Note: Descriptions are shown in the official language in which they were submitted.
CA 2754238 2017-03-22
A SYSTEM, METHOD, AND PROGRAM PRODUCT FOR MANAGING A
COLLECTIVE INVESTMENT VEIIICLE INCLUDING A TRUE-UP OPERATION
FIELD OF THE INVENTION
[00011 The present invention relates to collective investment vehicles. More
particularly, the
present invention relates to a mechanism for managing redemption and creation
events for
collective investment vehicles.
BACKGROUND
[0002] Collective investment vehicles comprise any entity that allows
investors to pool their
money and invest the pooled funds, rather than buying securities directly. A
variety of examples
of collective investment vehicles will be described in the detailed
description of the
embodiments. For convenience, examples of some embodiments of the invention
will be
described in the context of exchange traded funds, but the type of collective
investment vehicle is
not limiting on the invention. The invention will be described in relation to
"market
participants" ("MP's"). An MP is any person or entity that wants to create or
redeem shares in
the collective investment vehicle. One non-limiting example of an MP is an
authorized
participant, to be discussed below in relation to exchange traded funds.
[0003] Exchange Traded Funds, or ETEs, are a type of collective investment
vehicle that owns a
portfolio of securities and issues shares that are traded on a stock exchange
or other organized
market. Shares of an ETF are created by authorized participants (AP) who
either deliver cash, a
portfolio of securities, or a combination of cash and securities to the ETF,
and receive ETF
shares in return. ETF shares may also be redeemed by APs by delivering ETF
shares and
receiving cash, securities or a combination thereof. An AP may create or
redeem ETF shares.
Typically, other investors buy or sell ETF shares in an organized market.
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[0004] All ETFs must be approved for issuance by the Securities and Exchange
Commission
(SEC).
[0005] In order to approve an ETF for issuance, the SEC has required that thc
market trading the
ETF disseminate an indicative value of the ETF shares every 15 seconds during
trading hours.
BRIEF SUMMARY OF THE INVENTION
[0006] In one embodiment, a method for managing redemptions for a collective
investment
vehicle is disclosed, comprising: performing a creation event, comprising:
receiving a request to
create one or more shares of the collective investment vehicle; receiving an
asset from one of the
MP's in relation to the creation event; issuing, by one or more computers and
an electronic
network, one or more collective investment vehicle shares directly or
indirectly to the respective
one MP based on the asset received; obtaining securities for the collective
investment vehicle to
become a part of the portfolio of securities; obtaining or creating an
electronic record of security
identifiers for the portfolio of securities held by the collective investment
vehicle; calculating
and disseminating automatically an intraday indicative value (IIV), by one or
more computers
programmed to calculate the IIV, the calculating based on or derived from the
electronic record
of the portfolio of securities in the collective investment vehicle, or
transmitting data
electronically, by the one or more computers, of contents of the portfolio of
securities to one or
more third parties for a calculation and dissemination of the I IV; performing
a redemption event,
comprising: receiving, a request to redeem shares of the collective investment
vehicle for a given
MP, with the request to redeem shares comprising a number of shares to redeem
or a value-
specifying parameter; determining a distribution value of assets for a
distribution event, based on
the number of shares to redeem or the value-specifying parameter; determining,
based at least in
part on the distribution value, a first set of one or more assets to
distribute for the distribution
event, comprising commodities, or securities, or legal instruments, or
comprising at least two
selected from a group of cash, commodities, securities or legal instruments;
communicating
before a strike time an identification of the first set of one or more assets
to distribute including a
number of each one of the assets, to a market participant representative (MP
representative),
acting on behalf of the given MP for which the collective investment vehicle
shares were
received, which MP representative is governed by an agreement imposing a
restriction on
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liquidation and disclosure of the first set of assets; calculating, by one or
more computers, a
monetary value of the first set of assets as of the strike time based on price
data valid as of the
strike time; calculating, by one or more computers, a monetary value as of the
strike time of the
number of shares requested to be redeemed, or a monetary value as of the
strike time of a
number of shares approximated by the value-specifying parameter; calculating,
by one or more
computers, a redemption true-up monetary amount, based on the monetary value
at the strike
time of the first set of one or more assets and either the monetary value as
of the strike time of
the number of shares requested to be redeemed, or the monetary value as of the
strike time
comprising a number of shares approximated by the value-specifying parameter,
to obtain the
redemption true-up monetary amount; sending, by one or more computers and an
electronic
network, an electronic message to cause a transfer of all or a portion of the
first set of assets
directly or indirectly to an electronic account of the MP representative; and
further comprising:
requiring appointment of the respective MP representative to act for the
respective given MP in
at least one or more redemption events with the collective investment vehicle,
with the MP
representative subject to terms that govern the actions of the MP
representative and at least
requires a confidentiality restriction regarding an identity of all or a
portion of the first set of one
or more assets with respect to the MP and a liquidation parameter for all or a
portion of the first
set of one or more assets, and wherein the receiving an asset from the one MP
for the creation
event comprises receiving one or more securities for a creation basket in an
account transfer
from or on behalf of the one MP and/or cash from or on behalf of the one MP or
a combination
thereof.
100071 In a further embodiment, the restriction on confidentiality is limited
in time.
100081 In a further embodiment, the restriction on liquidation imposes a
timing or volume
restriction for liquidation of some or all of the first set of assets.
100091 In a further embodiment, the restriction on liquidation imposes a
methodology
requirement for the liquidation of some or all of the first set of assets.
[0010] In a further embodiment, the collective investment vehicle is an
actively managed
collective investment vehicle.
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[00111 In a further embodiment, thc collective investment vehicle is an
exchange traded fund
(ETF).
100121 In a further embodiment, the request to redeem comprises the number of
shares to be
redeemed, and further comprising: calculating, by one or more computers, using
a predetermined
valuation algorithm, a monetary value as of the strike time, of the number of
shares that were
requested for redemption; and wherein the calculating the redemption true-up
amount step
comprises determining a difference between the monetary value of the first set
of one or more
assets and the monetary value of the number of shares that were requested to
be redeemed as of
the strike time.
100131 In a further embodiment, the request to redeem comprises the value-
specifying
parameter, and wherein the calculating the redemption true-up amount step
comprises
determining a difference between the monetary value of the first set of one or
more assets and a
monetary value of shares that equal or approximate the value of the value-
specifying parameter
as of the strike time.
100141 In a further embodiment, operations are disclosed of obtaining an NAV
for the shares of
the collective investment vehicle; calculating, by the one or more computers,
a number of shares
to redeem as of the strike time based on the value-specifying parameter and
the NAV for the
shares of the collective investment vehicle; and communicating that number of
shares to be
redeemed directly or indirectly to the MP representative of the given MP.
[0015] In a further embodiment, an operation is disclosed of adding a value of
a fractional share
to the redemption true-up amount.
[0016] In a further embodiment, the communicating an identification of one or
more of the first
set of one or more assets to distribute, for the distribution event, to the MP
representative for the
given MP of the collective investment vehicle for whom the redemption is
taking place,
comprises transmitting, via the one or more computers and the one or more
networks, an
electronic message comprising identification information of one or more of the
first set of assets,
before the strike time.
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[0017] In a further embodiment, the collective investment vehicle comprises a
confidential
portfolio of securities.
[0018] In a further embodiment, the receiving the request to redeem shares
step comprises
receiving an electronic request, via one or more electronic networks and the
one or more
computers
[0019] In a further embodiment, the determining the first set of assets to
distribute further
comprises: calculating, by the one or more computers, a profit value or a loss
value for each of a
respective one or more purchase lots of each of more than one of the
securities in the portfolio of
securities; and selecting securities to distribute in the first set of assets,
in part based on the profit
value or loss value for each of the respective one or more purchase lots of
the plurality of
securities.
[0020] In a further embodiment, the strike time is a market close time.
[0021] In a further embodiment, an operation is disclosed of sending an
electronic message, by
the one or more computers and one or more networks, to cause a distribution of
assets equal to
the redemption true-up monetary value.
10022i In a further embodiment, one or more of the steps of calculating, by
one or more
computers, comprises the collective investment vehicle or its agent
contracting to direct one or
more third parties to perform on behalf of the collective investment vehicle,
by computer, one or
more of the calculating steps using one or more prescribed algorithms for one
or more prescribed
times.
[0023] In a further embodiment, the collective investment vehicle or its agent
directs, by
contract, a third party to perform at least one of said steps.
10024] In a further embodiment, the collective investment vehicle comprises a
plurality of
securities in a confidential portfolio of securities, and further comprising:
the collective
investment vehicle or its agent entering one or more agreements with one or
more third parties,
directing the one or more third parties to perform at least one of the
calculating steps on behalf of
CA 2754238 2017-03-22
the collective investment vehicle using prescribed algorithms, wherein the one
or more
agreements require the third parties to maintain in confidence information
about contents of the
confidential portfolio of securities of the collective investment vehicle; and
transmitting
electronically, by the one or more computers and an electronic network,
information relating to
the confidential portfolio of securities to at least one of the one or more
third parties that is
directed to perform at least one of the calculating steps.
100251 In a further embodiment, the collective investment vehicle is an
actively managed
exchange traded fund (EYE) holding a confidential portfolio of securities, and
further
comprising: the collective investment vehicle or its agent entering one or
more agreements with
one or more third parties, directing the one or more third parties to perform
one or more
calculations on behalf of the collective investment vehicle to obtain the IIV;
and the collective
investment vehicle or its agent sending an electronic message, by the one or
more computers and
one or more networks, to cause transfer of the redemption true-up monetary
amount of funds.
[0026] In a further embodiment, the collective investment vehicle is a closed-
end fund.
[0027] In a further embodiment, the collective investment vehicle is an index
fund. In yet a
further embodiment, the collective investment vehicle is a proprietary index
fund.
[0028] In a further embodiment, the collective investment vehicle comprises a
plurality of
securities in a confidential portfolio of securities, and further comprising:
the collective
investment vehicle or its agent directing one or more third parties by one
more contracts, to
perform one or more calculations on its behalf, by computer, to obtain the
IIV; and sending, by
the one or more computers and one or more networks, one or more electronic
messages
comprising information based on a composition of the confidential portfolio of
securities, to one
or more of the one or more of the third parties for making calculations.
[0029[ In a further embodiment, operations are disclosed of generating by the
ETF or having
generated on its behalf, by the one or more computers, an application
programming interface
(API) to select one or more assets of the collective investment vehicle to
distribute as the first set
of assets in response to the request to redeem the shares of the collective
investment vehicle.
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[0030] In a further embodiment, operations are disclosed of generating or
having generated, by
the one or more computers, an application programming interface (API) to
receive requests to
redeem shares and/or to create shares of the collective investment vehicle;
and aggregating or
netting, or having aggregated or having netted on behalf of the collective
investment vehicle,
shares from a plurality of the requests to redeem and/or create shares, by the
one or more
computers, to obtain a total number of shares to redeem in the method for the
redemption event
or a total number of shares to create in the creation event.
[0031] Note that the present method can be performed multiple times a day for
multiple different
strike times.
[0032] In a further embodiment, the method comprises determining if a
redemption basket for
the collective investment is disclosed; and only performing the steps for the
redemption event in
accordance with the method when the redemption basket for the collective
investment vehicle is
not disclosed.
[0033] In a further embodiment, the method comprises determining if a
redemption basket for
the collective investment represents or does not represent the actual
portfolio of the collective
investment vehicle; and only performing the steps for the redemption event in
accordance with
the method when the redemption basket for the collective investment vehicle
does not represent
the actual portfolio of the collective investment vehicle.
