extended trading services

Extended Trading ServicesExtended Trading Services

Vinit Sharma

www.niit-tech.com

NIIT Technologies White Paper

Extended Trading Services 1

Introduction 3

Financial Intermediaries 3

Financial Investors 3

Fund Companies 4

Bank and Trust Companies 4

Third Party Administrators (TPA) 4

Depository Trust and Clearing Corporation (DTCC) 4

Role of Information Technology 5

TPA Order Aggregation system 5

Order Management System (OMS) 5

Fund Accounting Platform 5

NSCC – Fund Serv 5

Settlement Platform 6

Industry Issues 6

Our Solution 6

Our Extended Day Trade Lifecycle 6

Conclusion 7

NIIT Experience and Benefits 7

About Author 9

About NIIT Technologies 9

CONTENTS

INVESTMENT

REVENUEREVENUE

INVESTMENT

INVESTMENT

INVESTMENT

FINANCE

FINANCE

FINANCE

FINAANCEFINANCEWEALTH

MARKET

MARKETMATKET

CAPITAL

CAPITALCAPITAL

CARGO CAPITALECONOMICS

ECONOMICS

BANKING

Traditionally, US-based open ended mutual funds are traded during

market hours from 9:00 a.m. to 4:00 p.m. Eastern Time (ET).

During these hours, the investor places an order via different

intermediaries and destinations to the respective fund companies.

Under the forward pricing rule, investment companies price their

entire buy and sell orders of fund shares according to the Next Net

Asset Value (NAV). The mutual funds calculate and report the NAV

once a day after trading closes down at 4:00 p.m. ET. Hence,

trades placed before trading closes for the day are priced at that

day’s NAV, while trades received after are priced at next day’s NAV.

Extended day trading in mutual funds refers to trades that are

placed after the closing but are priced at NAV for the same day.

Only a small subset of large investors such as HNIs, fiduciaries,

non-profit organizations, corporations, retirement plans, and

foundations are eligible to place extended day trades. This is

important as the sheer size and complexity of the transaction

warrants several processing steps to ensure adherence to U.S.

Securities and Exchange Commission (SEC) regulations and also

to make sure that the integrity of the financial data is maintained

and the end client’s investment is protected.

Trades submitted for extended day have at least two cut-off times

to be guaranteed the current day price. Firstly, the trades need to

be submitted to the trading destinations such as Depository Trust

and Clearing Corporation (DTCC) and Fidelity by respective

destination cut-off time (6:00 AM ET in case of DTCC). Also, trades

must reach the fund companies from the destinations before their

respective fund cut-off times. In either case, if the trades are

submitted after the cut-off time, they are priced at the following

day’s NAV.

Introduction

A financial intermediary is typically an institution that facilitates the

channeling of funds between lenders and borrowers indirectly. A

number of financial intermediaries are involved in the complete

lifecycle of trade - from order creation to trade settlement. The

intermediaries involved are:

• Financial Investors

• Mutual Fund Companies

• Banks and Trust Companies

• Third Party Administrators (TPAs)

• Brokers/ Dealers

• Destinations - Depository Trust and Clearing Corporation,

Schwab, Fidelity

This paper analyses the complete lifecycle of an extended day US

based mutual fund trade processing and the different financial

intermediaries involved. It focuses briefly on the information

technology stack commonly used by the intermediaries for

end-to-end processing of the trades.

Financial Intermediaries

These are investors (individuals or firms) who make investment

decisions for financial gain. They use their financial skills and

methods to increase returns and manage risks. Extended trading

services are almost exclusively used by large institutional investors

including fiduciaries, non-profit organizations, corporations,

retirement plans, and foundations. Most of the investments come

from retirement plans such as 401(K) and other defined

contribution plans. This is significant as almost 9% of American

household financial assets are invested in Defined Contribution

(DC) or Individual Retirement Account (IRA) plans.

Financial Investors

3

These are investment companies engaged in the business of

investing the pooled capital of investors in financial securities. Most

fund companies governed by SEC provide Extended Trading

Services. Some of the major players in the market are listed below:

• Vanguard

• American Funds

• Fidelity

• MFS Funds

• Nuveen

• American Century

4

Bank and Trust companies act as trustees for groups of people

who have lent money to a corporation through bonds or other

obligatory instruments. They provide a full range of core services

like custody services, compliance reporting, investment

management, and special record keeping for each of the

participating investor. Most of these companies have in-house

capabilities in information technology and provide platforms for

execution of extended day trades.

