DTCC's Networking for Standardized Data Reporting - an automated, standardized solution for complying with Rule 22c-2 of the Securities and Exchange Commission (SEC), is gaining traction with the insurance industry, which is working on applying the service to meet its particular needs. According to the SEC, there are approximately 196 insurance companies organized as unit investment trusts that sponsor registered separate accounts in order to offer variable insurance products; they are under the same obligation as broker/dealers and other intermediaries to share this information.

Using a new data stream DTCC created in Networking, one of several Mutual Fund Services provided by DTCC's National Securities Clearing Corporation subsidiary, funds can evaluate information for patterns of market-timing and frequent-trading activity and impose redemption fees, if applicable. Since 1988, Networking has been used by the funds industry to exchange and balance on their records account-level information in order to provide their customers with monthly statements that accurately reflect their investment activities. For carriers that are not members of Mutual Fund Services, DTCC has accelerated the process in order for them to complete as soon as possible the systems modifications necessary to use Networking for Standardized Data Reporting.

"To promote consistency within the financial services industries and to meet regulatory deadlines, we evaluated the opportunity to leverage an existing solution, and received a very positive response from both the fund managers and their distributors," explained Jeanann Smith, senior relationship manager, DTCC's Insurance Services.

Insurance Services News recently spoke with Robin Pikor, assistant director, U.S. Wealth Management at The Hartford, about the progress being made to enhance Networking for SDR for the insurance industry. Pikor is a member of the ICI/NAVA Variable Annuity SDR working group that was formed to initially look at the viability of using the service and that is now developing with DTCC an application that meets the specialized requirements of insurance carriers and distributors of variable annuity, life insurance and retirement products.

Q: Why is the insurance industry interested in using Networking for SDR?

A: It will allow insurance companies to communicate with fund companies using DTCC's secure, consistent, and repeatable pipeline for data sharing across recordkeeping systems and fund partners. Protecting our customers' information is crucial to our company and the industry, and using a proven channel is an important benefit to us.

Q: What will carriers need to do to program for SDR?

A: Many insurance companies are faced with a number of recordkeeping systems to consider as they perform their comprehensive reviews. One of the challenges is the ability to standardize the data in the various systems and also maintain a link to the source system. This will make it easy to communicate back and forth systematically and provide more transparency. The committee performed a review of the SDR formats and discovered that we need a few more data fields to help the recordkeepers respond quickly to fund companies.

For example, we require an identifier - a contract or participant number - that will facilitate our ability to map any follow-up request back to the source system. Carriers also use a unit value versus a share amount in their record-keeping systems, and the share amount would need to be calculated outside of the record-keeping systems. So we've recommended a unit value indicator.

The Hartford is creating a warehouse of all transactions from their various recordkeeping systems. The warehouse holds the history for many of our admin systems and will interface with Networking for SDR to respond promptly to fund company requests.

Q: What needs to be done to translate "fund language" to "insurance language" in the data dictionary?

A: The working group found areas that needed to be redefined or that required more information. We used Insurance Services' Financial Activity Reporting* transaction codes to translate from insurance transactions to fund transactions and identified additional transaction codes to facilitate the communication of data between fund and insurance companies.

For instance, "free-look" transactions give customers buying variable annuities the right to cancel a contract within a certain period of time, and fund companies thought it was important to be able to identify this particular type of transaction. We also identified annuitization transactions, whether they are partial or full withdrawals of money from an annuity; and credits, which are transactions used by the variable annuity and variable life products.

Corrections are also handled differently from the way broker/dealers may process, so we had to ensure that the funds could recognize a correction easily and not misinterpret the activity as frequent trading. Some recordkeeping systems used in the insurance industry require several days to correct a misapplied purchase by reversing or redeeming the original purchase and reprocessing.

Q: How will Networking for SDR be introduced to the insurance industry?

A: Our first step will be to revise the Technical and Best Practices Guides, obtain comments from the working group, and then go to the larger SDR group for final comments. After that, it will be distributed to the industry at large.

* Financial Activity Reporting transmits pertinent financial transaction information about an annuity or life insurance contract from carriers to distributors. This information includes free looks, cancelled contracts, large investments followed by immediate withdrawals, and loans on variable contracts. FAR is a tool that helps the insurance industry comply with the anti-money-laundering provisions of the USA PATRIOT Act and general suitability regulations.

To learn more about Networking for SDR, contact Jeanann Smith at (614) 405-2005 or jsmith@dtcc.com.