100341 In a further embodiment, the method comprises determining whether to
net collective
investment vehicle shares from one or more creation events and one or more
redemption events
based on one or more criteria; if it is determined that netting is to be
performed, then netting
shares from one or more of the creation events with shares from one or more of
the redemption
events to obtain a net number of shares; and using the net number of shares in
the performance of
the creation event or the performance of the redemption event.
[0035] In a yet further embodiment, a system for managing redemptions for a
collective
investment vehicle with a portfolio of securities, in relation to one or more
market participants
(MP's) is disclosed, comprising: one or more computers comprising memory
wherein the
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memory stores computer-readable instructions comprising program code that,
when executed,
cause the one or more computers to be configured with the following
components: a component
for performing a creation event, comprising a component for receiving a
request to create one or
more shares of the collective investment vehicle and a component for issuing,
by one or more
computers and an electronic network, one or more collective investment vehicle
shares directly
or indirectly to an electronic account of the respective, one MP based on
receiving in an
electronic account an asset from one of the MP's in relation to the creation
event; a component
for obtaining or creating an electronic record of security identifiers for the
portfolio of securities
held by the collective investment vehicle; a component for obtaining
securities for the collective
investment vehicle to become a part of the portfolio of securities; a
component for calculating
and disseminating automatically an intraday indicative value (IIV), by one or
more computers
programmed to calculate the IIV, the calculating based on or derived from the
electronic record
of the portfolio of securities in the collective investment vehicle, or
transmitting data
electronically, by the one or more computers, of contents of the portfolio of
securities to one or
more third parties for a calculation and dissemination of the IW; a component
for performing a
redemption event, comprising: a component for obtaining, by the one or more
computers, a
request to redeem shares of the collective investment vehicle for a given MP,
with the request to
redeem shares comprising a number of shares to redeem or a value-specifying
parameter; a
component for communicating, by the one or more computers and one or more
electronic
networks, before a strike time an identification of a first set of one or more
assets to distribute
including a number of each one of the assets, to a market participant
representative (MP
representative), acting on behalf of the given MP for which the collective
investment vehicle
shares were received, which MP representative is governed by an agreement
imposing a
restriction on liquidation and disclosure of the first set of assets; wherein
the first set of assets is
determined based at least in part on the number of shares to redeem or the
value-specifying
parameter, and wherein the first set of one or more assets comprises
commodities, or securities,
or legal instruments, or comprises at least two selected from a group of cash,
commodities,
securities or legal instruments; a component for calculating, by one or more
computers, a
monetary value of the first set of assets as of the strike time based on price
data valid as of the
strike time; a component for calculating, by one or more computers, a monetary
value as of the
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strike time of the number of shares requested to be redeemed, or a monetary
value as of the strike
time of a number of shares approximated by the value-specifying parameter; a
component for
calculating, by one or more computers, a redemption true-up monetary amount,
based on the
monetary value at the strike time of the first set of one or more assets and
either the monetary
value as of the strike time of the number of shares requested to be redeemed,
or the monetary
value as of the strike time comprising a number of shares approximated by the
value-specifying
parameter, to obtain the redemption true-up monetary amount; a component for
sending, by one
or more computers and an electronic network, an electronic message to cause a
transfer of all or
a portion of the first set of assets directly or indirectly to an electronic
account of the MP
representative; and wherein the agreement with the given MP to establish the
respective MP
representative to act for the respective given MP in at least one or more
redemption events with
the collective investment vehicle comprises terms that govern the actions of
the MP
representative and at least requires a confidentiality restriction regarding
an identity of all or a
portion of the first set of one or more assets with respect to the MP and a
liquidation parameter
for all or a portion of the first set of one or more assets, and wherein the
asset from the one MP
for the creation event comprises one or more securities for a creation basket
in an account
transfer from or on behalf of the one MP and/or cash from or on behalf of the
one MP or a
combination thereof.
100361 In a further embodiment the system comprises a component for generating
or having
generated on its behalf, by the one or more computers, an application
programming interface
(API) to receive requests to redeem and/or to create shares of the collective
investment vehicle;
and a component for aggregating or netting, or having aggregated or having
netted on behalf of
the collective investment vehicle, a number of shares from a plurality of the
requests to redeem
shares and/or to create shares, by the one or more computers, to obtain a
total number of shares
to redeem in the method for the redemption event or a total number of shares
to create in the
creation event.
100371 In a further embodiment, the system comprises a component for
determining if a
redemption basket for the collective investment is disclosed and only
performing the steps for the
redemption event in accordance with the method when the redemption basket for
the collective
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investment vehicle is not disclosed.
100381 In a further embodiment, the system comprises a component for
determining if a
redemption basket for the collective investment represents or does not
represent the actual
portfolio of the collective investment vehicle and only performing the steps
for the redemption
event in accordance with the method when the redemption basket for the
collective investment
vehicle does not represent the actual portfolio of the collective investment
vehicle.
100391 In a further embodiment, the system comprises a component for
determining whether to
net collective investment vehicle shares from one or more creation events and
one or more
redemption events based on one or more criteria; a component for netting
shares from one or
more of the creation events with shares from one or more of the redemption
events to obtain a
net number of shares, if it is determined that netting is to be performed; and
a component for
using the net number of shares in the performance of the creation event or the
performance of the
redemption event.
[0040] In a further embodiment, a program product for managing redemptions for
a collective
investment vehicle is disclosed, comprising: one or more computer-readable
media having
computer-readable program code embodied therein or among them if more than one
computer-
readable medium, the computer-readable program code comprising program code
for causing the
following method steps to be performed when executed by a computer: program
code for
performing a creation event, comprising program code for receiving a request
to create one or
more shares of the collective investment vehicle, program code for issuing, by
one or more
computers and an electronic network, one or more collective investment vehicle
shares directly
or indirectly to an electronic account of the respective one MP based on
receiving in an
electronic account an asset from one of the MP's in relation to the creation
event; program code
for obtaining or creating an electronic record of security identifiers for the
portfolio of securities
held by the collective investment vehicle; program
code for obtaining securities for the
collective investment vehicle to become a part of the portfolio of securities;
program code for,
calculating and disseminating automatically an intraday indicative value
(lIV), by one or more
computers programmed to calculate the IIV, the calculating based on or derived
from the
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electronic record of the portfolio of securities in the collective investment
vehicle, or for
transmitting data electronically, by the one or more computers, of contents of
the portfolio of
securities to one or more third parties for a calculation and dissemination of
the 11V; program
code for performing a redemption event, comprising: program code for
obtaining, by the one or
more computers, a request to redeem shares of the collective investment
vehicle for a given MP,
with the request to redeem shares comprising a number of shares to redeem or a
value-specifying
parameter; program code for communicating, by the one or more computers and
one or more
electronic networks, before a strike time an identification of a first set of
one or more assets to
distribute including a number of each one of the assets, to a market
participant representative
(MP representative), acting on behalf of the given MP for which the collective
investment
vehicle shares were received, which MP representative is governed by an
agreement imposing a
restriction on liquidation and disclosure of the first set of assets; wherein
the first set of assets is
determined based at least in part on the number of shares to redeem or the
value-specifying
parameter, and wherein the first set of one or more assets comprises
commodities, or securities,
or legal instruments, or comprises at least two selected from a group of cash,
commodities,
securities or legal instruments; program
code for calculating, by one or more computers, a
monetary value of the first set of assets as of the strike time based on price
data valid as of the
strike time; program code for calculating, by one or more computers, a
monetary value as of the
strike time of the number of shares requested to be redeemed, or a monetary
value as of the strike
time of a number of shares approximated by the value-specifying parameter;
program code for
calculating, by one or more computers, a redemption true-up monetary amount,
based on the
monetary value at the strike time of the first set of one or more assets and
either the monetary
value as of the strike time of the number of shares requested to be redeemed,
or the monetary
value as of the strike time comprising a number of shares approximated by the
value-specifying
parameter, to obtain the redemption true-up monetary amount; program code for
sending, by one
or more computers and an electronic network, an electronic message to cause a
transfer of all or
a portion of the first set of assets directly or indirectly to an electronic
account of the MP
representative; and wherein the agreement with the given MP to establish the
respective MP
representative to act for the respective given MP in at least one or more
redemption events with
the collective investment vehicle comprises terms that govern the actions of
the MP
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representative and at least requires a confidentiality restriction regarding
an identity of all or a
portion of the first set of one or more assets with respect to the MP and a
liquidation parameter
for all or a portion of the first set of one or more assets, and wherein the
asset from the one MP
for the creation event comprises one or more securities for a creation basket
in an account
transfer from or on behalf of the one MP and/or cash from or on behalf of the
one MP or a
combination thereof.
100411 These as well as other aspects, advantages, and alternatives will
become apparent to those
of ordinary skill in the art by reading the following detailed description,
with reference where
appropriate to the accompanying drawings.
BRIEF DESCRIPTION OF THE DRAWINGS
[0042] Figure 1A is a block diagram depicting certain aspects of an ETF and AP
representative
combination, and transactions involved in one embodiment of a creation event.
[0043] Figure 1B is a block diagram of an embodiment of a computer system for
implementing
certain aspects of the ETF.
100441 Figure 2 is a block diagram depicting transactions relating to an
alternative method of a
creation event.
[0045] Figure 3 is a block diagram depicting certain transactions relating to
a redemption event
using an ETF and an AP representative.
100461 Figure 4 is a block diagram depicting transactions used in an
alternative redemption
event.
100471 Figures 5 and 6 are flow charts depicting some embodiments of creation
and redemption
events, respectively.
. [0048] Figures 7A and 7B is a schematic block diagram of an embodiment of
the invention.
100491 Figure 8 is a schematic block diagram of another embodiment of the
invention.
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DETAILED DESCRIPTION
[0050] The present invention comprises a management system, method and program
product for
managing redemptions, and in some embodiments, creations, for a collective
investment vehicle,
with the system, method and program product configured with a true-up
operation.
[0051] As noted, collective asset vehicles comprise any entity that allows
investors to pool their
money and invest the pooled funds, rather than buying securities directly. A
collective
investment vehicle may be rigidly structured, as in an asset-backed security,
or it may be more
basic, like a stock or bond. An investment vehicle may involve the purchase of
a debt obligation,
with entitlement to repayment with interest, or it may involve buying an
ownership stake in a
business, with the hope that the business will become profitable. An example
of a collective
investment vehicle is an exchange-traded fund (ETF). Another example is mutual
fund.
100521 As noted, the invention will be described in relation to a "market
participant" ("MP"),
which is any person or entity that wants to create or redeem shares in the
collective investment
vehicle.
[0053] Note that in one embodiment, the AP representative is a broker and the
agreement with
the AP representative imposes a confidentiality restriction on the AP
representative that requires
that all or a portion of the first set of assets not be disclosed to the AP,
and/or anyone else for
some period of time, e.g., I day, 2 days, a week, for example, including
permanently.
[0054] In another embodiment, the agreement with the AP representative may
impose
requirements on liquidation timing for some or all of the first set of assets,
such as that all or a
portion of stock shares in the first set of assets be liquidated among a given
number of brokers
anonymously, within a given time period after first disclosure of the first
set of assets to the AP
representative. The AP representative may also be required by agreement to
liquidate only
designated securities, or security types. Additionally, the requirement for
liquidation may
include another timing requirement, e.g., only a portion of the assets may be
liquidated
immediately, and there must be a delay or several delays to liquidate the
other portions of the
remainder of the assets. Additionally, in one embodiment, the agreement with
the AP
representative may include a restriction on the markets used for the
liquidation, e.g., only a
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portion of the assets to be liquidated or only certain types of securities or
designated securities
may be sold in a given market. In an embodiment, the underlying securities and
other assets in
the portfolio may not be confidential, but the identity of the assets being
liquidated will be held
confidential for some period of time including permanently.
