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This paper analyses the complete lifecycle of an extended day US based mutual fund trade processing and the different financial intermediarie s involved . It focuses briefly on the information ...

This paper analyses the complete lifecycle of an extended day US based mutual fund trade processing and the different financial intermediarie s involved . It focuses briefly on the information technology stack commonly used by the intermediaries for end-to-end processing of the trades.

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Extended trading services Extended trading services Document Transcript

  • Extended Trading ServicesExtended Trading Services Vinit Sharma www.niit-tech.com NIIT Technologies White Paper
  • Extended Trading Services 1 Introduction 3 Financial Intermediaries 3 Financial Investors 3 Fund Companies 4 Bank and Trust Companies 4 Third Party Administrators (TPA) 4 Depository Trust and Clearing Corporation (DTCC) 4 Role of Information Technology 5 TPA Order Aggregation system 5 Order Management System (OMS) 5 Fund Accounting Platform 5 NSCC – Fund Serv 5 Settlement Platform 6 Industry Issues 6 Our Solution 6 Our Extended Day Trade Lifecycle 6 Conclusion 7 NIIT Experience and Benefits 7 About Author 9 About NIIT Technologies 9 CONTENTS
  • INVESTMENT REVENUEREVENUE INVESTMENT INVESTMENT INVESTMENT FINANCE FINANCE FINANCE FINAANCE FINANCE WEALTH MARKET MARKET MATKET CAPITAL CAPITALCAPITAL CARGO CAPITAL ECONOMICS ECONOMICS BANKING Traditionally, US-based open ended mutual funds are traded during market hours from 9:00 a.m. to 4:00 p.m. Eastern Time (ET). During these hours, the investor places an order via different intermediaries and destinations to the respective fund companies. Under the forward pricing rule, investment companies price their entire buy and sell orders of fund shares according to the Next Net Asset Value (NAV). The mutual funds calculate and report the NAV once a day after trading closes down at 4:00 p.m. ET. Hence, trades placed before trading closes for the day are priced at that day’s NAV, while trades received after are priced at next day’s NAV. Extended day trading in mutual funds refers to trades that are placed after the closing but are priced at NAV for the same day. Only a small subset of large investors such as HNIs, fiduciaries, non-profit organizations, corporations, retirement plans, and foundations are eligible to place extended day trades. This is important as the sheer size and complexity of the transaction warrants several processing steps to ensure adherence to U.S. Securities and Exchange Commission (SEC) regulations and also to make sure that the integrity of the financial data is maintained and the end client’s investment is protected. Trades submitted for extended day have at least two cut-off times to be guaranteed the current day price. Firstly, the trades need to be submitted to the trading destinations such as Depository Trust and Clearing Corporation (DTCC) and Fidelity by respective destination cut-off time (6:00 AM ET in case of DTCC). Also, trades must reach the fund companies from the destinations before their respective fund cut-off times. In either case, if the trades are submitted after the cut-off time, they are priced at the following day’s NAV. Introduction A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. A number of financial intermediaries are involved in the complete lifecycle of trade - from order creation to trade settlement. The intermediaries involved are: • Financial Investors • Mutual Fund Companies • Banks and Trust Companies • Third Party Administrators (TPAs) • Brokers/ Dealers • Destinations - Depository Trust and Clearing Corporation, Schwab, Fidelity This paper analyses the complete lifecycle of an extended day US based mutual fund trade processing and the different financial intermediaries involved. It focuses briefly on the information technology stack commonly used by the intermediaries for end-to-end processing of the trades. Financial Intermediaries These are investors (individuals or firms) who make investment decisions for financial gain. They use their financial skills and methods to increase returns and manage risks. Extended trading services are almost exclusively used by large institutional investors including fiduciaries, non-profit organizations, corporations, retirement plans, and foundations. Most of the investments come from retirement plans such as 401(K) and other defined contribution plans. This is significant as almost 9% of American household financial assets are invested in Defined Contribution (DC) or Individual Retirement Account (IRA) plans. Financial Investors 3