Bank and Trust Companies

Fund CompaniThird Party Administrators are organizations that are primarily

involved in processing insurance claims or certain aspects of

employee benefit plans for a separate entity.

They also handle other aspects of employee benefit plans such

as processing of retirement plans. Retirement plans such as

401(K) are often managed by investment companies. Instead of

handling all the plan contributions by employees, distribution to

employees, and other aspects of investment processing,

investment firms typically outsource these administrative tasks to

Third Party Administrators.

Third Party Administrators (TPA)

Mutual Funds in Household Retirement AccountsMutual Fund percentage of retirement assets by type of retirement vehicle, 1990-2010

DC plans*

816

2330

3844 45

50 53 4954

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

2228

3441

4648

4247 49 45 47

IRAs

DC plans include 403(b) plans, 457 plans, and private employer-sponsored DC pakns (including 401(k) plans).

Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined

Contribution Administrators, American Council of Life Insurers, and Internal Trvenue Service Statistics if

Income Division

Information Technology plays a pivotal role in facilitating trade

execution and processing. A number of automated and centralized

platforms are used from order entry – purchase, exchanges and

redemption, to order confirmation, registration and money settlement.

Some of the critical IT systems and platforms involved in extended

day trading are listed below:

• TPA Order Aggregation System

• Order Management System

• Fund Accounting Platform

• NSCC – Fund/ SERV

• Settlement Platform

Role of Information TechnologyRole of Information Technology

The fund accounting platform receives an extract of all the trade

orders submitted to NSCC and updates the corresponding accounts

for the type of order, units, fund, pricing, and other order details. The

platform provides the updated position for assets and cash for each

account and interfaces with the settlement platform. It also provides a

feed to TPAs and notifies them of the trade submitted to the fund

companies and the good faith estimate for the trades.

Fund Accounting PlatformFund Accounting Platform

5

TPAs use Order Aggregation systems to aggregate orders for their

client banks in their own standard format with basic validations and

send it to the order management systems.


Order Aggregation System


Order Aggregation System

The trade order management system receives aggregated orders

from TPAs/ banks and generates trade orders. The aggregated

orders can be of three types:

1. Sell (Full/ Partial liquidation)

2. Buy

3. SWAP/ Exchange

For sell orders, no pricing information is necessary for generating the

trade order. However, for buy orders or exchange orders, the

platform retrieves pricing information from the pricing engine to

generate corresponding trade order. After receiving confirmation

from fund companies, the platform also stores any pricing informa-

tion provided by the TPAs/ banks to identify future discrepancies.

The trade orders may or may not be aggregated depending on

business needs. Once the trade orders are created, the OMS

submits it to NSCC for further processing and submission to fund

companies. The platform also creates an extract for the fund

accounting platform based on the trade orders submitted to NSCC.

The extract is used for future reconciliation when confirmation for

trade is received from fund companies.

Order Management System (OMS)Order Management System (OMS)Depository Trust and Clearing Corporation is the world’s largest

post trade financial services company. It provides post-trade

services to exchange-traded and over-the-counter securities.

Through its subsidiary - National Securities Clearing Corporation

(NSCC), it provides clearing, settlement and information services

for equities, corporate and municipal bonds, government and

mortgage backed securities, money market instruments, and

over-the-counter derivatives. In the U.S., a vast majority of third

party mutual fund transactions are processed through NSCC

application Fund/Serv. Fund/Serv plays a major role in linking fund

companies with brokers/dealers, banks and other distribution firms

in expanding investor access to funds.

Depository Trust and Clearing Corporation

(DTCC)

In extended trading, TPAs aggregate orders for their respective

banks and send it to the trade order generation platform. Some of

the leading TPAs in the industry are EPIC (Electronic Payroll

Investing Center), Sunguard and RELIUS.

Settlement platform settles each account at the end of business

day for asset positions and cash balance. It receives feed from

Fund Accounting platform and NSCC.

Settlement PlatformSettlement Platform

6

Some of the key challenges that financial institutions face in

implementing extended trading services solution are:

• Trans-national markets and global exchanges that demand fast

and accurate processing of high transaction volumes

• Delivering superior customer service

• Providing an architecture that is easy for the customers to

understand and flexible to accommodate any future changes

Industry IssuesIndustry Issues

NIIT Technologies provides mission-critical, flexible and scalable

trading solutions that support multiple channels and cover different

types of trading methodologies, resulting in increased agility and

transparency in trading environments.