100551 As noted, an example of a collective investment vehicle is an exchange
traded fund
(ETF). Creation and redemption mechanisms for an Exchange Traded Fund (ETF)
are described
below as one example of the present invention in relation to collective
investment vehicles. The
creation and redemption mechanisms, in one embodiment for an actively traded
ETF, comprise
computer systems and methods for an authorized participant (AP) or other MP to
create ETF
shares, without an AP directly delivering the portfolio securities to the ETF,
and to redeem ETF
shares without the AP learning the identity of an underlying portfolio
securities of the ETF, at
least for some period of time, or in some embodiments, permanently. The
creation and
redemption mechanisms may involve in one embodiment, the use of a blind trust,
power of
attorney, agency or bailment agreement or any other mechanism that withholds
the identity of
the portfolio securities from the AP or other MP.
[0056] In one embodiment, a method of administering an ETF comprises a method
of creating
shares in the ETF. In one embodiment, the AP may provide the ETF with cash,
which is referred
to as a cash creation. The amount of cash required may be determined in
response to a number
of ETF shares requested for creation and the net asset value of the ETF's
assets, e.g., the value of
an ETF share. In an alternative embodiment, the method comprises appointing or
having
appointed a respective authorized participant representative (AP
representative) to act on behalf
of a respective AP for purposes of creating shares in the ETF. In this
embodiment, when an AP
initiates creation of ETF shares, it may deposit cash with it respective AP
representative with
instructions to provide the cash to the ETF to create the ETF shares.
Alternatively, the AP may
provide instructions to the AP representative to buy and/or borrow necessary
portfolio securities
to deliver to the ETF a creation basket of securities. In this embodiment, the
ETF provides to the
AP representative confidential data records containing information regarding
desired contents of
the creation basket. In embodiments where the securities are borrowed, the AP
representative is
authorized to pay an appropriate fee to the entity that loaned the securities.
To complete the
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creation, ETF shares may be electronically transferred directly to an
electronic account of the
AP, or may be electronically transferred to the AP via an electronic account
of the AP
representative.
100571 In particular, in one embodiment creations may be performed by an AP
representative
electronically receiving confidential creation-basket data records specifying
a desired basket of
portfolio securities for a creation event; the AP representative obtaining the
desired basket of
portfolio securities; the AP representative electronically transferring the
desired basket of
portfolio securities to the ETF; wherein the AP does not have access to the
confidential creation-
basket data records specifying the desired basket of portfolio securities.
[0058] In an additional embodiment, the method of administering the ETF
includes a method of
redeeming shares in the ETF. In this embodiment, an AP may redeem ETF shares
by providing
the ETF with the ETF shares directly, or may provide them to the ETF via the
AP representative.
To complete the redemption, the ETF will deliver portfolio securities to the
AP representative,
who will then sell or otherwise liquidate those securities on the open market
(or return them, if
borrowed) on behalf of the AP, without disclosing their identity to the AP,
and remit the cash
proceeds to the AP.
[0059] In one embodiment, the method of redeeming shares of an ETF comprises
providing a
request to redeem ETF shares; an AP representative electronically receiving
portfolio securities
from the ETF as a result of a redemption of ETF shares, while ensuring that
the identity of the
portfolio securities is not disclosed to the AP; the AP representative
obtaining transferable assets
in exchange for the portfolio securities; and providing the transferable
assets to the AP.
100601 In another embodiment, redemptions may comprise receiving a request to
redeem ETF
shares; identifying a redemption basket of portfolio securities; and
electronically transferring the
redemption basket of portfolio securities to an AP representative as part of a
redemption of ETF
shares, while ensuring that the identity of the redemption basket of portfolio
securities is not
disclosed to the AP.
[0061] In one embodiment, a relationship with an AP representative, or MP
representative for
CA 2754238 2017-03-22
other example embodiments, may be established by the AP as part of an
agreement between and
AP and the ETF, and this agreement, in one embodiment, may comprise an exhibit
to an ETF
registration statement filed with SEC. The AP representative may be selected
by the ETF, or at
least approved by ETF, as set out in the ETF-AP agreement. The actions of the
AP
representative are governed by instructions according to the ETF-AP agreement,
which may be
reflected in a direct agreement with the AP representative, with the
instructions requiring that the
identity of the underlying portfolio securities not be disclosed to the AP. In
one embodiment, an
instruction may be included requiring the AP representative to liquidate all
or a substantial
portion of securities received from the ETF in a redemption event, in order to
maintain the
identities of the securities identified for the redemption confidential with
respect to the AP.
Additionally, the receipt of the underlying portfolio securities by the AP
representative (e.g., into
the blind trust) is part of a like-kind exchange of ETF shares for the
delivered underlying
portfolio securities between an AP and an ETF.
[0062] In one embodiment, the ETF or other collective investment vehicle
disseminates or has
disseminated an intraday indicative value (IIV) of the ETF by providing the
contents of its
portfolio to a pricing service pursuant to the terms of a confidentiality
agreement. In another
embodiment, the portfolio is divided among two or more pricing services, such
that neither
pricing service knows the identity of the entire portfolio. In this
embodiment, the ETF, or listing
exchange, or an agent of either, uses the received prices to calculate the
intraday indicative value
for public dissemination.
100631 In one embodiment, the IIV is determined by electronically transmitting
a plurality of
partial position data records containing partial position information to a
plurality of pricing
agents; electronically receiving partial pricing data; automatically computing
an IIV; and
electronically publishing the IIV via a data communication feed. The methods
may be
performed using a computer readable storage medium having stored therein
instructions to cause
a microprocessor to: electronically receive partial pricing data and
automatically compute an IIV;
and, electronically transmit the IIV via a data communication feed. The
computer readable
storage medium may also include instructions to transmit a plurality of
partial position data
records containing partial position information to a plurality of pricing
agents. In one
16
CA 2754238 2017-03-22
embodiment, the pricing data from the multiple pricing agents is received by
the ETF or other
collective investment vehicle, or is received by a consolidator on behalf of
the ETF or other
collective investment vehicle, and an IIV is calculated and transmitted
electronically for
dissemination to the market.
[0064] With reference to Figure 1A, an embodiment of system and method 100 of
administering
an exchange traded fund (ETF) is described. While the methods and systems
described herein
may be used for any type of ETF, or other collective investment vehicle, they
are particularly
beneficial in conjunction with actively managed ETFs or other actively managed
collective
investment vehicles, such as closed-end funds, as well as for proprietary
indexes. An ETF 102
may engage in market transactions 120 with markets 110. Customers 108 and an
agent or AP
representative 104 may also engage in market transactions 122, 124,
respectively. The
authorized participant (AP) 106 interacts with the ETF 102 either directly as
shown by
transaction 126, or via the AP representative 104 as shown by transactions
130, 132. The AP
106 may buy from and sell ETF shares for customers 108 as shown by transaction
128, 134, or in
the market 110 as shown by transaction 148.
[0065] The transactions described herein involve the transfer of securities
between various
entities such as the ETF, the AP and the AP representative. It should be
understood that the
transfer of such securities is preferably performed electronically via
suitable messaging formats
and computer systems. For example, in one embodiment, the DTC (Depository
Trust Company)
or other suitable universal clearing service, provides a participant terminal
system for
transferring securities using electronic messaging. Thus, an electronic
transfer of securities may
be performed by sending an electronic message to the DTC. The DTC then
performs a book
entry movement by executing an accounting entry to move securities from one
account to
another account.
[0066] One aspect of an ETF is a calculation and reporting of the intraday
indicative value, or
IIV. In order to maintain the confidentiality of the holdings of the managed
ETF, the ETF 102
may provide partial position information 136, 142 to a plurality of pricing
agents, such as pricing
agent A 112 and pricing agent B 114. The pricing agents then provide partial
pricing data 138,
17
CA 2754238 2017-03-22
144 to an IIV consolidator 116. The IIV consolidator 116 consolidates the
partial pricing data
into an IIV, and provides the ETF IIV 140 to customers 108 (and to markets 110
generally). By
using a plurality of pricing agents, the ETF manager is able to maintain the
confidentiality of the
precise makeup of the ETE 102.
[0067] Note that in one embodiment, the ETF or other collective investment
vehicle may not
need to require confidentiality of the IIV calculation. Such an embodiment
would occur where
the securities in the underlying funds are not maintained in confidence, but
the AP representative
or MP representative is used to maintain the identity and quantity of
securities traded by the ETF
or collective investment vehicle for, e.g., 1 hour, 6 hours. 1 day, 2 days, 1
week, to name a few,
including permanently.
[00681 The ETF or collective investment vehicle 102 may be, for example, an
actively managed
fund wherein the ETF or collective investment vehicle manager engages in
transactions in the
market 110, as indicated by arrow 120, in order to alter the contents or
holdings of the ETF or
other collective investment vehicle 102. The ETF or other collective
investment vehicle
manager may also, or alternatively, alter the holdings of the ETF or
collective investment vehicle
through a series of creation and redemption events as described herein.
100691 The AP or MP may be, in one embodiment, a bank, broker-dealer, exchange
specialist,
market maker, arbitrageur, exchange or, an investor. The AP or other MP may
enter into an
agreement with the ETF or other collective investment vehicle setting the
terms for the creation
and redemption of the ETF's or other collective investment vehicle shares. In
one embodiment,
creations and redemptions may be required to be in creation unit or redemption
unit
aggregations. In another embodiment, the creations and redemptions may not
require creation
and/or redemption aggregation units. In one embodiment, a representative
relationship such as
via a blind trust or other agency vehicle is established by the AP or other MP
as part of the
agreement between and AP or other MP and the ETF or other collective
investment vehicle, The
actions of the AP representative or other MP representative (e.g., trustee of
the blind trust, agent,
etc.) are governed by instructions specified, or agreed or approved by the ETF
or other collective
investment vehicle, and the instructions require that the identities of the
underlying securities are
18
CA 2754238 2017-03-22
not disclosed to the AP and that all or a substantial portion of the delivered
securities are
liquidated so that the AP or MP does not learn the identity of a substantial
number of the
securities in the portfolio of the ETF or other collective investment vehicle
for at least some
period of time, or indefinitely.
100701 With reference to Figure 1B, a computer system, or system networked
computers 150,
may be used to implement various transactions and data transfers associated
with operation of
the ETF or other collective investment vehicle described herein. The system
150 may include an
AP or MP workstation 152, AP representative or MP representative workstation
154, and ETF or
other collective investment vehicle system 160, which, in one embodiment,
includes server 168,
a database 162 which contains information relating to the ETF or other
collective investment
vehicle portfolio securities and creation and redemption basket data, and
database 164 which
contains data relating to the APs and AP representatives and/or MP's and MP
representatives,
such as identification information, password files, encryption keys, other
access authorization
and accounting (AAA) data. In this regard, FIT or other collective investment
vehicle system
160 may optionally include AAA server 166 and a security gateway 158. The
various
components communicate over network 156, which may be a public network such as
the
Internet, or a private network including leased lines, or a virtual private
network using virtual
private network (VPN) protocols.
[0071] The various transactions and transfers described herein, in one
embodiment, takes place
using the systems and components shown in Figure 113, although one of skill in
the art will
appreciate that many variations of the system may be implemented without
departing from the
scope of the invention. Suitable networking protocols may be used, including
the Transport
Control Protocol/ Internet Protocol (TCP/IP) suite of protocols, and also
including the HyperText
Transport Protocol (HTTP) and associated security protocols HTTps, and other
mechanisms
such as Virtual Private Networking (VPN), Secure Sockets Layer (SSL),
Transport Layer
Security (TES), tunneling protocols such as Generic Routing and Encapsulation
(GRE), Layer 2
Tunneling Protocol (L2TP), and the like. Another protocol that may be used to
facilitate the
transactions and associated messaging described herein is the Financial
Information eXchange
(FIX) Protocol, which is a messaging standard developed specifically for the
real-time electronic
19
CA 2754238 2017-03-22
exchange of securities transactions. FIX is a public-domain specification
owned and maintained
by FIX Protocol, Ltd. In addition, some of the transactions may be
communicated in a manual
fashion, such as via telephone or textual messaging (email, and the like),
whereupon the relevant
transaction information may be keyed or otherwise entered into the appropriate
computer
systems.
