Momtchil Pojarliev
Traders Magazine Online News

Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

Traders Poll

Amid changes in builder, do you think the CAT project will be completed by 2020?

Free Site Registration

February 1, 2004

A Firmer Deadline to Curb Late Trading

By John A. Byrne

It could mean an earlier deadline for many stock investors.

But will the medicine be worse than the malady that it is designed to cure? That's what some critics were wondering after getting their first looks at the SEC's new proposal to end mutual fund late trading abuses.

In early December, the SEC issued for public comment, a proposal to introduce a new hard close' rule for processing trades. It would impose a more restrictive daily cutoff for pricing stock orders. The prices used for calculating purchases and redemptions would, in many cases, still remain the closing prices on the day received.

However, under the new rule, certain intermediaries, such as fund administrators, broker dealers and banks, could no longer submit orders by 4 p.m. and then transmit the trade information later that evening.

Instead, the SEC would require orders to be received, and in effect, time-stamped, by 4 p.m. (Eastern Time) at the National Securities Clearing Corp. (NSCC), the Wall Street clearance and settlement utility. Alternatively, eligible orders could also be accepted in this way by the fund companies or their transfer agents.

One early critic of the SEC's proposal was Charles Schwab. While the brokerage giant is clearly concerned about fraud, it warned that "investors will be confused and frustrated by different cutoffs for mutual funds than for equities, bond and other types of pool investments."

However, the initial unease seems to be abating. In part, that's because of one idea envisaged by Fidelity Investments and the NSCC, a plan that would create a more flexible hard close,' giving middlemen more time to process orders.

In practical terms, the SEC proposal could require the intermediaries to introduce earlier daily deadlines: perhaps by several hours, or even the previous day - instead of today's 4 p.m. deadline - to meet each day's pricing requirements. On the West Coast, the deadline would likely become the most restrictive. Some administrators may not even find it possible to price orders based on the date of receipt.

Today, the "forward pricing rule" of the Investment Company Act mandates funds to calculate the Net Asset Value (NAV) at least once a day. That is usually done after the 4.00 p.m. close, often in the early evening hours. That's when the middlemen forward processed orders to the NSCC's Fund/SERV system, or to the funds' primary transfer agents.

The new amended forward pricing rule, which the SEC believes would require a 12-month transition period to implement, has a lofty goal: preventing the sort of late trading reportedly conducted by Canary Capital Partners, the $730 million hedge fund which settled charges with New York State Attorney General Eliot Spitzer last September.

"Fund intermediaries have blended late trades with legitimate trades in the file containing net order information submitted to Fund/SERV or a fund's primary transfer agent after 4:00 p.m.," according to the SEC.

Order Executions

The new SEC proposal would likely have a profound impact on many parts of the trading process - from order entry to order execution by market makers, specialists, ECNs and ATSs. And not all investors are happy.

"What will happen, for example, if a company (perhaps the employer) issues poor earnings late in the day, or other bad news presents itself?" asked Richard Quinn, in a comment letter to the SEC.

"Non-401(k) investors have time to react while plan participants do not. This is blatantly unfair and unnecessary," added Quinn, director, compensation and benefits at the Public Service Enterprise Group in Newark, N.J.

The SEC said the proposal is pending and declined comment.