The new trading platform is built as a set of robust Extract, Trans-

form 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

workflow can send notifications at every critical stage of the trade

order. These notifications provide complete transparency with

respect to the status of an order at any time to the business users.

The workflows additionally provide the ability to raise B50 requests

for setting up new fund accounts.

NIIT Technologies has also built a Graphical User Interface (GUI) for

the operations team and the system administrators to easily

manage and view the status of trades placed. Few of the functional-

ities which are provided to the users are:

• A dashboard with summary information of all the trade orders

submitted/ processed/ confirmed/ in exception

• Ability to view and process exceptions raised during Straight

Through Processing

• Ability to setup new clients/ TPAs and their preferences

• Ability to maintain fund level attributes and setup or modify

trading destination details, transmission schedules and destina-

tion holidays

• Ability to generate trade order status reports, B50 status reports

and audit log reports

Our SolutionOur Solution

Fund/Serv is the industry standard for processing and settling

mutual fund transactions. It interfaces with fund companies, bank

and trust companies, TPAs, broker/dealers and other distribution

firms. It uses automated and standardized formats for trade

orders. The order generation platform creates trade orders for

Fund/Serv in the appropriate format. This is used by Fund/Serv

for placing the trades with respective fund companies. It also

provides confirmation to the order generation platform once the

trades are successfully processed by the fund companies.

Fund/Serv uses a cut-off time of 6 a.m. (ET) for extended day

trading. Any trade order received after that is processed for next

day’s NAV.

National Securities Clearing Corporation

(NSCC) – Fund/Serv

National Securities Clearing Corporation

(NSCC) – Fund/Serv

Our Extended Day Trade LifecycleOur Extended Day Trade LifecycleA brief overview of our Extended day trade lifecycle is captured in the below diagram.

TPA/BANK TPA/BANK TPA/BANK TPA/BANK TPA/BANK

Vendor Supported Process NSCC Supported ProcessTPA/Bank Supported Process

FUND 1

FUND 2

FUND 3

TRADE ORDER GENERATOR

PRICINGENGINE

NSCC (FUND SERVE)

ORDERAGGREGATOR

SETTLEMENT PLATFORM

SYSTEM OF RECORDS(FUND ACCOUNTING PLATFORM)

1

8

8

2 2 25

5

6

6

3

9

7

4

11

10

12

8 8

7

Trade orders received by NSCC are validated for certain mandatory

information. If the order satisfies the preliminary validation, an

acknowledgement is sent back to the trade order generator. NSCC

sends the trade order file to respective fund companies for

processing.

4. NSCC Validation and Order Submission to fund companies4. NSCC Validation and Order Submission to fund companies

The fund companies validate the trade orders and 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 trade order

confirmation contains information such as pricing of the trade,

number of units bought/ sold/ exchanged.

5. Trade Order Processing at fund companies5. Trade Order Processing at fund companies

Once trade confirmation is received by NSCC, the corresponding

confirmation is sent to the trade order generator. Usually the trade

confirmation for trade order placed could be received any time

during the day. There are multiple cycles in which confirmations for

the trade orders are sent by NSCC. If the confirmation is not

received during the day, an exception is flagged and a manual

intervention is necessitated to understand the issue and resolve it.


The trade order generator sends an acknowledgement to the

TPAs/ banks after it receives the trade confirmation from NSCC.

7. Trade Confirmation to the Banks/TPAs7. Trade Confirmation to the Banks/TPAs

The trade order generator sends the trade confirmation details to

the fund accounting platform for the corresponding fund account.

8. Feed to Fund Accounting Platform8. Feed to Fund Accounting Platform

The fund accounting platform updates the trade details for

bookkeeping purposes and generates settlement feed that

consists of information such as activity, position and income.


Actual settlement is performed and the asset position and cash

balance is updated for each individual account. Typically, the

settlement would happen on T+1 day; however, in certain

exceptional cases such as exchange trades, where both the buy

and the sell order could not be processed within the cut off time,

an exception is raised. Once both the sides of exchange trade are

executed, a confirmation is received by the settlement platform

from NSCC and the Fund Accounting platform and the final

settlement is executed. In some rare cases, a reconfirmation may

be received for a trade that was already settled. Such cases are

settled based on defined business rules and the concerned parties

e.g. TPAs, banks etc. are notified.

10. Trade Order Settlement10. Trade Order Settlement

TPAs create an order file and send it directly to the vendor

supported trade order generator or a bank may decide to

aggregate orders for TPA before TPAs send it to the trade order

generator. Different mechanism can be used for sending orders

including File Transfer Protocol (FTP) or Network Data Mover

(NDM) processes.