[0072] Figure IA may be used to illustrate the transactions associated with a
cash creation event.
In particular, AP 106 provides cash to the ETF 102 as shown by transaction 126
or indirectly via
an AP representative. In return, the ETF 102 issues ETF shares to the AP 106
as shown by
transaction 146, which in one embodiment, may take place via electronic
transfer from ETF
system 160 directly to the AP computer system 152, or to a DTC electronic
account of the AP,
using network 156. Note that although this example and the other examples
shown in Figs. 1-6
are provided in the context of ETF's and AP's and AP representatives, it
applies equally to other
collective investment vehicles, MP's and MP representatives.
[0073] Figure 2, in contrast, depicts the use of an AP representative 204 in
the creation event. In
method 200, the AP 206 provides the AP representative 204 with cash as shown
in transaction
212. For example, the AP representative may electronically receive a cash
transfer, the cash
being a value equivalent of a creation basket. In order to assemble a creation
basket of securities
for delivery to the ETF, the ETF 402 provides AP representative 204 with
information 218 to
identify the desired securities for the creation basket.
100741 In one embodiment, the AP or MP representative electronically receives
confidential
creation-basket data records specifying a desired basket of securities for a
creation event or
obtains this information by accessing a website or other Internet portal for
the ET!' or other
collective investment vehicle. Creation-basket data records may be
automatically created in
response to an ETF manager identifying securities for the creation basket. The
system then
creates one or more confidential creation-basket data records specifying a
desired basket of
securities for a creation event. In one embodiment, the ETF or other
collective investment
vehicle manager accesses a portfolio management interface associated with
server 168 that
allows the manager to identify the creation baskets. The interface allows the
ETF or other
CA 2754238 2017-03-22
collective investment vehicle manager to prioritize the order in which
different creation baskets
are used when performing a series of creation events. In addition, the
interface to server 168
allows designation of creation baskets in advance of any actual creation
notifications. System
160 then electronically transfers the confidential creation-basket data
records to the AP or MP
representative system 154 upon request, while ensuring that the identity of
the redemption basket
of portfolio securities is not disclosed to the AP or MP for at least some
period of time, including
permanently.
100751 The systems described above may include computer readable storage media
for use with
computer systems to effectuate certain steps described herein. In particular,
the computer-
readable media may contain instructions to cause a microprocessor to execute
the following
steps: receiving a request to create ETF shares; and transmitting confidential
creation-basket data
records specifying a desired basket of securities for a creation event.
[0076] While maintaining the information 218 in confidence, and not disclosing
the information
218 to the AP 206, the AP representative 204 acquires the desired portfolio
securities. In one
embodiment, the AP representative obtains the desired portfolio securities via
market 110 as
shown by transaction 216. In an alternative embodiment, the AP representative
204 may obtain
the underlying securities for the creation basket by borrowing some or all of
the desired basket of
securities. The AP representative then provides the desired creation basket to
ETF 202 as shown
by transaction 208. The ETF 202 then delivers shares of the ETF to the AP
representative 204 as
shown by transaction 210. In one embodiment, the AP representative
electronically transfers the
desired basket of securities to the ETF. That is, transaction 208 may be
performed by sending an
electronic message to the DTC or other universal clearing service with
instructions to make a
book transfer of the desired securities to an electronic account of the ETF
202. AP
representative 204 then provides the ETF shares to an electronic account of
the AP 206 as shown
by transaction 214.
100771 Information 218 may take the form of a confidential portfolio
composition file provided
only to AP representatives or MP representatives for purposes of creation
events. The ETF may
formulate unique composition files reflecting the ETF manager's desired
acquisitions. The data
21
CA 2754238 2017-03-22
may take the form of a plurality of confidential creation-basket data records
specifying a desired
basket of securities for a creation event. The acquisitions thus effectuated
via creation events,
together with the elimination or removal of specific underlying security
assets via redemptions,
allow the ETF manager to adjust or alter the portfolio composition without
purchasing or selling
securities directly.
[0078] As shown in Figure 3, one method 300 of performing a redemption
comprises the AP or
MP 306 providing ETF or other collective investment vehicle shares to the
actively managed
ETF or other collective investment vehicle 302 in transaction 308 or via the
AP representative or
MP representative 304. In exchange for the receipt of ETF or other collective
investment shares,
ETF or other collective investment vehicle 302 provides a basket of portfolio
securities to the AP
representative or MP representative 304 as shown by transaction 310.
Transaction 308 may be
performed by the AP or MP sending a message to the DTC or other universal
clearing service to
transfer ETF or other collective investment vehicle shares to the electronic
account of the ETF or
other collective investment vehicle. Transaction 310 may comprise the ETF or
other collective
investment vehicle sending a message to the DTC or other universal clearing
service to transfer
particular portfolio securities to the electronic account of the AP
representative or the MP
representative 304.
[0079] As noted, the selection of the underlying securities may be made by the
ETF manager so
as to alter or adjust the holdings of the ETF 302. In one embodiment, low-cost
basis securities
held in the ETF portfolio may be provided so as to retain only higher-cost
basis securities, or
only low-cost basis securities, or a mix thereof, or based on one or more
objectives of the fund
manager. The AP representative 304 then liquidates the portfolio securities,
through market
transactions or other transactions 314. The AP representative is then able to
provide the AP 306
with cash, or other suitable instrument as shown by transaction 312. Note that
although ETF 302
provides the portfolio securities to AP representative 304, the portfolio
securities are assets
rightfully belonging to AP 306.
[0080] Note that although the embodiments described comprise one or more
agreement
provisions requiring the AP representative or MP representative 304 to
maintain the
22
CA 2754238 2017-03-22
confidentiality of the identity of the portfolio securities provided to the AP
representative or MP
representative 304 by ETF or other collective investment vehicle 302, some
embodiments may
use an AP representative without this requirement.
[0081] With reference to Figure 4, an alternative method 400 of performing a
redemption event
is described. AP 406 may provide AP representative 404 with an amount of ETF
shares or a
sufficient amount of cash, which was bought from the customer 108 in
transaction 416, in
transaction 412. The AP representative 404 may then use the ETF shares (or buy
ETF shares
using the cash) and provide the shares to ETF 402 in transaction 408,
preferably performed via a
DTC transfer message to authorize an electronic transfer between accounts. ETF
402 provides a
basket of portfolio securities to AP representative 404 as shown by
transaction 410 via a DTC
transfer message. Again, the identity of the basket of portfolio securities is
held in confidence by
AP representative 404 for at least some period of time, and such information
is not provided to
AP 406, or to any other individual or entity that is not obligated to maintain
its confidentiality.
The AP representative 404 then liquidates the portfolio securities, preferably
using the market
110 as shown by transaction 420. The AP representative 404 then provides to
the AP and the
customer 108 via the AP cash or other suitable instruments as shown by
transactions 414 and
418.
100821 From the perspective of the ETF, the system 160 receives a request to
redeem ELF
shares. The request may come directly from the AP computer system 152, or via
the AP
representative system 154. Alternatively, the request may be communicated to
system 160 via
alternative communication methods, including phone, fax, email, etc., and the
information keyed
into the system. The ETF system then identifies a redemption basket of
portfolio securities.
This is preferably performed by an ETF manager, who creates one or more
confidential
redemption-basket data records specifying a desired basket of securities for a
redemption event.
In one embodiment, the ETF manager accesses a portfolio management computer
interface
associated with ETF server 168 that allows the manager to identify the
securities for the
redemption baskets. The interface, in one embodiment, allows the ETF manager
to prioritize the
order in which the redemption baskets are used when performing redemption
events. In addition,
the interface to the ETF server 168 allows designation of redemption baskets
in advance of any
23
CA 2754238 2017-03-22
actual redemption notifications. System 160 then electronically transfers the
redemption basket
of portfolio securities to an electronic account of the AP representative
system 154, to ensure that
the identity of the redemption basket of portfolio securities is not disclosed
to the AP for at least
some period of time, including permanently.
100831 With reference to Figure 5, a method 500 of performing a creation event
is illustrated.
The AP may establish a relationship with an AP representative such as by a
blind trust
agreement, power of attorney, agency agreement or bailment, or other suitable
agency vehicle.
The AP may provide the AP representative with cash, the cash being a value
equivalent of a
creation basket. At step 502 the AP representative may be given confidential
information from
the ETF regarding a desired basket of portfolio securities for the creation
event. The AP
representative may then obtain the portfolio securities at step 504, and then
engage in a like kind
exchange of the portfolio securities for ETF shares with the ETF at step 506.
For a creation
basket, the AP representative may obtain the underlying securities on the open
market using the
cash. Alternatively, the AP representative may borrow the underlying
securities from another
entity. The AP representative is authorized to pay an appropriate fee to the
entity that loaned the
underlying securities. The determination of whether to buy or borrow the
portfolio securities
may be based on the representative relationship agreement, and may be based on
relative costs of
engaging in the transactions on behalf of the AP. At step 508, the ETF shares
are provided to the
AP, thereby allowing the AP to sell the ETF shares in the market. The ETF
shares may be
provided directly to the AP from the ETF, or may pass through the AP
representative.
100841 With reference to Figure 6, a method 600 of administering an ETF is
described. Method
600 comprises requiring appointment of an AP representative to represent the
AP at least for
redemptions of ETF shares. This step may be implemented by the ETF appointing
an AP
representative at step 602, or requiring appointment of an AP representative.
A requirement for
an AP representative may comprise the ETF requiring the clearing system that
facilitates transfer
of the ETF shares, e.g., the DTC, to only accept redemptions and/or creations
for its ETF shares
from AP's represented by respective AP representatives, or to only accept
order transfer
communications on forms that automatically set up an AP representative. In one
embodiment,
the ETF may enter into an agreement with the AP to appoint an AP
representative. In another
24
CA 2754238 2017-03-22
embodiment, a purchase of a share of the ETF may automatically appoint an AP
representative.
In another embodiment, the ETF may have a right of approval of the AP
representative or other
input into the selection of the AP representative, and may specify specific
provisions on
confidentiality and liquidation. The
method of imposing this requirement of an AP
representative is not limiting on the invention.
100851 The AP representative takes actions on behalf of the AP, but as noted,
is precluded by the
agreement from disclosing or taking actions that would result in disclosure of
the securities of
the ETF portfolio to the AP for at least some period of time including
permanently. In method
600, the AP representative receives the portfolio securities from the ETF at
step 604. In the case
where a blind trust is used, the beneficiary of the blind trust is the AP
associated with the ETF.
The trust is a blind trust because the trustee manages the assets of the
trust, and acts on behalf of
the AP or MP beneficiary, without disclosing the identity of the trust assets
(the portfolio
securities exchanged with the ETF) to the AP for some period of time including
permanently, but
the AP directs the occurrence of the buy and sell events. At step 606 the AP
representative
liquidates the portfolio securities identified for the redemption in a manner
that ensures that the
identity of the securities in the redemption is not disclosed to the AP or the
market for some
period of time including permanently. The AP representative may liquidate the
portfolio
securities by selling them in the market, and the AP representative then
provides the funds
resulting from the sale to the AP at step 608. Alternatively, the trustee may
obtain other
transferable assets and provide them to the AP.
