DTCC Forms Alternative Investment Products Advisory Committee

by Karen Gregory

DTCC has announced the formation of an industry advisory committee on alternative investment products to develop an automated, centralized and streamlined approach to the processing of these instruments.

Comprising a cross-section of the industry, the advisory committee will look to leverage DTCC's existing infrastructure in support of the industry as it seeks to keep pace with current and future demands of a market that is undergoing explosive growth.

In recent years, the alternative investment market has been booming, with increases in both the amount of money being invested in these instruments and in the different types of alternative investments being offered, which today include hedge funds, managed futures, private equity/debt, and other nontraditional stock and bond instruments. According to The Wall Street Journal, investments in hedge funds alone have more than doubled to $1 trillion in assets from $400 billion since 2001, and some predict they will grow to more than $4 trillion by 2010

The majority of these trades are processed manually, making the complex paperwork labor-intensive and time-consuming. For example, paper-based matching and confirmations can literally take weeks to complete, a huge impediment given the size and complexity of some of these transactions. Where technology is used, it is largely expensive, unscalable and proprietary; and there is no single, standard system for processing trades of alternative investment products.

“This is a great step forward for alternative investments and hedge funds, specifically,” said Robert Alderman, managing director and head of Alternative Investments for Merrill Lynch's Global Private Client Group and a member of the advisory committee. “As the industry continues to grow, efficiency has become more important, and the work being done will address this growing need.”

“The alternative investment products industry is at a crossroads, much like mutual funds were 20 years ago,” said Ann Bergin, managing director for Mutual Fund Services at DTCC and head of the advisory committee. “In the mid-1980s mutual funds were processed in a manual environment, but were growing by leaps and bounds. We're seeing the same situation today with alternative investment products. DTCC is working closely with the industry to build a solution, in much the same way we helped the mutual fund industry with Fund/SERV® and our other services.”

Fund/SERV, introduced in 1986, is the industry standard for processing and settling a broad range of investment funds and for linking fund companies with their distributor partners, including broker/dealers, banks and financial planners.

Bergin added that strong collaboration with industry members was a focal point of DTCC's business strategy. “By establishing customer involvement as early as possible in the research and development stage, we can ensure that a business can achieve critical mass and will be self-sustaining,” she said.

As a first step in its needs assessment, the Steering Committee surveyed its members on a range of issues, including alternative investment products deemed to be priorities for automation, current and projected transaction volumes for various investment products, and preferred technology platforms on which solutions can be developed. Based on the survey results, the committee will focus its immediate attention on five areas: new accounts and subscriptions, purchases and redemptions, commissions, position reporting, and account maintenance. Additional areas of focus may include data exchange, such as prospectus information, breakpoints and rights of accumulation, offshore transactions, and exchange-traded funds. @