BVI-SECURITIES TRANSACTION STANDARDS

Transcription

1 German Investment Funds Association BVI-SECURITIES TRANSACTION STANDARDS 2. TRADING WITH ADVISORS / OUTSOURCING 1

2 External Business Communication of Kapitalanlagegesellschaften (German Investment Management Trading with s /Outsourcing

3 Content 1 Business Processes under the Outsourcing Model Trading Broker Matching Allocations Trade Confirmation Checks Carried Out by the Investment Management Institution Contract Notification Using MT Trade Notification using MT 541/ Settlement Contractual Settlement Actual Settlement with Settlement Confirmation Business Processes under the y Model Trading Order Verification by German IMI Order Placement by the Broker Matching Settlement of Securities The Role and Services of SWIFT... 9 Page 1

4 Introduction This document supplements the document entitled External Business Communication of Investment Management Institutions: Trading & Settlement. It covers the interaction between external asset managers or advisors on the one hand and IMIs and custodians on the other. In this case, trade with brokers/dealers has been outsourced by the Kapitalanlagegesellschaft (German IMI). This is for instance the model to be found in connection with the so-called "Master-KAG" (Master-IMI) structure. The document covers their external communications. The aim is to achieve posting of all transactions by the German IMI on the basis of the trade date. For such a set-up SWIFT can provide two major advantages as a communication medium: Standardised contents - SWIFTNet FIN (message types, MT) - SWIFTNet FIX (FIX protocol). Standardised and fast communication: - SWIFTNet FIN (store & forward operation within seconds) - SWIFTNet FIX : real-time operation within sub-seconds Two business models have been considered: 1) Outsourcing model 2) y model. 1. Business Processes under the Outsourcing Model Under this model the entire asset management function is outsourced. The German IMI is the account owner of the fund's assets at the custodian bank. The asset manager has power of attorney over the account. The entire process can be outlined as follows: What? Collecting research Making the investment decision Verifying investment limits and compliance with other provisions of the German Investment Company Act (KAGG) Getting price quotations Placing order with broker/dealer Advising execution to asset manager Verifying consistency between order and execution report Checking execution report(s) against independent price indications Transmitting asset manager settlement chain; in case of block Who? B/D Page 2

5 orders, transmitting allocations to B/D Creating trade confirmation and sending it to the asset manager Notifying trade to German IMI Verifying investment limits and compliance with other provisions of KAGG Release of trade and initiating settlement by custodian B/D German IMI Verification by the German IMI takes place prior to book-entry and prior to determining the net asset value (NAV). The target is to achieve T+0. This includes 1) Marking to market (fair market value) 2) Checking of broker (broker license) 3) Verification of investment limits and other provisions of the Investment Law (InvG). The German IMI reserves the right to cancel orders. The following high level chart illustrates how the individual parties involved in the process communicate with each other. The Arabic numerals represent the chronological flow. Asset Manager Trading Broker/ Dealer 2) Trade Matching 2a) Trade Notification 3) Settlement 4) Custody KAG All communicaions can be done via SWIFT 5) Asset Servicing 3a) Settlement Custodian CSD 1.1 Trading The entire trading communication is handled by the asset manager. The asset manager executes the trade in exactly the same way as an German IMI with an in-house asset management function. More details are given in the document: External Business Communication of German IMIs: Trading & Settlement. 1.2 Broker Matching Under the outsourcing model, all transaction details are matched between the asset manager and the broker/dealer. More details are given in the document External Business Communication of German IMIs: Trading & Settlement. Page 3

6 1.2.1 Allocations Where appropriate, the asset manager will trade blocks (block orders) and subsequently allocate these to individual accounts (where appropriate also for several German IMIs). This is usually been done with the assistance of the broker/dealer. More details are given in the document External Business Communication of German IMIs: Trading & Settlement Trade Confirmation Upon receipt of the allocations, the broker/dealer creates the trade confirmations and sends them to the asset manager. In the trade confirmation the broker-dealer refers back to the respective allocation. The required data format standards are MT 515 (SWIFTNet FIN) or "FIX Trade Confirmations" (SWIFTNet FIX). More details are given in the document External Business Communication of German IMIs: Trading & Settlement. The transaction between the asset manager and the broker/dealer is carried out on behalf of the German IMI. The MT 515 therefore shows the German IMI and the broker/dealer as contracting parties Checks Carried Out by the Investment Management Institution Asset Manager Broker/ Dealer a) Trade Notification IMI All via SWIFT: SWIFTNet FIN: a) MT 541/543 Custodian CSD Once the trade has been matched between the asset manager and the broker/dealer, the asset manager must send a trade notification to the German IMI, using a SWIFT message, and thus submit it for verification. The intention is for the notification to be received no later than the day of the transaction was executed. 1 In the MT 515, Confirmation Parties, for instance, Party BUYR BIC of German IMI and name of fund in the account field, Party SELL BIC of broker-dealer and broker/dealer's clearing account for the fund. Page 4