[00861 As noted previously, the examples of Figs. 1-6 apply equally to
collective investment
vehicles, MP's and MP representatives.
100871 In some embodiments, the basket of securities selected for delivery to
the AP or the MP
representative may be made up of a proportionate share of all the securities
held by the ETF or
other collective investment vehicle. Alternatively, the basket composition may
be determined at
the discretion of the ETF or other collective investment vehicle manager. In
this way, the
manager may selectively reduce the fund's holdings in one or more particular
securities. In some
embodiments it may be desirable to place some limitations on the basket of
portfolio securities
CA 2754238 2017-03-22
provided to the AP or the MP representative. Primarily, any such limitations
or restrictions are
intended to ensure that the selection of the portfolio securities delivered
during a redemption
does not place an undue burden on the AP or the MP representative. In this
regard, the manager
may be required to ensure that the basket does not include an undue
concentration of any
particular security. The concentration of any security may be specified as a
percentage of the
overall value of the basket. Alternatively, the basket may be restricted based
in part on the
relative liquidity of the securities. That is, the quantity of any particular
security in the
redemption basket may be limited by a percentage of the average daily trading
volume of that
security. In one embodiment, the server 168 includes a software module to
ensure the
redemption baskets comply with the necessary restrictions.
[00881 Redemption events include providing the ETF or other collective
investment vehicle with
the fund's shares in exchange for the portfolio securities. While the AP or
the MP representative
in actively managed ETF or other collective investment vehicle embodiments
receives the
portfolio securities from the ETF or other collective investment vehicle
during redemption, the
fund shares may be provided directly to the ETF or other collective investment
vehicle by the AP
or the MP. Alternatively, the AP or MP may first provide the AP or MP
representative with the
shares of the ETF or other collective investment vehicle, thereby allowing the
AP or MP
representative to provide the fund shares to the ETF or other collective
investment vehicle as part
of a redemption event.
[0089] A further aspect of the EYE or other collective investment vehicle
operation is the
calculation and reporting of the intraday indicative value, or IIV. The 11V
may also be referred
to as the underlying trading value, indicative portfolio value, or the like.
In one embodiment, the
collective investment vehicle may itself calculate the IIV and provide the IIV
to a service for
publication. In another embodiment, the collective investment vehicle may
contract with a
service to calculate the IIV on its behalf and provide the IIV for
publication. In one
embodiment, in order to maintain the confidentiality of the holdings of a
managed ETF or other
collective investment vehicle, the ETF or other collective investment vehicle
102 may provide
partial position information 136, 142 to a plurality of pricing agents, such
as pricing agent 112
and pricing agent 114. Preferably, a plurality of partial position data
records containing partial
26
CA 2754238 2017-03-22
position information is electronically transmitted to a plurality of pricing
agents. The partial
position information includes security identifiers, and in some embodiments,
corresponding
quantity information, for different subsets of the portfolio holdings, for
different pricing agents.
The partial position information 136, 142 may also include some erroneous
stock identifiers
and/or the ETF or other collective investment vehicle may maintain a token
number of a variety
of securities in order to further mask the exact makeup of the ETF or other
collective investment
vehicle holdings. The pricing agents then provide partial pricing data 138,
144 to the intraday
indicative value (IIV) consolidator 116. Preferably, the consolidator 116
electronically receives
the partial pricing data. The partial pricing data is preferably the value of
the partial positions.
The IIV consolidator 116 may then combine the partial pricing data into a
composite
consolidated price, or preferably using a secure server for automatically
computing an intraday
indicative value (11V). In the event that erroneous stock identifiers and
positions were included
in the partial position information, these values are subtracted by the IIV
consolidator 116 during
the calculation.
[0090] Alternatively, the 11V consolidator 116 may be the ETF or other
collective investment
vehicle custodian, or another entity that has authorized access to the
confidential identity of the
holdings of the managed ETF or other collective investment vehicle, and may
compute the
pricing information directly without the use of a pricing agent. The IIV
consolidator provides
ETF or other collective investment vehicle quotes 140 to customer 108 (and to
markets 110
generally) by electronically publishing the IIV via a data communication feed.
By using a
plurality of pricing agents, the ETF or other collective investment vehicle
manager is able to
maintain the confidentiality of the precise makeup of the ETF or other
collective investment
vehicle 102. Methods of performing the IIV calculation and consolidation are
disclosed in
application serial number 11/838,681, filed on August 14, 2007.
[0091] Referring to Fig. 7, one embodiment of a system, method and program
product for
administering a collective investment vehicle with a portfolio of securities,
in relation to one or
more market participants (MP's) is illustrated. As noted above, such a
collective investment
vehicle may comprise, by way of example but not by way of limitation, an
exchange-traded fund
(ETF) or a mutual fund. With reference to Fig. 7, block 700 comprises an
operation of
27
CA 2754238 2017-03-22
performing a creation event for a collective investment vehicle. The creation
event would
comprise an operation of receiving a request to create shares of the
collective investment vehicle,
receiving an asset from one of the MP's or on its behalf in relation to the
creation event. The
asset may comprise anything of value for which the MP would be willing to
issue shares of its
fund. In one embodiment, the asset received may comprise one or more
securities for a creation
basket in an account transfer from or on behalf of the one MP and/or cash from
or on behalf of
the one MP or a combination thereof. Note that the use of the word
"comprising" is always
intended to be open-ended. The collective investment vehicle manager would
then issue shares
directly or indirectly to the respective one MP based on the asset received.
In one embodiment,
the fund shares are transferred to the MP by sending an electronic message, by
one or more
computers and an electronic network, to a clearing agency, e.g., the DTC, to
provide fund shares
of the collective investment vehicle to an electronic account for the MP, or
the electronic account
of the MP representative. As noted previously, the fund share creation may be
accomplished by
the DTC or other clearing entity performing a book entry movement by executing
an accounting
entry to move or create securities for account.
100921 Block 702 of Fig. 7 comprises an operation of obtaining securities for
the collective
investment vehicle to become a part of the portfolio of securities. This
operation may be
performed manually, or electronically. For example, securities for the
collective investment
vehicle may be obtained by the collective investment vehicle receiving into
its electronic account
the securities. As noted, this may occur when the DTC or other clearing entity
performs a book
entry movement by executing an accounting entry to move securities from an
account of a
securities owner account to the account for the collective investment vehicle.
The method of
obtaining the securities is not limiting on the invention.
100931 Block 704 of Fig. 7 comprises an operation of obtaining or creating an
electronic record
of security identifiers for the portfolio of securities held by the collective
investment vehicle.
This operation may comprise receiving data keyed into a computer interface, or
receiving data
from a network, to name a few. The method of obtaining the electronic record
of the security
identifiers is not limiting on the invention.
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[0094] Block 706 of Fig. 7 comprises an operation of calculating and
disseminating
automatically an intraday indicative value (IIV), by one or more computers
programmed to
calculate the IIV, with the calculating based on or derived from the
electronic record of the
portfolio of securities in the collective investment vehicle, or transmitting
data electronically, by
the one or more computers, of contents of the portfolio of securities to one
or more third parties
for a calculation and dissemination of the IIV. Note that the operation of
calculating is intended
to encompass having the IIV calculated on behalf of the collective investment
vehicle by one or
more third parties for dissemination. Examples of such third party calculation
for a confidential
portfolio have been previously disclosed using one or more pricing agents and
a consolidator.
[0095] Blocks 708-770 of Fig. 7 comprise an operation of performing a
redemption event.
Block 708 comprises an operation of receiving a request to redeem shares of
the collective
investment vehicle for a given MP, with the request to redeem shares
comprising a number of
shares to redeem or a value-specifying parameter. In one embodiment, the
request may be
received by one or more computers of the system, via an electronic
communication network.
Alternatively, the request may be received by facsimile, or by telephone, or
by letter, to name a
few, and the data from the request keyed into the system computers. In the
case of a request to
redeem a number of shares, the request may include a specific number, e.g.,
1000 shares to be
redeemed. Examples of such requests and the calculations operations to process
the redemption
of a specific number of shares are provided below. Alternatively, or in
addition, the request to
redeem shares of the collective investment vehicle may comprise a value-
specifying parameter
for at least approximating a number of shares to be redeemed. For example, the
communication
may request a redemption of $100,000 worth of shares. Note that this is a
number that
approximates a number of shares for redemption. The actual number of shares to
be redeemed
will be determined based on a price of a share of the collective investment
vehicle determined by
a prescribed valuation algorithm for a given strike time, examples of which
are described below.
The calculation entailed by receipt of such a value-specifying parameter, in
one embodiment,
comprises dividing $100,000 by the determined share price at the strike time.
This share number
calculation will, in many cases, result in a whole number of shares plus a
fractional share. In
many exchange system embodiments, fractional shares are not traded. Thus, for
the $100,000
redemption example, shares equal to only $99,500 may be redeemed, with a $500
fractional
29
CA 2754238 2017-03-22
share remaining, which is not traded. This is described in an example below.
However, this
system will operate equally well in exchanges that do trade fractional shares
of the collective
investment vehicle.
[0096] Block 710 in Fig. 7 comprises an operation of determining a
distribution value of assets
for a distribution event, based on the number of shares to redeem, or based on
the number of
shares determined from the value-specifying parameter, or the value-specifying
parameter itself.
In one implementation, this determining operation comprises, calculating, by
one or more
computers, a distribution value of assets for the distribution event. By way
of example, if 1000
shares are requested to be redeemed in the redemption request or are
determined based on the
value-specifying parameter, then 1000 is multiplied by an estimated value of a
share of the
collective investment vehicle determined using a valuation algorithm. The
valuation algorithm
may be pre-determined or may be determined at the time of the redemption
request. The
determination or the pre-determination of the valuation algorithm may be made
by the manager
of the collective investment vehicle, or made by the MP making the redemption
request, or
his/her agent or representative, or it may be pre-determined based on an
agreement between the
collective investment vehicle and the MP making the redemption request, or
his/her agent or
representative, or by other agreement.
[0097] The algorithm used to determine the share value of the collective
investment vehicle may
be simply to use the then-current value of the share in the market at a time
of the receipt of the
redemption request, or at a prescribed time on a given day, e.g., 3:30 pm on
the day of receipt of
the request. Alternatively, it may be an estimate of the share value at the
market close or at a
given time, based on one or more share value projection algorithms. Non-
limiting examples of
other algorithms that may be used to calculate the value of the shares to be
redeemed at a given
time are a last sale price for an asset, quotation information such as a bid
price, offer price, or
median or other point between the bid price and the offer price for the asset,
or an algorithm-
based calculation based on VWAP (value weighted average price), or an
algorithm-based
calculation based on PWAP (price-weighted average price of the shares of the
asset), or an
algorithm-based calculation based on a straight average price of the shares of
the asset traded
over the course of a period of time, or an algorithm-based calculation based
on an average of a
CA 2754238 2017-03-22
share price of the asset traded over the course of a period of time, but
excluding a last trade, or
excluding the highest and/or lowest share price, among others. These examples
name just a few
of the possible prescribed algorithms that may be used to perform this
calculation.
[0098] Note that the distribution value calculation of block 710 is performed
at a different time
from a calculation of the value of the shares of the collective investment
vehicle made for
purposes of determining a true-up amount, to be discussed below. Regarding the
timing of the
calculation, in one embodiment, the calculation is made at a time the request
to redeem is
received. In another embodiment, the calculation is performed at a later time,
such as 3:30 pm.
[0099] In the case where the redemption request comprises a value-specifying
parameter, the
determination of block 710 may simply comprise taking the value-specifying
parameter from the
redemption request and designating/using that value as the distribution value.