  • These are investment companies engaged in the business of investing the pooled capital of investors in financial securities. Most fund companies governed by SEC provide Extended Trading Services. Some of the major players in the market are listed below: • Vanguard • American Funds • Fidelity • MFS Funds • Nuveen • American Century 4 Bank and Trust companies act as trustees for groups of people who have lent money to a corporation through bonds or other obligatory instruments. They provide a full range of core services like custody services, compliance reporting, investment management, and special record keeping for each of the participating investor. Most of these companies have in-house capabilities in information technology and provide platforms for execution of extended day trades. Bank and Trust Companies Fund Compani Third Party Administrators are organizations that are primarily involved in processing insurance claims or certain aspects of employee benefit plans for a separate entity. They also handle other aspects of employee benefit plans such as processing of retirement plans. Retirement plans such as 401(K) are often managed by investment companies. Instead of handling all the plan contributions by employees, distribution to employees, and other aspects of investment processing, investment firms typically outsource these administrative tasks to Third Party Administrators. Third Party Administrators (TPA) Mutual Funds in Household Retirement Accounts Mutual Fund percentage of retirement assets by type of retirement vehicle, 1990-2010 DC plans* 8 16 23 30 38 44 45 50 53 49 54 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 22 28 34 41 46 48 42 47 49 45 47 IRAs DC plans include 403(b) plans, 457 plans, and private employer-sponsored DC pakns (including 401(k) plans). Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Trvenue Service Statistics if Income Division
  • Information Technology plays a pivotal role in facilitating trade execution and processing. A number of automated and centralized platforms are used from order entry – purchase, exchanges and redemption, to order confirmation, registration and money settlement. Some of the critical IT systems and platforms involved in extended day trading are listed below: • TPA Order Aggregation System • Order Management System • Fund Accounting Platform • NSCC – Fund/ SERV • Settlement Platform Role of Information TechnologyRole of Information Technology The fund accounting platform receives an extract of all the trade orders submitted to NSCC and updates the corresponding accounts for the type of order, units, fund, pricing, and other order details. The platform provides the updated position for assets and cash for each account and interfaces with the settlement platform. It also provides a feed to TPAs and notifies them of the trade submitted to the fund companies and the good faith estimate for the trades. Fund Accounting PlatformFund Accounting Platform 5 TPAs use Order Aggregation systems to aggregate orders for their client banks in their own standard format with basic validations and send it to the order management systems. Third Party Administrators (TPA) Order Aggregation System Third Party Administrators (TPA) Order Aggregation System The trade order management system receives aggregated orders from TPAs/ banks and generates trade orders. The aggregated orders can be of three types: 1. Sell (Full/ Partial liquidation) 2. Buy 3. SWAP/ Exchange For sell orders, no pricing information is necessary for generating the trade order. However, for buy orders or exchange orders, the platform retrieves pricing information from the pricing engine to generate corresponding trade order. After receiving confirmation from fund companies, the platform also stores any pricing informa- tion provided by the TPAs/ banks to identify future discrepancies. The trade orders may or may not be aggregated depending on business needs. Once the trade orders are created, the OMS submits it to NSCC for further processing and submission to fund companies. The platform also creates an extract for the fund accounting platform based on the trade orders submitted to NSCC. The extract is used for future reconciliation when confirmation for trade is received from fund companies. Order Management System (OMS)Order Management System (OMS) Depository Trust and Clearing Corporation is the world’s largest post trade financial services company. It provides post-trade services to exchange-traded and over-the-counter securities. Through its subsidiary - National Securities Clearing Corporation (NSCC), it provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage backed securities, money market instruments, and over-the-counter derivatives. In the U.S., a vast majority of third party mutual fund transactions are processed through NSCC application Fund/Serv. Fund/Serv plays a major role in linking fund companies with brokers/dealers, banks and other distribution firms in expanding investor access to funds. Depository Trust and Clearing Corporation (DTCC) In extended trading, TPAs aggregate orders for their respective banks and send it to the trade order generation platform. Some of the leading TPAs in the industry are EPIC (Electronic Payroll Investing Center), Sunguard and RELIUS.
