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The Needs of an Industry via Innovative Software Products

The Needs of an Industry via Innovative Software Products

Much to her chagrin, I have told my wife many times that operating a software products company is like being a riverboat gambler. It is exciting, risky, and involves timing, industry savvy and a good relationship with Lady Luck (she hates it when I mention other women!) As a software product company focused 100% on the mutual fund and pooled products industry, Delta Data will generally see software development opportunities emerge in two distinct ways. First, there are the opportunities that present themselves as a result of mandated legislation. Then there are the opportunities that are discovered through an evolution within the industry itself. Each of the two opportunities has its pros and cons. To be successful, software companies need to recognize these opportunities and bring innovative products to the market faster and better than the bigger fish in the pond. Of course this innovation involves risk, hence the relationship with gambling.

In this first part of two posts, I will discuss an example of a software product Delta Data has developed as a result of an industry mandate, and the inherent development risk. In the second part of this post I’ll discuss the risks in developing a product that is a response to a revolving industry. Each has its own lesson.

The Mandated Product

One current developing mandate in the mutual fund industry involves the changes required around Money Market Reform (MMR). The SEC adopted new money market reforms in July, 2014 and has imposed a compliance deadline of October, 2016. In this example, systems on both the fund and the distributor side will have to be changed over a rather short period of time in order to meet an SEC mandated change. I don’t see this as much of a new product opportunity as it is a requirement for changes to existing systems. As evidence to this, the DTCC is not developing any new service to accommodate MMR but rather is having to modify existing services such as Fund/SERV, Profile I and II and Networking.

An example of an SEC rule that did initiate the development of a new software product can be found in SEC Rule 22c-2. In 2005 the SEC adopted rule 22c-2 to help fund companies combat short term trading, i.e., the market timing of their funds. This rule allowed funds to impose a 2% short term redemption fee, but also empowered funds with the ability to request from their firm distribution partners the detailed trades at the sub account level when the firm was trading in omnibus accounts.

As with money market reform, the SEC gave the industry roughly two years to comply with the new rule; the rule was adopted in May of 2005 and had a compliance date of October, 2007. The aspect of Rule 22c-2 that allowed fund companies to send out requests to the firms for sub-account trading activity required the development of new software applications as well as a new industry service from the DTCC. This was called Standardized Data Reporting, or SDR. SDR provided the standard file formats for sending the request and for remitting the detailed trade data back to the funds. Internal IT shops and third party software development firms knew exactly what the requirements were and when they had to be completed.

Delta Data was one of those third party development firms that saw the need for an industry wide 22c-2 solution and we developed a product to help funds and firms comply with the rule, utilizing the SDR service of the DTCC. The expected deliverable was well defined by the rule. The formats defined by SDR, and the target clients were defined by the industry. Pretty straight forward and fairly safe, as long as you get to market first and have a good product.

From a software development perspective, the biggest risk involved beating competitors to market, and beating internal IT shops before they got too deep into developing internal applications. Fortunately we were able to do just that, and have a successful product, DART, ( Data, Analysis, Reporting and Transparency) that we continue to build upon, eight years after it went into production. Timing gave us a first mover advantage. In the second part of this post we’ll discuss developing new software products as a response to an evolving industry.

Burton Keller

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