This is the case
where the value-specifying parameter is simply a currency value in a
redemption instruction,
e.g., "Please redeem $100,000 of shares of the collective investment vehicle."
Alternatively, a
calculation, by one or more computers, may be performed if the value-
specifying parameter is
not directly usable as the distribution value, such as if the value-specifying
parameter is in
currency that is not usable by the collective investment vehicle, or is in
some other form not
directly useable. The algorithm for converting this value-specifying parameter
to a distribution
value is not limiting on the invention.
1001001 Block 720 comprises an operation of determining, based at least in
part on the
distribution value of block 710, a first set of one or more assets to
distribute for the distribution
event, comprising commodities, or securities (e.g., equities, bonds, to name a
few), or legal
instruments, or comprising at least two selected from a group of cash,
commodities, securities or
other legal instruments.
1001011 Note that the assets chosen to cover the distribution value may
comprise a slice
that reflects the composition of the assets making up the collective
investment vehicle.
Alternatively, the assets chosen may reflect an investment strategy of a
manager of the collective
investment vehicle. For example, for an actively traded collective investment
vehicle, the
manager may decide that he/she wants to reduce or eliminate his/her position
in a particular asset
31
CA 2754238 2017-03-22
or set of assets. Thus, the first set of assets to distribute may comprise
shares of just one asset, or
shares of just two assets to be reduced or eliminated from the collective
investment vehicle. In
one embodiment, the number of shares of the one or more assets and the mix of
assets to be
distributed for the redemption is determined by computer, based at least in
part on the number of
shares set forth in the request to redeem, or on the value-specifying
parameter set forth in the
request to redeem. Another criterion that may be used to select the first set
of assets for the
distribution comprises a gain or loss that will be realized from a sale or
transfer of particular lots
of the given asset, if included in the first set of assets for distribution.
100102] Block 730
comprises the operation of communicating before a strike time an
identification of the first set of one or more assets to distribute including
a number of each one of
the assets, to a market participant representative (MP representative), acting
on behalf of the
given MP for which the collective investment vehicle shares were received,
which MP
representative is governed by an agreement imposing a restriction on
liquidation and disclosure
of the first set of assets. To facilitate this operation, a requirement is
made to establish the
respective MP representative to act for the respective given MP in at least
one or more
redemption events with the collective investment vehicle, subject to terms
that govern the actions
of the MP representative and at least requires a confidentiality restriction
regarding an identity of
all or a portion of the first set of one or more assets with respect to the MP
and a liquidation
parameter for all or a portion of the first set of one or more assets. As
noted previously for the
AP representative, the particular method of imposing the requirement to
appoint an MP
representative to represent the MP at least for redemptions of collective
investment vehicle
shares is not limiting on the invention. This step may be implemented by the
collective
investment vehicle appointing an MP representative, or requiring appointment
of an MP
representative. A requirement for an MP representative may comprise the
collective investment
vehicle requiring the clearing system that facilitates transfer of the
collective investment vehicle
shares, e.g., the DTC, to only accept redemptions and/or creations for its
collective investment
vehicle shares from MP's represented by respective MP representatives, or to
only accept order
transfer communications on forms that automatically set up an MP
representative. In one
embodiment, the collective investment vehicle may enter into an agreement with
the MP to
appoint an MP representative. In another embodiment, a purchase of a share of
the collective
32
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investment vehicle may automatically appoint an MP representative. In another
embodiment, the
collective investment vehicle may have a right of approval of the MP
representative or other
input into the selection of the MP representative, and may specify specific
provisions on
confidentiality and liquidation.
[00103] The purpose of this communication is to permit the MP or its
representative to
transform a different set of assets in the marketplace. In one embodiment,
this communication
takes place in advance of an actual delivery of the first set of assets
thereto. For example, the
actual distribution of the first set of assets to the account of the MP or its
representative may take
place the same day (1+0), the next day (T+1), two days later (T+2), three day
later (1+3), or at
some other time. This advance notification allows the MP, or its
representative to sell or place
contracts to sell one or more of the first set of assets in advance of the
actual delivery of the first
set of assets. In one embodiment, this communication operation is performed
electronically by
telephone, by email, Fax, by cell phone text messaging, or other convenient
communication
method. As an example, the communication may be implemented by Push software
at a server
on behalf of the manager of the collective investment vehicle in response to
an input of a number
of shares to be redeemed into a graphical user interface provided by the
server of the collective
investment vehicle.
1001041 Block 740 comprises a computer-implemented operation of
calculating, by the
one or more computers, a value of the first set of assets as of a strike time
based on price data
valid as of the strike time. Note that the result of this calculation will be
used in a true-up
calculation to be discussed below for block 760 and the strike time is the
time that is agreed for
the true-up valuation. The strike time may be a market close time for the day
the redemption
request was received. Alternatively, the strike time may be a different time
determined by the
manager of the collective investment vehicle, or the MP or representative of
the collective
investment vehicle, or by agreement. The algorithm used for the calculation
may be a last sale
price for an asset, quotation information such as a bid price, offer price, or
median or other point
between the bid price and the offer price for the asset, or an algorithm-based
calculation based on
VWAP (value weighted average price, i.e., a number of shares traded for a
given asset used to
weight the price for the shares), or an algorithm-based calculation based on
PWAP (price-
33
CA 2754238 2017-03-22
weighted average price of the shares of the asset), or an algorithm-based
calculation based on a
straight average price of the shares of the asset traded over the course of a
period of time, or an
algorithm-based calculation based on an average of the price of a share of the
asset traded over
the course of a period of time, but excluding a last trade, or excluding the
highest and/or lowest
share price, to name a few.
1001051 Block 750 comprises a computer-implemented operation of
calculating, by the
one or more computers, either a monetary value as of the strike time of the
number of shares
requested to be redeemed, or a monetary value as of the strike time of a
number of shares
approximated by the value-specifying parameter. Note that the result of this
calculation will be
used in a true-up calculation to be discussed below for block 760. The
algorithm used for the
calculation may be one or more of those algorithms listed above for the other
calculations, or a
different algorithm. The valuation method selected for valuing the shares of
the collective
investment vehicle may be the same method used to value the first set of
assets, or may be a
different method.
1001061 Block 760 comprises a computer-implemented operation of calculating
a
redemption true-up monetary amount to distribute, or a true-up monetary amount
to receive,
depending on the result of the calculation. The redemption true-up monetary
amount is
determined based on the monetary value at the strike time of the first set of
one or more assets
and either the monetary value as of the strike time of the number of shares
requested to be
redeemed, or the monetary value as of the strike time comprising a number of
shares
approximated by the value-specifying parameter, to obtain the redemption true-
up monetary
amount. In one embodiment, the redemption true-up amount is determined by
calculating, by
one or more computers, a difference between the value determined at the strike
time of the first
set of one or more assets and either the monetary value at the strike time of
the number of shares
requested to be redeemed, or the monetary value at the strike time comprising
a number of shares
approximated by the value-specifying parameter. In one embodiment, a value of
any fractional
share is not included in the true-up amount. In another embodiment, the value
of the fractional
share is added to the positive or negative number comprising the true-up
amount.
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CA 2754238 2017-03-22
1001071 Block 770 represents an operation of communicating an amount based,
at least in
part, on the true-up monetary amount. In one embodiment, the true-up amount
itself is
communicated to the MP or MP representative. In another embodiment, an amount
of a
fractional share is added to the calculated true up amount. In another
embodiment, one or more
other amounts are added to or subtracted from the true-up amount based on
details pertaining to
the particular MP for other transactions of that MP. In one embodiment, this
communication
operation is performed electronically by telephone, by email, by cell phone
text messaging, or
other convenient electronic communication method. In one embodiment, the
communication
may be implemented by Push software at a server on behalf of the manager of
the collective
investment vehicle. In another embodiment, the communication operation
comprises sending an
electronic message, via one or more computers and one or more networks, to
cause a clearing
system to transfer an amount equal to the true-up amount. By way of example,
the electronic
message may be sent to the DTC or other clearing system, as discussed herein,
to cause the
transfer of assets between electronic accounts. Note that in one embodiment
where the true-up
amount has one sign, e.g., positive, there may be a transfer of assets equal
to the amount of the
true-up value from an account of the collective investment vehicle to an
account of the MP or its
MP representative. Alternatively, if the true-up amount has the opposite sign,
e.g., negative, the
transfer caused may be to transfer assets equal to the amount of the true-up
value from an
account of the MP or its MP representative to the account of the collective
investment vehicle.
1001081 An operation of sending by the one or more computers and an
electronic network,
an electronic message to cause a transfer of all or a portion of the first set
of assets directly or
indirectly to an electronic account of the MP representative may be performed.
Note that the
timing of the transfer of this first set of assets is not limited by the
timing of the communication
of block 730 or the true-up operation. In one embodiment, the electronic
message is to the DTC
or other clearing system to cause transfer of the shares to be redeemed to an
account of the MP
or its MP representative, or another designated third party. Note that in one
embodiment, step
770 and the operation of sending the electronic message may be combined. Note
that this
distribution of the first set of assets to the account of the MP or its MP
representative may take
the same day (T-0), the next day (T+1), two days later (T+2), three day later
(T+3), or at some
other time. In an alternate embodiment, the transfer amount may be effected
directly by
CA 2754238 2017-03-22
computers of the collective investment vehicle.
[00109] In one embodiment, the collective investment vehicle comprises a
plurality of the
securities in a confidential portfolio of securities. Alternatively, the
collective investment
vehicle may have a non-confidential portfolio, but the portfolio is actively
managed so that it is
desirable to maintain trades confidential for some period of time, e.g., 1
hour, several hours, I
day, 2 days, 3 days, 1 week, to name a few, including permanently. In this
embodiment, the
system imposes a requirement directly, or it is imposed indirectly on its
behalf, for an
appointment of an MP representative for the market participant (MP) to
maintain confidentiality
of the identity of some or all of the first set of assets being
traded/redeemed relative to the MP
and to transform at least a portion of the first set of assets distributed,
into a second set of one or
more assets that are different from the first set of assets. Alternatively,
the MP representative
may be required simply to maintain confidentiality of the composition of the
first set of assets
and not disclose the composition of the first set of assets to the MP for some
period of time
including permanently. For embodiments requiring a transformation of the
assets. the
transformation may be into cash, or into different securities, for example. A
contract may be
executed directly with the MP representative, or directly with the MP or
another third party to
require that the MP representative maintain confidentiality of the composition
of the first set of
assets and not disclose the composition of the first set of assets to the MP,
and/or to
transform/liquidate part of all of the first set of assets received to ensure
that any assets delivered
to the MP do not disclose the composition of the trade. In one embodiment, the
same type of
contract would be set executed, as that described herein for Authorized
Participant
representatives, as described previously.
[00110] This embodiment further comprises that the electronic message, in
the step of
sending an electronic message to cause transfer of the first set of assets,
has an electronic address
or other information to cause, transfer of the first set of assets only to the
account of the MP
representative on behalf of the MP.
1001111 In one embodiment, the request to redeem is an electronic request
received via the
one or more electronic networks and the one or more computers.
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CA 2754238 2017-03-22
[00112] In a further embodiment, the determining the first set of assets to
distribute
comprises: calculating, by the one or more computers, a profit value or a loss
value for each of a
respective one or more purchase lots of each of a plurality of the securities
in the portfolio of
securities; and selecting securities to distribute in the first set of assets,
in part based on the profit
value or loss value for each of the respective one or more purchase lots of
the plurality of
securities. In one embodiment, the calculation of a profit value or a loss
value is made for all
purchase lots of each of the securities in the portfolio of securities in the
collective investment
vehicle, and a selection of which lots to transfer as part of the first set of
assets, is determined,
based at least in part, on this profit or loss calculation.
