now, is granted the challenging role of innovating and modernizing a conservative and traditional market like the one of fund distribution in Italy.
As a matter of fact, the Luxembourg authorities got interested in the listing in Italy of Luxembourg domiciled UCITS and the CSSF (local regulator) requested technical clarifications in the past months to Borsa Italiana before accepting requests from Luxembourg domiciled UCITS seeking for the listing in Italy. Other concerns – more political in nature – relate to the implications of the listing with regard to the traditional channels of distributions in Italy as well as the costs involved in distribution. Few months have passed by since the introduction of this new segment and some managers have already decided to pursue a listing on this segment of the ETFplus market, whilst other market players are monitoring the situation, before deciding what to do. In our humble view, this is for sure an interesting phenomenon to be observe carefully over the next 12 months to see how the Italian market will concretely respond.
UCITSindex.com: What does a fund manager need to do to get his fund listed?
Attilio Veneziano: In order for a UCITS fund to be eligible for listing on the new dedicated market segment of the ETFplus market of Borsa Italiana, a few steps will need to be taken by its manager or promoter. The process is not very different from the one already applied for the listing of ETFs on the existing market of Borsa Italiana. Some of the required steps are directed to have the fund authorised to offer its shares or units in Italy with the local regulatory authority, which is one of the prerequisite for the listing, whilst some other additional formalities are owed towards Borsa Italiana for the listing itself. Let’s look at them more closely into more details..At a preliminary level, the constitutive documents of the fund will have to have provisions allowing for the fund to be listed on a stock exchange as well as the NAV will have to be calculated on a daily basis. Also, unless the fund does not already have any type of passport authorisation – as contemplated under UCITS directive – to market its units or shares in Italy, it is firstly required to passport the fund according to the so called “light registration”. In this regime, the fund can be consequently offered exclusively to professional investors and there is only a requirement to make public the NAV for investors as well as produce the key investor information documents in Italian, with no need to appoint a paying agent, an entity in charge of the offer towards Italian investors or a distributor. The relevant notification process for this authorisation takes 10 days and is electronic, Home-to-Host state regulator.
At the same time, the manager or promoter of the fund will have to work on the application for listing to be filed with Borsa Italiana. From the day of submission of a listing application, Borsa Italiana has a couple of months to revert on the application and grant the listing. As part of this process and amongst the documentation required, the fund needs to produce a Listing Document in Italian, drafted in accordance with the regulation issued by the Italian regulatory authority Consob, as well as approved by it. Also, as part of the same application, the fund will have to provide the name of the appointed intermediary on the market as well as establish the NAV feed with Borsa Italiana. As far as the appointed intermediary is concerned, the new segment dedicated to the trading of open-ended funds is part of the existing ETFplus market, where ETFs are already traded, and is consequently open to all the intermediaries already operating on such market. This is key in order to allow for listed funds to be offered to a vast array of investors, from institutional to retail, which from now on could daily buy and sell shares or units in such funds at a price equal to the NAV of the relevant trading day, calculated and published the following day.
The role of the intermediary, whose presence in the operating mechanism is mandatory, is to execute any imbalance between buy and sell orders. The appointed intermediary has the role to follow the negotiations; act as a go between the primary and secondary market in the shares or units of the funds listed and intervene in the auction phase to execute the number of shares or units to buy or sell in order to balance the market. The choice of the appointed intermediary, and the ensuing ongoing relationship once one is appointed, is entirely upon the manager or promoter of the fund. There is already a list of intermediaries published on the relevant section of the website of Borsa Italiana (http://www.borsaitaliana.it/fondi/fondi-aperti/intermediarioperativi/intermediarioperativi.en.htm) and more Italian institutions are already preparing themselves to join such list and be authorised to operate on such market.
Once the listing is obtained and trading is taking place, there will be ongoing obligations for the funds that are listed on the stock exchange, as well as ongoing charges. The set of ongoing obligations are related to both the authorisation to market obtained with local regulatory authorities, as well as the listing and the disclosure requirements imposed by Borsa Italiana. Fees will be applicable by the Italian regulatory authority as well as the stock exchange. It is interesting to note that Borsa Italiana has introduced a fee structure that allows for a reward to issuers who decides to be listed at the very early stages of the introduction of the new market segment and before the end of the month of October 2015.
UCITSindex.com: What are the main features of the ETFplus market and is it very expensive to get listed?