  • Settlement platform settles each account at the end of business day for asset positions and cash balance. It receives feed from Fund Accounting platform and NSCC. Settlement PlatformSettlement Platform 6 Some of the key challenges that financial institutions face in implementing extended trading services solution are: • Trans-national markets and global exchanges that demand fast and accurate processing of high transaction volumes • Delivering superior customer service • Providing an architecture that is easy for the customers to understand and flexible to accommodate any future changes Industry IssuesIndustry Issues NIIT Technologies provides mission-critical, flexible and scalable trading solutions that support multiple channels and cover different types of trading methodologies, resulting in increased agility and transparency in trading environments. The new trading platform is built as a set of robust Extract, Trans- form and Load (ETL) workflows to process all inbound files (trade order confirmation, pricing information etc.) and outbound files (trade order files to destination, client notifications etc.). The workflow can send notifications at every critical stage of the trade order. These notifications provide complete transparency with respect to the status of an order at any time to the business users. The workflows additionally provide the ability to raise B50 requests for setting up new fund accounts. NIIT Technologies has also built a Graphical User Interface (GUI) for the operations team and the system administrators to easily manage and view the status of trades placed. Few of the functional- ities which are provided to the users are: • A dashboard with summary information of all the trade orders submitted/ processed/ confirmed/ in exception • Ability to view and process exceptions raised during Straight Through Processing • Ability to setup new clients/ TPAs and their preferences • Ability to maintain fund level attributes and setup or modify trading destination details, transmission schedules and destina- tion holidays • Ability to generate trade order status reports, B50 status reports and audit log reports Our SolutionOur Solution Fund/Serv is the industry standard for processing and settling mutual fund transactions. It interfaces with fund companies, bank and trust companies, TPAs, broker/dealers and other distribution firms. It uses automated and standardized formats for trade orders. The order generation platform creates trade orders for Fund/Serv in the appropriate format. This is used by Fund/Serv for placing the trades with respective fund companies. It also provides confirmation to the order generation platform once the trades are successfully processed by the fund companies. Fund/Serv uses a cut-off time of 6 a.m. (ET) for extended day trading. Any trade order received after that is processed for next day’s NAV. National Securities Clearing Corporation (NSCC) – Fund/Serv National Securities Clearing Corporation (NSCC) – Fund/Serv Our Extended Day Trade LifecycleOur Extended Day Trade Lifecycle A brief overview of our Extended day trade lifecycle is captured in the below diagram. TPA/BANK TPA/BANK TPA/BANK TPA/BANK TPA/BANK Vendor Supported Process NSCC Supported Process TPA/Bank Supported Process FUND 1 FUND 2 FUND 3 TRADE ORDER GENERATOR PRICING ENGINE NSCC (FUND SERVE) ORDER AGGREGATOR SETTLEMENT PLATFORM SYSTEM OF RECORDS (FUND ACCOUNTING PLATFORM) 1 8 8 2 2 2 5 5 6 6 3 9 7 4 11 10 12 8 8
  • 7 Trade orders received by NSCC are validated for certain mandatory information. If the order satisfies the preliminary validation, an acknowledgement is sent back to the trade order generator. NSCC sends the trade order file to respective fund companies for processing. 4. NSCC Validation and Order Submission to fund companies4. NSCC Validation and Order Submission to fund companies The fund companies validate the trade orders and if the orders qualify for trade and are received before their cut-off time, they are processed and a confirmation is sent to NSCC. The trade order confirmation contains information such as pricing of the trade, number of units bought/ sold/ exchanged. 5. Trade Order Processing at fund companies5. Trade Order Processing at fund companies Once trade confirmation is received by NSCC, the corresponding confirmation is sent to the trade order generator. Usually the trade confirmation for trade order placed could be received any time during the day. There are multiple cycles in which confirmations for the trade orders are sent by NSCC. If the confirmation is not received during the day, an exception is flagged and a manual intervention is necessitated to understand the issue and resolve it. 6. Trade Order Processing at fund companies6. Trade Order Processing at fund companies The trade order generator sends an acknowledgement to the TPAs/ banks after it receives the trade confirmation from NSCC. 7. Trade Confirmation to the Banks/TPAs7. Trade Confirmation to the Banks/TPAs The trade order generator sends the trade confirmation details to the fund accounting platform for the corresponding fund account. 8. Feed to Fund Accounting Platform8. Feed to Fund Accounting Platform The fund accounting platform updates the trade details for bookkeeping purposes and generates settlement feed that consists of information such as activity, position and income. 9. Trade Order Processing at fund companies9. Trade Order Processing at fund companies Actual settlement is performed and the asset position and cash balance is updated for each individual account. Typically, the settlement would happen on T+1 day; however, in certain exceptional cases such as exchange trades, where both the buy and the sell order could not be processed within the cut off time, an exception is raised. Once both the sides of exchange trade are executed, a confirmation is received by the settlement platform from NSCC and the Fund Accounting platform and the final settlement is executed. In some rare cases, a reconfirmation may be received for a trade that was already settled. Such cases are settled based on defined business rules and the concerned parties e.g. TPAs, banks etc. are notified. 10. Trade Order Settlement10. Trade Order Settlement TPAs create an order file and send it directly to the vendor supported trade order generator or a bank may decide to aggregate orders for TPA before TPAs send it to the trade order generator. Different mechanism can be used for sending orders including File Transfer Protocol (FTP) or Network Data Mover (NDM) processes. 1. Order Generation1. Order Generation Fund Prices are sent to the trade order generator from multiple vendors. Usually prices are taken from multiple sources and based on a pre-decided business rule; one source is selected for a particular fund. 2. Pricing Information2. Pricing Information Trade orders are generated in NSCC supported format at regular intervals throughout the night. NSCC has a cut-off time (5:00 AM ET) till which it accepts the trade orders. Every fund company has their own specified cut-off time, by which, if the trade order is received, they are obliged to price the trade at the current NAV. 3. Trade Order Generation3. Trade Order Generation
