Seeking to leverage its strengths in mutual fund processing, Depository Trust & Clearing Corp. (DTCC) is readying a service that automates pre- and post-trade processes for the alternative funds market. The service is expected to launch next year, pending regulatory approval.
The explosive growth is straining a system that has relied on manual processes, spreadsheet-based recordkeeping and time-consuming paperwork, said Ann Bergin, managing director of DTCC wealth management services. Lack of regulation and standardization has resulted in multiple and redundant processing strategies within and between organizations, and legacy technology can't handle the dynamic nature of alternative investments.
The alternative investment products (AIP) service, to be offered by DTCC subsidiary National Securities Clearing Corp. (NSCC), parallels the Fund-Serv platform for mutual funds. AIP will process purchases and redemptions, commission payments, position reporting, valuation reporting and account maintenance details for funds-of-hedge funds, single-strategy funds, real estate investment trusts (REITs), private equity funds and commodity pools. Fund-Serv, launched in 1986, processes over 786,000 transactions daily for more than 1,000 fund companies, broker/dealers and other distributors.
DTCC is tying its efforts into Swift's initiative in Europe to create 11 new message types for order routing and processing for the cross-border hedge funds market.
According to Bergin, all of the messages and data formats for AIP have been created in collaboration with the La Hulpe, Belgium-based network utility so that DTCC and Swift participants only have to build messaging interfaces once. The goal is to ensure that members of DTCC and Swift can use the same message formats to communicate either through Swift or the DTCC's proprietary link, she said.
In July, DTCC will begin testing messages with broker-dealers and REIT administrators; a second phase will incorporate communications between brokers and fund of funds administrators. Pilot-testing of custodian and fund manager messaging, which is slated for November, will overlap with testing of Swifts International Organization for Standardization (ISO) 20022 messaging formats.
While Swifts hedge fund messaging will only include secondary transactions, AIP will include initial orders by scanning the necessary paperwork and signatures.
Because alternative investment products dont have a standard identification code, NSCC will issue its own ID for usage by the fund and the firms trading the instrument. Yet to be determineddepending on the jurisdiction governing the hedge fundis whether additional data to meet anti-money-laundering demands can be faxed or separately mailed.
To use the AIP service, hedge funds will need to become members of NSCC and appoint a settlement bank to make payments in same-day funds over the Fedwire service. NSCC is not guaranteeing settlement of transactions that pass through the AIP service.