[00113] In a yet further embodiment, the operation is performed of sending
an electronic
message, by the one or more computers, to cause a distribution of assets of
the collective
investment vehicle equal to the true-up monetary value if the true-up monetary
amount is
positive.
[00114] In a yet further embodiment, the calculating a true-up monetary
amount step
comprises determining a difference of the value of the first set of assets as
of a strike time, from
the monetary value as of the strike time, of the number of shares that were
requested for
redemption.
[00115] In a yet further embodiment, the collective investment vehicle is
an exchange
traded fund (ETF), and the MP is an authorized participant (AP), and further
comprising
appointing or requiring appointment of a respective authorized participant
representative (AP
representative) to act for the respective authorized participant (AP) at least
in redemption events
with the ETF, with the appointment including instructions that require
confidentiality of an
identity of one or more of the securities in the first set of assets of the
ETF, with the respective
AP representative being independent from the respective AP at least to the
extent that the
respective AP representative cannot be forced by the respective AP to disclose
one or more of
the identities of the first set of assets for the redemption; and wherein in
this embodiment the
causing distribution step comprises sending, by the one or more computers and
an electronic
network, an electronic message to authorize or otherwise initiate a process of
transfer one or
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CA 2754238 2017-03-22
more of the first set of assets only to the account of the AP representative.
1001161 In a further embodiment, one or more of the steps of calculating
comprises
directing by contract a third party to perform by computer the calculating
step on behalf of the
collective investment vehicle using one or more prescribed algorithms, and
having the third party
perform the calculating step for one or more prescribed times. For example,
the calculation may
need to be performed before a time, such as 3:30 pm, or at or after market
close time, or at
another time.
1001171 In a further embodiment, one or more of the steps of calculating
comprise
directing by contract a third party to perform at least one of the steps on
behalf of the collective
investment vehicle.
1001181 In a yet further embodiment, the collective investment vehicle
further comprises a
plurality of securities in a confidential portfolio of securities, and the
method further comprises
entering one or more agreements with one or more third parties, directing the
one or more third
parties to perform on its behalf at least one of the calculating steps using
one or more prescribed
algorithms and with the calculation to be performed with specified data for
prescribed times,
wherein the one or more agreements require the third parties to maintain in
confidence
information about contents of the portfolio of securities of the collective
investment vehicle
and/or trades therefor; and transmitting electronically, by the one or more
computers and an
electronic network, information relating to the confidential portfolio of
securities to at least one
third party that is directed to perform at least one of the calculating steps.
For example, this one
or more calculations may be for obtaining the 11V.
1001191 In a further embodiment, the collective investment vehicle is an
exchange traded
fund (ETF) and the MP is an authorized participant (AP), and the AP is
represented by an
authorized participant representative (AP representative) appointed to act for
the respective
authorized participant (AP) at least in redemption events with the ETF, with
the appointment
including instructions requiring the AP representative to maintain
confidentiality from and not
disclose to the AP a composition of one or more of the first set of assets of
the ETF to be
delivered or provided in redemption or creation events, and directly or
implicitly requires the AP
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CA 2754238 2017-03-22
representative to transform through liquidation one or more of the first set
of assets into cash or
other one or more legal instruments in order to maintain such confidentiality.
This embodiment
further comprises the steps of receiving, by the one or more computers and one
or more
electronic networks, a given number of ETF shares requested to be redeemed as
part of a request
to redeem. This receiving step may comprise, in one embodiment, receiving into
an electronic
account held by the ETF in a clearing system, such as the DTC, a number of
shares of the ETF
transferred into the account. This embodiment further comprises distributing
the first set of
assets only to the AP representative. This distributing step may be performed,
in one
embodiment, by sending an electronic message, by the one or more computers and
one or more
electronic networks, to cause one or more securities of the portfolio of the
ETF to be transferred
to an electronic account held by the AP representative in the clearing system.
In one
embodiment, the method comprises sending an electronic message to the AP
representative to
identify one or more of the first set of assets before the market close. In a
further aspect, the
redemption true-up monetary amount is transferred electronically to an account
held by the AP
representative.
1001201 In a further embodiment, where the collective investment fund is an
exchange
traded fund (ETF) that maintains a confidential portfolio of securities, the
method further
comprises the steps of contracting with a third party to calculate an intraday
indicative value
(IIV) or a portion thereof under confidentiality; and transmitting
electronically, by the one or
more computers and the one or more networks, a composition of the confidential
portfolio of
securities in the ETF or a portion thereof to the third party for calculating
the 'IV or a portion
thereof. The step is then performed of publishing or having published the
calculated IIV, as
described herein.
1001211 In a yet further embodiment, the collective investment vehicle
computers may
generate an application programming interface (API) to receive requests to
redeem shares of the
collective investment vehicle. The API may be made available on a website or
via another
network connection. The collective investment vehicle computers may be
programmed to
aggregate a number of shares from a plurality of requests to redeem shares
and/or to create share
obtained over some period of time, or aggregated until at least a threshold
total redemption
39
CA 2754238 2017-03-22
amount is reached, to obtain a total number of shares to redeem in the method
for redemption.
This operation may facilitate retail redemptions and/or creations. In one
embodiment, the
collective investment vehicle may contract with one or more third parties to
maintain a website
or other aggregation site available on a website or via another network
connection to aggregate
on behalf of the collective investment vehicle a number of shares from a
plurality of the requests
to redeem shares and/or to create shares, and then provide to the collective
investment vehicle a
total number of shares to redeem for the redemption event or a total number of
shares to create
for the creation event.
[00122] Note that
in some embodiments there may not be a need for performance of the
disclosed true-up operation when performing redemptions, if a redemption
basket is published or
otherwise made available to the MP or his/her MP representative or other agent
initiating a
redemption request, and the redemption basket represents the actual portfolio
of securities held
by the collective investment vehicle. The accessibility of the redemption
basket that represents
the portfolio may indicate that only the securities and other assets and their
proportions listed in
the redemption basket are to be transferred in a redemption event with this
MP. Accordingly, in
one embodiment, the method and system may further comprise determining if a
redemption
basket for the collective investment is disclosed; and only performing the
steps for the
redemption event in accordance with the method when the redemption basket for
the collective
investment vehicle is not disclosed. In a further embodiment, the method
comprises determining
if a disclosed redemption basket for the collective investment represents or
does not represent the
actual portfolio of the collective investment vehicle; and only performing the
steps for the
redemption event in accordance with the method when the redemption basket for
the collective
investment vehicle does not represent the actual portfolio of the collective
investment vehicle.
These "only performing" steps encompass, but are not limited to, triggering
performance of the
method, or preventing the performance of the method. Note that the step of
determining if a
redemption basket for the collective investment represents or does not
represent the actual
portfolio of the collective investment vehicle may be obtained by accessing a
database or a
webpage or other network site, or may keyed into the system by the manager or
another. The
method of making this determination is not limiting on the invention.
CA 2754238 2017-03-22
1001231 Note that the step of determining if there is a redemption basket
disclosed may be
performed, in one embodiment, by accessing a database or a website or other
network address.
In another embodiment, the determining step may be performed manually by the
manager of the
collective investment vehicle, or on his/her behalf In another embodiment, the
determining step
may include a step of determining whether or not to make disclosure of a
redemption basket to
the given MP initiating the request or its agent to redeem based on one or
more criteria, such as,
for example, a quantity of the redemption order, or a relationship with the
collective investment
vehicle, or a relationship with another entity, such as the clearing system,
to name a few. This
step of determining whether or not to disclose a redemption basket to the
particular MP may be
determined on the fly, or may be performed earlier, and then recorded in a
database or at another
network address.
1001241 In a further embodiment, the method and system comprises
determining whether
to net collective investment vehicle shares from one or more creation events
with shares from
one or more redemption events based on one or more criteria; if a
determination is made to
perform netting, then netting shares from one or more of the creation events
with shares from
one or more of the redemption events to obtain'a net number of shares; and
using the net number
of shares in the performance of the creation event or the performance of the
redemption event.
Note that the operation of determining whether to net collective investment
vehicle shares from
one or more creation events with collective investment vehicles shares from
one or more
redemption events may be performed by accessing a database, or a webpage or
other network
address. In another embodiment, a determination of whether or not to net may
be performed
manually by the manager of the collective investment vehicle based on criteria
such as a
reduction of administrative cost or a reduction of SEC fees, or based on a
manager investment
objective with respect to retaining or transferring out various lots of
securities, to name a few.
The one or more criteria on which to base the determination to net is not
limiting on the
invention. The manager determination may be keyed into a database, or a web
page or other
network address and may specify netting for redemption requests and creation
requests received
over a period of time, such as an hour, or multiple hours, or up to a cutoff
point, or a day, to
name a few. Alternatively, the manager determination may be made on the fly by
selecting a set
of one or more specific requests to redeem and one or more specific requests
to create that have
41
CA 2754238 2017-03-22
not yet been acted upon. In another embodiment, the determination may be
performed
automatically, by the one or more computers, based on one or more computers.
1001251 If it is determined that netting is to be performed, then the step
is performed of
netting shares from one or more of the creation events with shares from one or
more of the
redemption events to obtain a net number of shares. The netting may be
performed, in one
embodiment, by the one or more computers netting the shares from selected
requests to redeem
shares and selected requests to create shares, with the selection based on one
or more criteria,
such as the quantity of shares in the respective requests, or an identity of
the MP's making the
respective requests, to name a few. Alternatively, the netting may be
performed manually, and a
net number of shares resulting keyed into the system. This net number of
shares would then be
used in the method and system in the performance of the creation event or the
performance of the
redemption event, depending on whether the net results in a number of shares
to be created or
results in a number of shares to be redeemed.
f00126] A set of true-up calculations are set forth below, by way of
example and not by
way of limitation. Note that these examples apply equally to other collective
investment
vehicles.
1001271 EXAMPLE 1: Basic Redemptions with True-Up
ABC is an ETF each share of which consists of 1 share of AAA and 1 share BBB
-Before 3:30PM (Redemption Window Close):
Customer notifies an AP broker of a desire to redeem 1000 shares of ETF ABC.
Fund manager establishes a basket of a first set of one or more assets for
redemption comprising
- 2 shares of AAA to be distributed for each redeemed share of the ETF ABC,
selected by the
manager as part of his/her strategy to reduce the number of shares of AAA in
the ETF portfolio.
The fund manager has previously established a strike time for the transactions
as 4:01 pm, just
after a market close of 4:00pm.
-3:30PM (Redemption Window Close):
The INAV for one share of ABC (indicative net asset value at a time before the
close time) is
$100 (and one share AAA has a last trade price at 3:30PM $50, BBB has a last
trade price at
42
CA 2754238 2017-03-22
3:30PM $50 )
ETF notifies the broker's AP Representative of delivery of 2000 shares of AAA
for his
redemption of 1000 ABC
The AP Rep. then places an order to Sell 2000 AAA at Market On Close for that
day.
-4:01PM (True Up Strike Time):
The Closing NAV of ABC is $99.99 (AAA has a close price at 4:00PM S49.99, BBB
has a close
at 4:00PM $50.00)
Closing value of the first set of one or more assets selected for redemption
is $99.98 (2 shares of
AAA with a close price at 4:00PM of $49.99)
True Up Cale = (Closing NAV of ABC $99.99 minus Closing value of redemption
basket of
$99.98 per share of ABC) * shares for redemption)
=(S99.99 - S99.98) * 1000 shares = positive $10.00.
Result: ETF Fund Transfers $10.00 to the AP or someone on behalf of the AP.
