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Processing Stable Value Funds: How DTCC's Defined Contribution Service Makes it Easy

The Depository Trust & Clearing Corporation's has an understated role in the financial markets, a tribute to how well it does its job-providing the infrastructure for trading that makes U.S. financial markets the model for the world. DTCC has taken this knowledge and applied it to both mutual funds and defined contribution plans.

Since the 1980s, when DTCC's subsidiary, National Securities Clearing Corporation (NSCC) extended its services to the mutual fund community, the organization has continued to help grow the fund industry. It created a network of connectivity among virtually all broker/dealers, banks, fund companies, third-party administrators, major insurance carriers and financial intermediaries. And it created services such as the industry standard for transaction processing - Fund/SERV® - and Defined Contribution Clearance & Settlement (DCC&S).

Defined Contribution Clearance & Settlement - What It Is

For defined contribution business partners - fund companies, trustees, and third-party administrators - DCC&S offers a unique, fully-automated, centralized servicing hub for processing defined contribution plan orders, whether they are mutual funds, Stable Value funds, collective investment trusts or separate accounts.

Since its introduction in 1997, DTCC has helped eliminate a complex web of "spaghetti-type" connections for firms using the service. In addition, DCC&S has standardized the order flow through its pipeline, moving information quickly, reducing operating costs, and simplifying the settlement process by calculating one single money settlement figure for each participant daily.

What Users Say about DCC&S

For firms like MetLife, one of the largest national providers of Stable Value funds with $18 billion in Stable Value assets, a service such as DCC&S has become a critical component of its business. MetLife uses DCC&S for its Met Managed GIC product and plans an ongoing migration of its Stable Value assets onto DCC&S. Ben Gorton, MetLife managing director, Stable Value Investments, explains, "Most 401(k) providers, especially TPAs that want to access different funds, have to be able to link to Fund/SERV, regardless of what platform they are on. For MetLife, it's critically important to our business that we use the DCC&S platform, and that our business partners do, as well. We couldn't have built such a large business otherwise. The intense labor that a manual environment requires, plus the errors you encounter in transmitting information by fax or phone, would have slowed us down."

Galliard Capital Management, a subsidiary of Wells Fargo & Company and another leading Stable Value manager, has been using DCC&S for the past two years. "We've found the service to be a very efficient way of communicating between our record-keepers and Wells Fargo. Trade communications are done on-line, and the settlement is completed through a single wire that includes all our fund transactions," says Leela Scattum, a principal with Galliard.

Before becoming a member of NSCC, Galliard/Wells Fargo would handle its Stable Value trade processing manually. "A record keeper trading with a fund would fax an order to Wells Fargo and the money would be transferred by wire. We were exchanging different wires with different parties every day. It was not cost efficient," she notes.

How DCC&S Works

DCC&S uses three DTCC Mutual Fund Services to move a defined contribution trade through all the steps leading to a smooth, problem-free conclusion. It combines the order entry, confirmation and registration capabilities of Fund/SERV with the account maintenance and customer account record-keeping capabilities of Networking, and the NAV calculations (and other underlying security data) of Mutual Fund Profile Service.

In a typical DCC&S process, Mutual Fund Profile Service receives from fund companies the daily NAVs of each fund, and sends that information, along with the rates, to record keepers and trustees. The record keeper calculates the orders for each fund and transmits the orders through Fund/SERV. After a basic format and file check, Fund/SERV transmits the orders to the fund companies and the trustees. Fund companies then confirm or reject the orders, and, if confirmed, the transactions are set up for settlement.

On settlement day, trustees and funds are provided with a net settlement figure and a summary of all purchases and redemptions. NSCC then debits or credits each trustee and fund company with a single net settlement via Fed Funds for all confirmed trades. TPAs can also transmit data to firms acting as clearing hubs, and they will be directly responsible for settlement of trades with DTCC.

In the final step, a fund company submits updated account balance information through Networking, and this information is then transmitted to the trustee and the TPA.

In a situation where a firm acts as both record-keeper and trustee, the role of TPA is eliminated.

Usage Continues to Grow

Over the last five years, DCC&S has experienced significant growth in the number of users and in the volume of defined contribution transactions being processed through the service. This was most dramatically apparent in 2002, when volume increased an unprecedented 81% to 18 million trades. In some part, that surge reflected the inclusion of Stable Value funds, which DTCC was given regulatory approval to process (along with other non-1940 Act retirement products) in 2001. With consumer interest increasing and more and more assets being directed into these funds, a service such as DCC&S can provide firms with an automated, technologically advanced solution that will support their Stable Value business at ever-growing volumes, in an environment that has been proven to reduce costs and operational risk.

DTCC is an industry-owned utility that was formed originally by the NYSE, the American Stock Exchange and the NASD. Operating on a cost basis, DTCC's subsidiaries serve as a post-trade clearinghouse for virtually all equity and fixed income trades, including corporate and municipal bonds and government and mortgage-backed securities. DTCC is also the leading processor of mutual fund and insurance products; and its depository subsidiary provides custody and asset servicing for more than two million securities issues from the U.S. and more than 100 other countries.

See also: Tri-Party Processing (PDF, 282KB)

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