Veneziano: Some of the features of the relevant segment of the ETFplus market have already been highlighted above, especially when talking about the appointed intermediary, as one of the required entities in the operative mechanism of the listing, with its role of executing the imbalance between buy and sell orders by means of undertaking to enter bids and offers for a quantity equal to the difference between the buy and sell quantities on the books.
At a glance, additional features of the new market segment are a) the trading model of single auction call, between 8 am and 11 am, as well as b) the lack of a central counterparty. Also, the orders must exclusively indicate the quantity and not the price, with a minimum trading lot of 1 share or unit with no decimal available. The trading price is represented by the NAV of the relevant trading day. One of the most peculiar aspects of this segment is then the valuation of the orders, made on the basis of quantity rather than price. In fact, the price of the orders will be made available on the following day after the NAV (and the proportional value of each unit/share accordingly) of the fund for that trading day has been calculated and disseminated to Borsa Italiana. In simpler terms, it will be possible to buy or sell a certain quantity of units or shares, with a price that will be made available only on the following day.
As far as the costs involved in the listing, these are attracted at various levels. We will divide these between initial and ongoing costs and assign them to the various moving parts of the listing proposition. We have to firstly consider that there are costs associated with obtaining the authorisation for marketing by Italian authorities. Costs are normally incurred for preparing the application and the relevant documentation and translations. Of course there are costs attracted also in terms of regulatory fees chargeable by the local regulatory authority for the maintenance of such authorisation. It is fair to note that the amount of the overall costs will largely vary on the basis of the route chosen by the manager or promoter of the fund to deal with such process and whether and to what extent this is outsourced to an external provider. There are also costs related to the listing itself, also here at various levels. There are one off costs related to the production of the Listing document in Italian and the authorisation process with the Italian regulator of such document, as well as for the application for listing to Borsa Italiana. There are initial and ongoing listing fees charged by Borsa Italiana as well. It is interesting to note here on the point of the fees charged by Borsa Italiana that a very interesting approach, though not advertised very openly, has been adopted on the initial joining fees, discounted up to 75% to issuers who decide to join the market segment before the end of October this year. There are also ongoing semi-annual listing fees chargeable by the stock exchange and calculated on the basis of the asset of the specific ISIN traded on the exchange.
Of course, it is not possible to draw a universal conclusion on costs, as these are variable – depending on the extent of the work outsourced and the type of provider used – and also relative to the fund house concerned. For sure, any valuation on costs should be made bearing in mind the potential of this new channel of distribution and the one of the Italian market as well, which seems to be a booming market for funds today. Any evaluation of the costs of listing will also have to be made considering the costs and the opportunities currently offered by more traditional channels of distribution available in this market.
UCITSindex.com: What type of managers should consider to go this route distributing into Italy?
Bruni: Today, the new market segment launched by Borsa Italiana for the listing of open-end UCITS funds represents a new and innovative distribution channel in Italy, which clearly competes with the existing traditional model of distribution and diverges from this both from an operational and commercial perspective. In fact, as part of the potential downsides of this route, we’d like to point out that in the case of a listing the asset manager would lose the visibility of the end client, as the orders routed through the intermediary on the market segment do not allow for such visibility, which is an element of paramount importance in the traditional distribution scenario in Italy. Although we do not have the crystal ball – and traditionally prefer to avoid making general recommendations “one-fits-all”-, we think that small to medium asset managers may look with interest at the route of the listing in Italy, especially the ones who do not have available a proprietary distribution channel in Italy, be it through a bank or tied in agents, and nevertheless need to gain access to the retail market. Our only humble advice in this regard would be to carefully consider and quantify beforehand the costs side that has been extensively described above. A proper costs (quantifiable)/ benefits (estimated) analysis remains a wise first step for asset managers of any size.
Last but not least, considering also that the market in Italy is today dominated by asset managers with a banking or insurance background (eg. Pioneer, Eurizon Capital, Generali just to name some of the biggest in terms of AuM) or banking institutions (that can rely on an extensive network of tied in agents like Mediolanum or Fideuram Bank), it will be interesting to see how the two different models of distribution will either coexist, achieving a balance that allows both models to grow and expand, or clash. To conclude, we believe that the initiative of Borsa Italiana is innovative and deserves the attention of asset managers interested in penetrating or consolidating their position in the Italian market. The rest of the story will be told by the market itself in the coming years.
UCITSindex.com: Thank you for the interview