Notes:
1. The Redemption Window Close may be any time and date in the future.
2. When the fund manager establishes the redemption basket, his/her goal is to
issue a
basket with the same closing value as the INAV of the fund + or minus his/her
cash
requirements. He/she may use techniques such as beta correlations and
historical
performance to best estimate the closing values of his redemption basket. The
first set of
one or more assets, i.e., the redemption basket itself, would be a function of
his/her
trading strategy.
3. The AP Representative will have previously agreed with the AP broker as to
how and
when to liquidate the basket in this example. The ETF's obligation for the
true-up is only
up to the closing value of the redemption basket. The profit or loss from any
actual
liquidations of the first set of one or more assets by the AP representative
are at the risk
of the AP representative and the AP.
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CA 2754238 2017-03-22
[00128] EXAMPLE 2: Redemptions with Variable Redemption True-Up Strike and
Window Close Times
ABC is an ETF, each share of which consists of 1 share of AAA and 1 share BBB.
Fund Manager establishes a Redemption Window Close at (12:00PM) and a True-Up
Strike time
at (1:00PM).
-Before 12:00 (Redemption Window Close):
Customer notifies broker (the AP) of a desire to redeem 1000 shares of ETF
ABC.
The Fund manager establishes a basket for redemption - 2 shares of AAA for
each share of ABC
to be redeemed.
-12:00PM (Redemption Window Close):
The INAV (indicative net asset value at a time before the close time) for one
share of the En
ABC is $100 (one share of AAA has a last trade price at 12:00PM of $50; one
share of BBB has
a last trade price at 12:00PM of $50).
The ETF Fund notifies the broker's AP Representative that 2000 shares of AAA
will be
delivered for his redemption of 1000 ABC. Note that the actual delivery may
take place at some
subsequent time. (T+1) or (T+2) or (T+3), for example.
-1:00PM (True-Up Strike Time):
The AP Representative places an order to Sell 2000 AAA at Market.
Strike time INAV (indicative net asset value at a time before the close time)
of a share of ABC is
$99.99 (one share of AAA has a last price at 1:00PM of $49.99; one share of
BBB has a last
price at 1:00PM of $50.00).
Strike time value of the redemption basket for a share of ETF ABC is $99.98 (=
2 shares of AAA
at $49.99 last price at 1:00PM)
True Up Cale = (1:00PM Strike time INAV of ABC $99.99 - Strike time value of
basket for
redemption $99.98) * shares for redemption)
=($99.99 - $99.98) * 1000 = positive $10.00.
Result: ETF Fund Transfers $10.00 to the AP or someone on behalf of the AP.
[00129] EXAMPLE 3: Value Specified Redemptions with True-Up
ABC is an ETF, each share of which consists of I share of AAA and 1 share BBB.
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CA 2754238 2017-03-22
-Before 3:30PM(Redemption Window Close):
A Customer notifies broker (the AP) of a desire to redeem shares of an ETF
using a value-
specifying parameter, e.g., redeem $100,000 worth of ABC shares.
The ETF Fund manager establishes a basket for redemption of - 2 shares of AAA
for each share
of ABC to be redeemed. The fund manager has previously established a strike
time for the
transactions as 4:01 pm, just after a market close of 4:00pm.
-3:30PM (Redemption Window Close):
ABC INAV is $100 ( one share of AAA has a last trade price at 3:30PM of $50,
one share of
BBB has a last trade price at 3:30PM of $50)
The ETF Fund estimates a number of ETF shares that will equal or approximate
the value-
specifying parameter of $100,000 at True-Up Strike Time.
The ETF Fund manager computer determines that 1000 Shares of ABC will cover
the value-
specifying parameter of $100,000 at True-Up Strike Time.
The ETF Fund notifies the broker's AP Representative that 2000 shares of AAA
will be
delivered for the redemption of 1000 shares of ABC.
The AP Representative places order to Sell 2000 shares of AAA at Market On
Close.
-4:01PM (True Up Strike Time):
The Closing NAV of a share of ABC is $99.99 (one share of AAA has a close
price at 4:00PM
of $49.99, one share of BBB has a close at 4:00PM of $50.00)
The Closing value of the basket chosen for redemption (the first set of one or
more assets) of a
share of ARC is $99.98 (= 2 shares of AAA at $49.99 close price at 4:00PM)
True Up Cale = (Closing NAV of ABC $99.99 - Closing value of redemption basket
$99.98) *
shares for redemption)
= ($99.99 - $99.98) * 1000 = positive $10.00.
Result: ETF Fund Transfers $10.00 to the AP or someone on behalf of the AP.
Total Proceeds to customer = $99,990
Note that depending on the agreement with the AP broker, if there is a
fractional share remaining
after the number of shares is determined based on the value-specifying
parameter, then the value,
in one embodiment may be added to the true-up value.
CA 2754238 2017-03-22
[00130] EXAMPLE 4: Algorithmically Valued Redemptions with True-Up
ABC is an ETF each share of which consists of 1 share of AAA and 1 share BBB.
-Before 3:00 PM(Redemption Window Close):
A Customer notifies a broker (AP) of a desire to redeem 1000 shares of ETF
ABC.
The ETF Fund manager establishes a basket for redemption for each share to be
redeemed - 2
shares of AAA for each share of ABC to be redeemed, using a last hour Volume
Weighted
Average Price (VWAP) for True-Up valuations.
-3:00PM (Redemption Window Close):
The En' Fund Begins VWAP calculations for ETF constituents.'
The ETF Fund notifies the broker's AP Representative that 2000 shares of AAA
are to be
delivered for the redemption of 1000 shares of ABC.
The AP Representative starts selling 2000 AAA using a VWAP trading engine.
-4:01PM (True Up Strike Time):
The Closing period of 3:00-4:00 VWAP value of ABC is $99.99 (one share of AAA
is $49.99
for 3:00-4:00 VWAP, one share of BBB is $50.00 for 3:00-4:00 VWAP)
The Closing value of the basket selected for redemption of one share of ABC is
$99.98 (= 2
shares of AAA at $49.99 3:00-4:00 VWAP).
True Up Cale = (3:00-4:00 VWAP of one share of ABC is $99.99 - 3:00-4:00 VWAP
of
redemption basket $99.98) * shares for redemption)
=($99.99 - $99.98) * 1000 = positive $10.00.
Result: ETF Fund Transfers $10.00 to the AP or someone on behalf of the AP.
Notes:
1. Redemption Window Close and True-Up Strike time can be variable over time
and date.
2. Liquidation is determined by AP as any difference between the liquidation
price and
True-Up and is at his/her risk.
3. Other valuation methodologies include, but are not limited to Price
Weighted Average
Price (PWAP), Straight average, average excluding last, to name a few.
[00131] Fig. 8 illustrates a further embodiment of the true-up method,
system and program
product implemented for managing share creations for a collective investment
vehicle.
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CA 2754238 2017-03-22
Referring to Fig. 8, block 800 comprises receiving, a request to create shares
of the collective
investment vehicle, with the request to create shares comprising a number of
shares to create or a
value-specifying parameter for at least approximating a number of shares to be
created. This
step may be implemented manually or electronically via a communication over
one or more
networks, similar to that described for block 708 of Fig. 7.
[00132] Block 810
in Fig. 8 comprises an operation of determining a value of assets for a
creation event, based on the number of shares to create or the value-
specifying parameter. This
valuing step may be implemented electronically, using the same algorithms
described for block
710 of Fig. 7, or may be valued using a different algorithm. Note that if a
value specifying
parameter was received in a currency amount, then the currency amount may be
used as the
value of the assets for the creation event, e.g., an instruction to create
$100,000 worth of
collective investment vehicle shares.
[00133] Block 820
in Fig. 8 comprises an operation of determining, based at least in part
on the value of assets, a first set of one or more assets to receive for the
creation event,
comprising commodities, or securities, or legal instruments, or comprising at
least two selected
from a group of cash, commodities, securities or legal instruments. This
step may be
implemented electronically, similarly to that described for block 720 of Fig.
7. In other words,
the assets determined to be received for the creation event may simply
comprise a slice to be
added to the collective investment vehicle. Alternatively, the assets
requested may focus on one
or more assets that the collective investment manager wishes to acquire to
increase the collective
investment vehicle holding in view of his/her investment strategy. The value
of the assets
determined will be based, at least in part, on the number of shares to be
created or the value
specifying parameter.
[00134] Block 830
in Fig. 8 comprises the operation of communicating an identification of
one or more of the first set of one or more assets to be received, to an MP
representative for the
MP for .whom the creation is taking place. This communication step may be
implemented,
similarly to that described for block 730 of Fig. 7. As an example, the
communication may be
implemented by Push software at a server on behalf of the manager of the
collective investment
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CA 2754238 2017-03-22
vehicle in response to an input of a number of shares to be created into a
graphical user interface
provided by the server of the collective investment vehicle. Alternatively,
the step may be
implemented by posting an identification of the first set of assets to a
website accessible by the
MP representative, or may be communicated by facsimile or by telephone, to
name a few.
1001351 Block 840 in Fig. 8 comprises an operation of calculating, by the
one or more
computers, a monetary value of the first set of assets as of a strike time.
This step may be
implemented electronically, similarly to that described for block 740 of Fig.
7, using one of the
same valuation algorithms disclosed previously or a different valuation
algorithm. The valuation
algorithm selected is not limiting on the invention.
1001361 Block 850 in Fig. 8 comprises an operation of calculating, by the
one or more
computers, a monetary value as of the strike time of the number of shares
requested to be
created, or a monetary value as of the strike time comprising a number of
shares approximated
by the value-specifying parameter. This step may be implemented
electronically, similarly to
that described for block 750 of Fig. 7, using one of the same valuation
algorithms previously
disclosed or a different valuation algorithm. As noted, the valuation
algorithm selected is not
limiting on the invention.
1001371 Block 860 in Fig. 8 comprises an operation of calculating, by the
one or more
computers, a true-up monetary amount, based on the monetary value as of the
strike time of the
first set of one or more assets and either the monetary value as of the strike
time of the number of
shares requested to be created, or the monetary value as of the strike time
comprising a number
of shares approximated by the value-specifying parameter, to obtain a true-up
monetary amount.
This step may be implemented electronically, similarly to that described for
block 760 of Fig. 7,
using the same or a different algorithm for the calculation.
1001381 Block 870 in Fig. 8 comprises the operation of receiving a transfer
of the first set
of assets. This step may be implemented electronically, similarly to that
described for block 770
of Fig. 7 via the receipt into an electronic account of the collective
investment vehicle held in a
clearing system, such as the DTC. In a further aspect, an electronic message
may be sent to
cause an electronic transfer of the shares created for this creation event to
the DTC account of
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CA 2754238 2017-03-22
the MP that requested the creation or a DTC account of the representative of
that MP.
[00139] Note that the same permutation applies to the creation request as
was described
for the redemption request. For example, the collective investment vehicle may
be an ETF.
[00140] In a yet further embodiment, one or more of the steps of the method
may be
contracted out to be performed by one or more third parties.
[00141] Block 880 in Fig. 8 comprises an operation of communicating an
amount based,
at least in part, on the true-up monetary amount. This step may be implemented
similarly to that
described for block 770 of Fig. 7.
[00142] The system described above may include computer readable storage
media for use
with computer systems to effectuate certain steps described herein. In
particular, the computer-
readable media may contain instructions to cause a microprocessor to execute
the following
steps: electronically receiving partial pricing data and automatically
computing an intraday
indicative value (IIV); and, electronically transmitting the IIV via a data
communication feed. In
addition, instructions may include those for transmitting a plurality of
partial position data
records containing partial position information to a plurality of pricing
agents.
100143] Exemplary embodiments of the invention have been described above.
Those
skilled in the art will appreciate that changes may be made to the embodiment
described without
departing from the inventive concepts described herein.
49
