How do mutual funds and ﬁnancial services companies ensure delivery essentials of completeness, security, timeliness, responsiveness, consistency, and resiliency? How do they manage challenges to rise above competition and create a point of diﬀerence in their frame of reference? The solution is to ﬁnd IT partners capable of managing these challenges and requisites with a track record of exemplary delivery. An organization’s pursuit of customized and robust systems will ensure a seamless operation that will enrich the experience of end-users—both employees and customers—helping it stand out amidst competition.
Extended Trading Services: The Premise
US-based open-ended mutual funds are traditionally traded during market hours of 9:00 a.m. – 4:00 p.m. Eastern Time (ET). During these hours, investors place trade orders to fund companies via intermediaries and destinations. With the forward pricing rule, fund companies price their purchase and redemption trades of mutual fund units as per the next Net Asset Value (NAV). Once a day, after the trades close at 4:00 p.m. ET, fund managers calculate and report the NAV. Hence, trades placed before close of day are priced at same day’s NAV, while trades received after closing are priced at next day’s NAV. Extended Day Trading in mutual funds refers to trades placed after closing but priced at same day’s NAV. Only a small subset of large investors is eligible for extended day trading. This is critical, as the sheer size and complexity of these transactions warrant several processing steps—adherence to U.S. Securities and Exchange Commission (SEC) regulations—that help in maintaining integrity of ﬁnancial data and investment security.
Extended day trading has at least two cut-oﬀ times that guarantee current day price. Firstly, the trades need to reach trading destinations such as Depository Trust and Clearing Corporation (DTCC) and Fidelity by respective cut-oﬀ times (6:00 a.m. ET for DTCC). Also, trades must reach fund companies from destinations before companies’ fund cut-oﬀ times. In either case, trades submitted after cut-oﬀ times are priced at the following day’s NAV.
This paper analyzes the complete Extended Day-trade Processing Lifecycle of US-based mutual funds. It focuses brieﬂy on the information technology stack that intermediaries commonly use for end-to-end processing of trades, the challenges, and solutions that can lead them to spatial and business growth.
Critical IT Systems at the Heart of Trade Execution and Processing
Information Technology plays a pivotal role in facilitating trade execution and processing. Multiple automated and centralized platforms are used from order entry (purchase, exchanges, and redemption) to order conﬁrmation, registration, and money settlement. Some critical IT systems and platforms in extended day trading are:
- TPA Order Aggregation System
- Order Management System
- Fund Accounting Platform
- NSCC – Fund/SERV
- Settlement Platform
TPA Order Aggregation System
Third-Party Administrators (TPAs) use Order Aggregation Systems to amass orders for their client banks in their standard format with basic validations, and refer them to the Order Management System.
Order Management System (OMS)
The trade Order Management System (OMS) receives aggregated orders from TPAs/banks and generates trade orders. The aggregated orders can be of three types:
- Sell (full/partial liquidation)
For sell orders, pricing information is not necessary to generate trade orders. However, for buy or swap/exchange, the OMS retrieves pricing information from the pricing engine to generate corresponding trade orders. On conﬁrmation from fund companies, the OMS also stores pricing information provided by TPAs/banks to identify and manage future discrepancies
Trade orders may or may not be aggregated depending on business needs. Once trade orders are created, the OMS submits these to the National Securities Clearing Corporation (NSCC) for processing and submission to fund companies. OMS also creates fund accounting platforms on the basis of which trade orders are submitted to NSCC. Extracts are used for future reconciliation when fund companies conﬁrm trade receipt.
Fund Accounting Platform
The Fund Accounting Platform receives extracts of all trade orders submitted to NSCC, and updates corresponding accounts with types of orders, units, funds, pricing, and other order details. It provides an updated position for assets and cash for each account and interfaces with the settlement platform. It also feeds TPAs and notiﬁes them of trades submitted to fund companies with exact estimate of trades.
National Securities Clearing Corporation’s (NSCC) Fund/SERV Standard
Fund/SERV is the industry standard to process and settle mutual fund transactions. It interfaces with fund companies, banks and trust companies, TPAs, broker/dealers, and other distribution ﬁrms. The order generation platform creates trade orders for Fund/SERV in the appropriate (automated and standardized) format. Fund/SERV uses this to place trades with respective fund companies. Once trades are successfully processed by the fund companies, it also conﬁrms back to the order generation platform. Fund/SERV uses a cut-oﬀ time of 6:00 a.m. (ET) for extended day trading. Trade orders received later that day are processed on the next day’s NAV.
The settlement platform settles each account for asset positions and cash balance at the end of a business day. It receives feed from the Fund Accounting Platform and NSCC.
Industry Challenges—The Need for a Better Game
Some key challenges that ﬁnancial institutions face in implementing extended trading services solutions are:
- Trans-national markets and global exchanges demanding fast and accurate processing of high transaction volumes
- Delivering superior customer service
- Providing architecture that is easy for customers to understand, and ﬂexible to accommodate future changes
Leveraging Technology to Up the Game
Information Technology is transforming capital markets by negotiating challenges and opening up possibilities. Markets are interconnected resulting in ever-emerging and ever-evolving transnational markets and global exchanges. Aggressive growth and accurate processing of high transaction volumes are imperative for ﬁnancial companies while they strive to deliver an enhanced experience for customers as well as employees.
There is an urgent need to provide mission-critical, ﬂexible, and scalable extended day trading solutions, which support multiple channels and cover diﬀerent types of trading methodologies—resulting in increased agility and transparency in trading environments. For example, trading platforms that are built as a set of robust Extract, Transform 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 workﬂows can send notiﬁcations at every critical stage of the trade order. These notiﬁcations are able to provide complete transparency on the status of orders at any time to business users. The workﬂows provide added functionality to raise B50 requests to set up new fund accounts, and a Graphical User Interface (GUI) for the operations team and system administrators to manage and view the status of orders easily.