  • Mature Best-in-class Process Framework NIIT software factories are ISO 27001, CMMi Level 5 and PCM Level 5 accredited. Our resources are therefore well versed with operating in a highly mature process oriented and secure environment and bring this expertise to all client engagements. Access to large resource base NIIT has a large resource base of over 5000 analysts and consul- tants and hence is able to quickly source professionals with the desired skill sets required for the project. Furthermore, we also possess the capability to ensure a quick ramp-up of project resources when in need. 8 NIIT offerings span business and technology consulting, application development and management services, IT infrastructure services, and business process outsourcing. Our services to customer- partners across the world has led to the evolution of a strong value- optimizing framework for offering similar services through a cost effective delivery model that can be used in single shore, dual or multi shore formats. Technology Bandwidth Strong Industry Focus NIIT has several thousand person years of experience in designing, building and maintaining large-scale applications for day-to-day NIIT Experience and Benefits Information Technology has transformed the capital markets. Markets have become interconnected resulting in the emergence of trans-national markets and global exchanges. Aggressive growth and accurate processing of high volumes of transactions has become an imperative for financial companies to deliver enhanced customer service. Our team has worked with leading financial services companies to help them with trading solutions that support multiple channels and covers different types of trading methodologies. NIIT Technologies help identify and assemble the core building blocks to improve trade processing responsiveness, variability and resiliency. Our offerings begin with the analysis and evalua- tion of the customers’ trade processing environments. By select- ing the right set of business processes, we help financial services organizations manage costs and risks of transforming trading environments. Our banking and financial solutions help differentiate a financial firm in an increasingly competitive marketplace. They help in delivering new capabilities and establishing market credentials. We also enable enterprise-wide trade cycle management by leveraging integrated automation of processes thereby improving efficiency, increasing transaction capacity and reducing opera- tional and financial risk. Conclusion business and has considerable experience in Front Office, Middle Office and Back Office operations. As per the Datamonitor Black Book of Outsourcing 2010 survey, in the overall satisfaction ratings, NIIT Technologies is ranked number 1 in the Data Management Services. NIIT’s team has working knowledge of Charles River, Calypso, Advent Moxy, Linedata Longview, MacGregor ITG, Eze Castle, Omgeo, Bloomberg, Reuters, Yodlee solutions such as “Yodlee Account Data gathering” and many other tools and products used in the industry.
  • A global IT sourcing organization | 21 locations and 14 countries | 7000+ professionals | Level 5 of SEI-CMMi, ver1.2 ISO 27001 certified | Level 5 of People CMM Framework D_10_220612 Write to us at marketing@niit-tech.com www.niit-tech.com NIIT Technologies is a leading IT solutions organization, servicing customers in North America, Europe, Middle East, Asia and Australia. The Company offers services in Application Development and Maintenance, Managed Services, Cloud Computing and Business Process Outsourcing to organizations in the Financial Services, Insurance, Travel, Transportation and Logistics, Manufacturing and Distribution and Government sectors. The Company’s deep domain knowledge and new approaches to customer experience management with robust outsourcing capabilities, and a dual shore delivery model, have made NIIT Technologies a preferred IT partner for global majors in these chosen industries. Profound and enduring customer engagements have become a hallmark of NIIT Technologies. NIIT Technologies vision is to be the “First Choice” of services for the focused segments serviced. The Company has a simple strategy - to focus and differentiate. It competes on the strength of its specialization. Over the years the Company has forged extremely rewarding relationships with global majors, a testimony to mutual commitment and its ability to retain marquee clients, drawing repeat business from them. Whether it is global banking and insurance major, leading Asset Management solutions provider, the Number Two cement manufacturer, or travel big-wigs, NIIT Technologies has been able to scale its interactions with these marquee clients into extremely meaningful, multi-year "collaborations. About NIIT Technologies Vinit Sharma is a Business Solution designer within the Banking and Financial Services practice at NIIT Technologies Ltd. He has over 8 years of experience. His expertise includes Capital Markets, Corporate Finance, Credit Card and US Mortgage business. About the Author Europe Singapore India NIIT Technologies Ltd. Corporate Heights (Tapasya) Plot No. 5, EFGH, Sector 126 Noida-Greater Noida Expressway Noida – 201301, U.P., India Ph: +91 1 120 399 9555 Fax: +91 1 120 399 9150 Americas NIIT Technologies Inc., 1050 Crown Pointe Parkway 5th Floor, Atlanta, GA 30338, USA Ph: +1 (770) 551 9494 Toll Free: +1 (888) 454 NIIT Fax: +1 (770) 551 9229 NIIT Technologies Limited 2nd Floor, 47 Mark Lane London - EC3R 7QQ, U.K. Ph: +44 (0) 20 70020700 Fax: +44 (0) 20 70020701 NIIT Technologies Pte. Limited 31 Kaki Bukit Road 3 #05-13 Techlink Singapore 417818 Ph: +65 68488300 Fax: +65 68488322