7 Under the complete outsourcing model, the transaction is finished for the German IMI once it has been verified and booked. Settlement is initiated by the asset manager (see below) Contract Notification Using MT 515 To notify the transaction, the asset manager sends the German IMI a copy of the MT 515 received from the broker/dealer. MT 515 contains all details of the transaction and is therefore a suitable basis for the verification of transactions. and German IMI agree that in this case the MT 515 does not serve as a trade confirmation (because the asset manager does not act as broker/dealer for the German IMI) but as a trade notification Trade Notification using MT 541/543 As an exception the trade notification can also be effected with MT 541/543 subject to an extension of the specified message scope. This means that the asset manager and the German IMI must agree by contract that MT 541/543 have the content quality of a trade notification and not of a settlement instruction 3. This alternative applies even when the German IMI itself initiates settlement after verification. Consequently the asset manager must complete the MT 541/543 in exactly the same way as the German IMI regarding the business relationship between German IMI <-> custodian (e.g. the German IMI's account number with the custodian). This is fairly easy for the asset manager if, as described above, he has previously received a MT 515 from the broker/dealer 4. The exceptional use of MT 541/543 can be interpreted as a case of outsourcing the creation of MT 541/543 (from a MT 515) by the German IMI to the asset manager 5. Only after successful trade verification will the German IMI initiate settlement of the transaction. To that effect the German IMI sends the MT 541/543 under its name to the custodian qualifying as a settlement instruction. From the point of view of the custodian for whom the German IMI is its client, the subsequent steps are exactly the same as without an asset manager, as described in External Business Communication of German IMIs: Trading & Settlement. The processes and communication to be followed in the event of repudiation by the German IMI still have to be specified (for the asset manager and the broker/dealer, the deal is concluded anyway!). 2 The MT 515 features mechanisms that make it possible to tell a copy from a "real" trade confirmation. 3 The MT 541/543 scope assumes that the recipient keeps a security account for the sender and that the sender issues a receipt/delivery instruction. However, legally speaking this is probably not the case in an advisor <-> German IMI relationship. 4 An MT 515 completed in accordance with the User Hand Book and "Securities Market Practice" contains all details necessary for creating an MT 541 (buy) or MT 543 (sell). 5 Even though MT 515 and MT 541/543 (intentionally) contain many identical blocks and elements of data, system support is still necessary for creating one from the other (and making book entries in own systems). Page 5

8 Under the complete outsourcing model, even issuing the settlement instruction by the German IMI to the asset manager is outsourced. The asset manager has power of attorney over the account. The MT 541/543 used for trade notification can be regarded as a copy of the settlement instruction from asset manager to custodian (and can even be marked as such by the code word COPY). The German IMI reserves the right of cancellation. 1.3 Settlement Settlement takes place on the basis of the various allocations, as appropriate. Under the outsourcing model, the asset manager handles the entire communication with the custodian: settlement instruction, settlement status, settlement confirmation, securities account statement, etc. For this the asset manager must be the account owner or have power of attorney over the account. Details of the settlement are covered in another document: External Business Communication of German IMIs: Trading & Settlement. Some German IMIs want settlement clearance by the custodian immediately upon settlement instruction. For this reason two alternative methods are documented here: Immediate clearance of settlement 1) Contractual Settlement with Settlement Confirmation 2) Actual Settlement with Settlement Confirmation Contractual Settlement Asset Manager Broker/ Dealer a) Settlement Instruction b) Contractual Settlement Confirmation KAG b) Contractual Settlement Confirmation (Copy) All via SWIFT: SWIFTNet FIN: a) MT 541, MT 543 b) MT 545, MT 547 c) MT 541, MT 543 d) MT 548 e) MT 545, MT 547 Custodian c) Settlement Instruction d) Settlement Status e) Settlement Confirmation CSD Immediately after the asset manager has instructed the custodian, the latter creates a settlement confirmation for the German IMI without waiting for the settlement to happen 6. The asset manager receives a copy of the settlement confirmation. 6 In MT 545/MT547 this functionality can be expressed by means of the "PREC" (Pre-Confirmation) code. Page 6