- View summary information of all trade orders submitted/processed/conﬁrmed/in exception in dashboard
- View and process exceptions raised during Straight Through Processing
- Set up new clients/TPAs with their preferences
- Maintain fund level attributes, and set up or modify trading destination details, transmission schedules, and destination holidays
- Generate order status reports, B50 status reports, and audit log reports
Extended Day Trade Lifecycle
An illustration of a typical seamless Extended Day Trade lifecycle is given below:
Solution System Attributes for Seamless Process Flow
- Order Generation: TPAs create and send order ﬁles directly to vendor-supported trade order generators. Alternatively, banks may aggregate orders for TPAs before TPAs send it to trade order generators. Orders can be sent using technology variants like File Transfer Protocol (FTP) or Network Data Mover (NDM) processes.
- Pricing Information: Fund prices are sent to trade order generators from multiple vendors. Prices are usually received from multiple sources—and based on a pre-deﬁned business rule, one source is selected for a particular fund.
- Trade Order Generation: Trade orders are generated in NSCC-supported format at regular intervals throughout the night. NSCC has a cut-oﬀ time of 5:00 a.m. (ET) for accepting trade orders. Fund companies have their respective cut-oﬀ times, and trade orders received by this cut-oﬀ, obliges them to price the trade at the previous day’s NAV.
- NSCC Validation and Order Submission to Fund Companies: Trade orders received by NSCC are validated for mandatory information. On successful preliminary validation, an acknowledgement is sent back to the trade order generator. After the acknowledgment is received, NSCC sends the trade order ﬁle to respective fund companies for processing.
- Trade Order Processing (by Fund Companies): All trade orders are ﬁrst validated. 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 conﬁrmation contains details such as pricing, number of units bought/sold/exchanged, etc.
- Trade Order Processing (by Fund Companies): Once NSCC receives conﬁrmation, a corresponding conﬁrmation is sent to the trade order generator. The conﬁrmation from the trade order generator can be received any time during the day. NSCC sends trade order conﬁrmations in multiple cycles. If conﬁrmation is not received that day, an exception is ﬂagged, necessitating manual intervention to cognize the issue and resolve it.
- Trade Conﬁrmation to Banks/TPAs: Once the trade order generator receives trade conﬁrmation from NSCC, it sends an acknowledgement to TPAs/banks.
- Trade Order Settlement: An actual settlement is carried out, and asset position and cash balance are updated for each account. Settlement would typically happen on T+1 day. However, in some cases such as exchange trades where both buy and sell orders cannot be processed within cut-oﬀ, an exception is raised. Once both sides of exchange trade are executed, NSCC and the fund accounting platform send a conﬁrmation to the settlement platform, and the ﬁnal settlement is executed. In rare cases, a reconﬁrmation may be received from NSCC for a trade that was already settled. Such cases are settled based on deﬁned business rules, and the concerned parties, like TPAs, banks, etc. are notiﬁed.
- Feed to Fund Accounting Platform: The trade order generator sends trade conﬁrmation details to the fund accounting platform for corresponding fund account.
- Trade Order Processing (by Fund Companies): The fund accounting platform updates the trade details for book-keeping purposes and generates settlement feed with details such as activity, position, and income.
The Coforge Thought Board:
Capturing the Business Value of Extended Trading Services
Need for an Organization with a Credo
The primary requisite for ﬁnancial intermediaries is a team that has been partnering with leading ﬁnancial services companies, providing them with trading solutions that support multiple channels, and one that covers an extensive range of trading methodologies.
The organization should be able to help identify, analyze, design, assemble, implement, and maintain solution systems that improve trade processing responsiveness, security, consistency, and resiliency. Oﬀerings must begin with analysis and evaluation of customers’ trade processing environments. Then, by selecting the right set of business processes, they need to enable ﬁnancial services organizations to manage costs and alleviate risks of transforming trading environments.
In an increasingly competitive marketplace, banking and ﬁnancial solutions are helping ﬁnancial ﬁrms to develop key diﬀerentiators. These solutions are helping deliver new, state-of-the-art systemic capabilities and establishing enduring market credentials. They are also enabling enterprise-wide trade cycle management by leveraging integrated automation of processes—improving eﬃciency, increasing transaction capacity, and reducing operational and ﬁnancial risk.
Coforge: The Organization with a Credo
Strong Industry Focus
Coforge has several thousand person-years of experience in identifying, analyzing, designing, building and maintaining large-scale applications for day-to-day business teamed with considerable experience in front-, mid-, and back-oﬃce operations. Our team has extensive 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 advanced tools and products used in Banking, Financial services, and Insurance(BFSI). The Datamonitor Black Book of Outsourcing 2010 survey, in its overall satisfaction ratings, ranked Coforge Number 1 in Data Management Services.
Our 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 have 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, dual or multi-shore formats.
Mature Best-in-class Process Framework
Our software facilities are ISO 27001, CMMi Level 5, and PCM Level 5 accredited. These recognitions underline that our resources are expertly versed with operating in mature process-oriented, secure environments, and bring this expertise along with other value sets to all our client engagements.
Access to a Large Resource Base
Coforge has a large resource base of over 5,000 analysts and consultants, who form the backbone of our capability. In addition, we are capable of ensuring rapid ramp-up of project resources whenever needed.
About the Author
Vinit Sharma is a Business Solution designer within the Banking and Financial Services practice at Coforge. He has over eight years of experience. His expertise extends to Capital Markets, Corporate Finance, and the Credit Card, and US Mortgage Business.