DTCC launches market timing compliance service

Source: Depository Trust & Clearing Corporation

The Depository Trust & Clearing Corporation (DTCC) announced today the launch of a new service designed to help the mutual fund industry comply with an impending deadline under a new Securities and Exchange Commission (SEC) rule designed to combat short-term trading and market timing.

The SEC's Rule 22c-2 requires fund companies to create agreements with intermediaries in order to access shareholder data within omnibus accounts and evaluate trading patterns for possible market-timing activity. Leveraging technology that already exists within Networking, one of its key Mutual Fund Services, DTCC has developed a solution that will allow funds to more accurately track and record instances of frequent trading in omnibus accounts (a pool of individual accounts combined into one account, usually in the name of an intermediary firm), and then use that information to impose short-term redemption fees, if applicable.

Networking is provided by DTCC's subsidiary, National Securities Clearing Corporation. It is used by the mutual fund industry to exchange and reconcile customer account-level activity between fund companies and broker/dealers and other distributors, and offers centralized settlement of cash dividends and capital gains distributions. A new data stream in the service, created specifically to support the industry's compliance requirements, will provide fund companies with an automated, standardized and centralized method of requesting and receiving information through DTCC's secure and reliable infrastructure.

"With close collaboration from a working group of the Investment Company Institute, we've been able to deliver a solution two months ahead of schedule and provide the industry with ample time to program and test prior to the SEC's October 16 deadline," said Barbara Simon, DTCC vice president, Relationship Management.

Kathy Joaquin, director of Operations & Distribution, Investment Company Institute, explained that the group cooperated on multiple levels. "While the working group provided guidance in dealing with the requirements of the SEC ruling, three additional task forces dealt specifically with key initiatives we identified as critical to the development and implementation of a solution - communications, guidelines and technical design." These task forces developed a standard agreement package for the industry, a set of best practices, user guides, and an outline for business functionality and systems requirements.

The new service, called Networking for Standardized Data Reporting, allows fund companies to request, and distributors to transmit, information at two levels:

  • the summary level for super omnibus accounts (comprising multiple plans, trusts and/or investor omnibus accounts). Data can include account numbers, dollar amounts and numbers of buys and sells
  • the detail level, where a fund company uses summary level data to request more specific information, such as details on shareholders in a 401(k) or retirement plan

Service open to secondary intermediaries Frequently, more than one firm exists in the intermediary chain, which can mean that the primary intermediary does not have the level of information that a secondary intermediary - a recordkeeper, for example - has. For firms using Networking, the information can be passed automatically through the service. For firms in the chain who are not Networking participants, DTCC offers a Data Services Only (DSO) membership, which has fewer requirements than a full-service Networking membership, and allows for information-exchange only. In this case, a DSO member would be able to use Networking to pass information directly to the funds requesting it, or to their transfer agents.

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