SEC Approves Launch of New AIP Services

Richard H. Baker, President and CEO, Managed Funds Association

DTCC received regulatory approval from the U.S. Securities and Exchange Commission in May to launch its Alternative Investment Products (AIP) suite of services. AIP, a service platform that links market participants – including broker/dealers, fund managers, administrators and custodians – will provide settlement of subscriptions and redemptions for various alternative investment vehicles, automating the exchange of all trade-related account information. It is being offered by NSCC, a DTCC subsidiary.

“AIP will support growth in the marketplace and facilitate greater product distribution,” said Ann Bergin, managing director, DTCC Wealth Management Services. “Over 20 years ago, our Fund/ SERV® system revolutionized how mutual fund orders were processed and settled. We believe AIP, modeled after the success of our other mutual fund products, will have the same positive transformation on alternate and direct investment administration.”

Alternative investment products include funds of hedge funds, single hedge funds, real estate investment trusts (REITs), private equity funds, and energy, equipment and commodity pool funds. They are typically pooled investment products that are offered through private placements to high-net-worth individuals and institutional investors, such as pension funds. Driven by investors’ desire for portfolio diversification, the market for alternative investments has grown significantly since 2000. Hedge fund assets alone are at $2.7 trillion and are projected to reach $4 trillion by 2010. REIT assets, at $438 billion, have almost tripled in just five years.

Standard Formats, Standard Messages

AIP will standardize the way the alternative investment industry communicates information about the investment security and the associated investments. By effectively addressing operational issues that challenge broker/dealers, fund sponsors and their administrators, AIP will help the alternative investment community become more scalable through increased efficiencies, reduced operational risk and lowered costs.

“This initiative is a significant response to the industry call for standardization and accelerated progress in the reduction of operational risks.” --Gary Palmer, CEO, Irish Fund Industry Association

“This initiative is a significant response to the industry call for standardization and accelerated progress in the reduction of operational risks,” said Gary Palmer, CEO, Irish Fund Industry Association. “Measures that have the ability to successfully accomplish these shared objectives are currently being unified in the form of global guidelines for sound practices for hedge fund managers and their service providers.”

Richard H. Baker, president and CEO, Managed Funds Association (MFA), said, “MFA supports efforts to improve efficiency and reduce operational risk in the alternative investment industry, including DTCC’s efforts in creating the AIP suite of services.”

Centralized, Consolidated Information

Alternative investments are currently handled through hard copy, fax, email, phone calls and spreadsheets, and the lack of automation and centralization prolongs the transaction process. Not only does manual processing make these instruments error-prone, it also prevents business growth as volume outpaces the industry’s ability to manage it.

With DTCC as a central clearing facility for uniform operational functions, thus eliminating the multiple contact points for fund sponsors, broker/dealers, administrators and transfer agents, the AIP service will streamline and automate all the processes related to trade order initiation, money settlement and post-trade reporting.

“From an administration standpoint, AIP benefits all investors and makes alternative products a much more mainstream investment,” said John White, executive director of the Investment Program Association.

“Providers of transfer agent and clearing services can now make information on alternative investments available to clients in the same fashion as mutual funds and common stocks,” said Gerald Gregorio, managing director in the Customer Processing and Services group at Pershing LLC, an affiliate of The Bank of New York Mellon. “Innovations such as AIP will help streamline the investment process and benefit investors and service providers alike.”