re: Subscription/Redemption as ExecInst
Dwight Arthur / Depository Trust & Clearing Corporation
28 Sep 2001 8:43AM ETI agree with CXhris' response but would like to reword it a little for clarity to those who may not have closely followed this issue to this point.
First, we need to clearly distinguish between two similarly-named yet entirely different issues: open-ended/closed-ended funds versus open/closed funds.
Open-ended funds are funds in which the fund company is accepting subscription and redemption orders. For a subscription order, the fund company or its agent will issue new (additional) shares in the fund upon receipt of the investor's payment, priced at the Net Asset Value (NAV) as determined from time to time by the fund company. For a redemption order, the fund will receive previously-issued shares from the investor, return them to unissued status, and remit payment to the investor for the value of the shares based on the NAV as determined from time to time.
For closed-end funds, the total number of shares outstanding is fixed and subscription/redemption orders are not accepted by the fund company. The shares trade on one or more open markets, with an investor free to sell shares to any other investor at any price so long as the trade complies with all relevant rules of the particular market, including where relevant the participation of an authorized market maker in the deal.
We have noted that there are cases in which a fund begins as open-ended until some target number of shares have been issues, and then becomes closed-ended.
By way of contrast, open and closed funds are both open-ended. The open fund operates as an open-ended fund described above. In a closed fund, the fund company has determined that the number of shared issued and outstanding is at or near the maximum amount desirable and stops accepting new subscription orders. (Exceptions may be made for new shares issued through dividend reinvestment, subscription orders received tp add shares to an existing investment, or subscription orders for a new participant in a group that holds existing shares such as a new employee in an employee-sponsored retirement plan.) Redemption orders, however, are accepted by the fund company and investors do not sell shares to each other on the open market.
Our finding has been that a fund is either open-ended or closed-ended at any one point in time. If it is open-ended, subscription and redemption orders are sent to the fund company or its agents. (For an open-ended fund that it closed, new subscriptions will be rejected). For a closed-ended fund, orders to buy or sell shares are sent to the open markets or market makers on which these shares are traded.
(Note, up to this point I am only reporting what we find to be industry practice, and now I will turn to what FIX/CIV protocol does about it.)
We believe that the CIV protocol within FIX applies to open-ended funds. We believe that closed-ended funds are traded as equities, and that no enhancements or extensions to FIX equity protocols are needed to cater for closed-ended funds. Finally, we believe that the question of whether a fund is open-ended or closed-ended is NOT a part of the information to be submitted on an order. Rather, it is determined by the fund company and becomes a part of the static data defining the particular securities instrument.
In writing this explanation, I find that we may be missing a corporate action message to announce that an open-ended fund will be converted to closed-ended or vice versa as of some specified point in time.
Josef Fehr of UBS Warburg describes a need to designate whether an order is to be sent to either the primary market (fund company) or secondary market (exchange). I believe that this makes sense only in the case that there is a single instrument, designated by a single ISIN (or equivalent designation) which, at a single point in time, is simultaneously trading as open-ended (subscriptions accepted by fund company) and closed-ended (at a market-maker or exchange).
I would be interested to know (a) whether there are or have been instruments that simultaneously trader both ways, as described above, and (b) if not, whether a situation can be described in which this designation on the order cannot be eliminated by reference to static instrument data.
- Dwight