9 1.3.2 Actual Settlement with Settlement Confirmation Asset Broker/ Manager Dealer a) Settlement Instruction d) Settlement Status f) Settlement Confirmation Custodian IMI f) Settlement Confirmation (Copy) b) Settlement Instruction c) Settlement Status e) Settlement Confirmation CSD All via SWIFT: SWIFTNet FIN: a) MT 541, MT 543 b) MT 541, MT 543 c) MT 548 d) MT 548 e) MT 545, MT 547 f) MT 545, MT 547 Under this alternative, the custodian issues the settlement confirmation only after settlement is actually finalised. 2 Business Processes under the y Model The entire process can be outlined as follows What? Collecting research Making the investment decision Getting price quotations Transmitting order proposal to German IMI Verifying investment limits and compliance with other provisions of KAGG Release of order Placing order with the broker/dealer Reporting execution(s) to the advisor Checking execution report(s) for consistency with order Checking execution report(s) against independent price indications Creating trade confirmation and forwarding it to German IMI Who? German IMI (KAG) German IMI Broker/dealer Broker/dealer The subsequent steps are the same as for the process without advisor and documented in External Business Communication of IMIs: Trading & Settlement. The following sections specify in detail the individual steps of the transactions. Page 7

10 2.1 Trading Investment c) Order Broker/ Dealer b) Order- Release a) Order (Advice) d) Execution Report e) Copy of Ex. Report IMI All via SWIFT: SWIFTNet FIX or SWIFTNet FIN: Custodian CSD Order Verification by German IMI The advisor forwards the order to the German IMI. The order has the nature of an advice (a). The German IMI checks the advice (e.g. for compliance with investment limits). The German IMI confirms to the advisor receipt of the advice and either releases the order or rejects it (b) Order Placement by the The advisor sends the order to the broker/dealer on behalf of the German IMI (c) The broker/dealer sends the execution report to the advisor (d) The advisor matches the execution report with the order. The advisor sends a copy of the execution report to the German IMI (e). 2.2 Broker Matching The term "broker matching" denotes the matching of transaction details between the German IMI and the broker/dealer. Broker matching and the subsequent process steps are identical 7 To facilitate subsequent processing the following procedure for linking individual messages is proposed (provided for in FIX and ISO 15022): The German IMI assigns a clear order reference which it transmits to the advisor when the order is released. The German IMI immediately generates a pending deal, which it posts on an interim basis and finalises upon receipt of the trade confirmation from the broker/dealer. The advisor is obliged to transmit the order reference together with the order to the broker/dealer to enable it to return the reference in the execution report and trade confirmation. This enables the German IMI to link the trade confirmation with the release of the order to the advisor and to close the interim booking. Page 8

11 with the process without advisor. They are described in the document: External Business Communication of German IMIs: Trading & Settlement. 2.3 Settlement of Securities In the case that the German IMI initiates settlement of the securities through the custodian, the German IMI is the account owner or has power of attorney over the account. The custodian accepts settlement instructions only from the German IMI. The details are covered in a separate paper: External Business Communication of German IMIs: Trading & Settlement. 3 The Role and Services of SWIFT SWIFT is a co-operative owned by the financial industry. It basically offers two services: Standardised telecommunication with high levels of security, confidentiality and availability. Worldwide connection of all financial institutions via a common network. Current status: 7,800 institutions in 201 countries. Standardised data and transaction formats. Together with the financial industry, SWIFT develops and maintains standards. Usually these standards follow international rules (ISO standards). Market Practice documents specify the application of these standards in a given market. SWIFT's tasks are clearly defined: SWIFT is not itself an intermediary SWIFT does not offer any software for transaction processing but will establish contacts with vendors if desired. For more information please contact: Dr. Thomas Redelberger Regional Manager, Securities Industry Division S.W.I.F.T. Germany GmbH Tel.: Fax: thomas.redelberger@swift.com Klaus Schritt Regional Manager, Securities Industry Division S.W.I.F.T. Germany GmbH Tel.: Fax: klaus.schritt@swift.com Page 9