DTCC is creating a technology solution for the alternatives market through its subsidiary, NSCC, with active participation and input from broker dealers, alternative investment companies and their administrators.

Overview

Driven by third party distribution of alternative investment products (AIP) through broker/dealers, banks and other channels, DTCC is developing a processing solution for hedge funds, funds of hedge funds, real estate investment trusts (REITs), managed futures and commodity pools. Hedge fund assets alone have grown to $2.4 trillion in 2007 with the number of funds reaching the 8,000 mark. Growth is projected to reach $4 trillion by 2010. REITs assets have reached $438 billion, almost tripling total assets in just five years.

DTCC is creating a technology solution for the alternatives market through its subsidiary, National Securities Clearing Corporation (NSCC), with active participation and input from broker dealers, alternative investment companies and their administrators. These products are primarily private vehicles that are periodically traded rather than being traded and valued daily, so automating these transactions requires a customized solution. NSCC’s AIP service will automate and streamline trade order, sub-account documentation exchange, reporting and settlement of these complex instruments.

Alternative investments processing is challenging because it is currently handled manually, using hard copy documents, fax, email, phone calls and manual entries on spread sheets. The paper-based matching and confirmation can take literally weeks to complete, a huge impediment that creates tremendous risk given the size and complexity of these transactions.

Drawing from NSCC’s success in automating the financial markets' transactional and information-exchange processes, the new AIP service will automate new account processing, purchases, redemptions, tender offers, and commission payments for alternative investment products. Establishing connectivity to the service is easy using XML, mainframe file transfer or spreadsheet upload. NSCC expects to pilot the service by year-end 2007, and to launch it into full production in 2008, pending approval by the Securities and Exchange Commission.

Who Can Use this Service

NSCC’s service will be open to participants in the alternative investment space, including current users of NSCC fund services, SEC registered advisors, CFTC registered commodity pool operators, trading advisors, SEC registered investment companies, broker/dealers, banks and trusts. U.S.-based firms are currently eligible for membership, with plans in place to accommodate non-U.S. firms in the near future. Participants must sign an AIP membership agreement and appoint an NSCC settling bank.

Benefits

For a growing industry that today relies largely on manual processing, NSCC’s service will offer a number of key benefits that:

 

Improve client service

• Increased efficiency through automation and standardization of transactions between firms and funds eliminates the need for fax, email, and phone calls for order processing.
• Lower risk of errors with automated information management that minimizes duplication and eliminates gaps in information.
• Improved client service through the timely dissemination of position and valuation reports without the need to manually track and manage information each account.
• Streamlined reconciliation between counterparties provides an accurate picture of a client's account at any given time.

Enhance functionality and reconciliation

• Global capabilities with settlement reporting in multiple currencies.
• Superior order status management using a proven network that maintains an audit trail of all data to streamline information management and reconciliation.
• Automated, straight-through-processing increases speed of settlement and eliminates redundant paperwork and delays in reconciling transactions.

Provide superior data integrity and security

• Centralized, electronic data exchange over a secure, reliable and self-healing network with unparalleled business continuity capabilities.
• Robust, automated data environment offers improved capacity for data and trend analysis, management reports and compliance reviews.

How the Service Works

All members need separate participant numbers for the AIP service, and settlement obligations for alternative investments will not be netted with other activity. AIP activity will be settled gross, with debits settled separately from credits.

For More Information

We'd like to show you how DTCC's proposed service for alternative investments can help you grow your business. Contact AIP Relationship Management at 212-855-8877.