1. Order Generation1. Order Generation

Fund Prices are sent to the trade order generator from multiple

vendors. Usually prices are taken from multiple sources and based

on a pre-decided business rule; one source is selected for a

particular fund.

2. Pricing Information2. Pricing Information

Trade orders are generated in NSCC supported format at regular

intervals throughout the night. NSCC has a cut-off time (5:00 AM

ET) till which it accepts the trade orders. Every fund company has

their own specified cut-off time, by which, if the trade order is

received, they are obliged to price the trade at the current NAV.

3. Trade Order Generation3. Trade Order Generation

Mature Best-in-class Process FrameworkNIIT software factories are ISO 27001, CMMi Level 5 and PCM Level

5 accredited. Our resources are therefore well versed with operating

in a highly mature process oriented and secure environment and

bring this expertise to all client engagements.

Access to large resource baseNIIT has a large resource base of over 5000 analysts and consul-

tants and hence is able to quickly source professionals with the

desired skill sets required for the project. Furthermore, we also

possess the capability to ensure a quick ramp-up of project

resources when in need.

8

NIIT 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 has 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 shore, dual or

multi shore formats.

Technology Bandwidth

Strong Industry FocusNIIT has several thousand person years of experience in designing,

building and maintaining large-scale applications for day-to-day

NIIT Experience and Benefits

Information Technology has transformed the capital markets.

Markets have become interconnected resulting in the emergence

of trans-national markets and global exchanges. Aggressive

growth and accurate processing of high volumes of transactions

has become an imperative for financial companies to deliver

enhanced customer service. Our team has worked with leading

financial services companies to help them with trading solutions

that support multiple channels and covers different types of

trading methodologies.

NIIT Technologies help identify and assemble the core building

blocks to improve trade processing responsiveness, variability

and resiliency. Our offerings begin with the analysis and evalua-

tion of the customers’ trade processing environments. By select-

ing the right set of business processes, we help financial services

organizations manage costs and risks of transforming trading

environments.

Our banking and financial solutions help differentiate a financial

firm in an increasingly competitive marketplace. They help in

delivering new capabilities and establishing market credentials.

We also enable enterprise-wide trade cycle management by

leveraging integrated automation of processes thereby improving

efficiency, increasing transaction capacity and reducing opera-

tional and financial risk.

Conclusion business and has considerable experience in Front Office, Middle

Office and Back Office operations. As per the Datamonitor Black

Book of Outsourcing 2010 survey, in the overall satisfaction ratings,

NIIT Technologies is ranked number 1 in the Data Management

Services. NIIT’s team has 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 tools and

products used in the industry.

A global IT sourcing organization | 21 locations and 14 countries | 7000+ professionals | Level 5 of SEI-CMMi, ver1.2 ISO 27001 certified | Level 5 of People CMM Framework

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Write to us at [email protected] www.niit-tech.com

NIIT Technologies is a leading IT solutions organization, servicing customers in North America,

Europe, Middle East, Asia and Australia. The Company offers services in Application

Development and Maintenance, Managed Services, Cloud Computing and Business Process

Outsourcing to organizations in the Financial Services, Insurance, Travel, Transportation and

Logistics, Manufacturing and Distribution and Government sectors.

The Company’s deep domain knowledge and new approaches to customer experience

management with robust outsourcing capabilities, and a dual shore delivery model, have made

NIIT Technologies a preferred IT partner for global majors in these chosen industries. Profound

and enduring customer engagements have become a hallmark of NIIT Technologies.

NIIT Technologies vision is to be the “First Choice” of services for the focused segments

serviced. The Company has a simple strategy - to focus and differentiate. It competes on the

strength of its specialization.

Over the years the Company has forged extremely rewarding relationships with global majors, a

testimony to mutual commitment and its ability to retain marquee clients, drawing repeat

business from them. Whether it is global banking and insurance major, leading Asset

Management solutions provider, the Number Two cement manufacturer, or travel big-wigs, NIIT

Technologies has been able to scale its interactions with these marquee clients into extremely

meaningful, multi-year "collaborations.

About NIIT Technologies

Vinit Sharma is a Business Solution designer within the Banking and Financial Services practice

at NIIT Technologies Ltd. He has over 8 years of experience. His expertise includes Capital

Markets, Corporate Finance, Credit Card and US Mortgage business.

About the Author

Europe

Singapore

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