Subscription, redemption and switching processing
Dealing questions test the order lifecycle: what price applies, when it is struck, when cash and units move, and what happens when something goes wrong.
Order lifecycle
The distributor or investor submits an instruction before the dealing cut-off. The TA validates it (AML cleared, funds expected, authorised signatory, complete documentation), captures it, and the order is priced at the next valuation point - forward pricing means the price is unknown at the point of instruction. A contract note confirms units, price, trade date, settlement date and charges.
Subscriptions
Application form plus cleared funds by the settlement date in the prospectus. Units are commonly rounded to three decimal places, with any residual handled per the prospectus (carried or refunded). Late or uncleared monies mean rejection or holding over, with the investor or distributor bearing any loss. AML sign-off must precede acceptance.
Redemptions
The investor gives up units and receives proceeds on the settlement date. Prospectuses may permit in-specie redemption, large-deal treatment, or apply a dilution adjustment. Gates and suspension are possible in stressed markets; during suspension, deals queue and are processed at the next available price once dealing resumes.
Switches
A switch is a redemption from one sub-fund or class plus a subscription into another, usually at the same valuation point, with a switch fee (often nil or a small percentage). It is a disposal for capital gains tax even though no cash leaves the platform.
Worked example
An investor subscribes GBP 100,000 at a forward price of GBP 10.5000 with no initial charge. Units = 100,000 ÷ 10.50 = 9,523.809. At three-decimal rounding the register shows 9,523.809 and the small residual is dealt with under the prospectus. If the order arrived after the 12:00 cut-off, it would be priced at the next valuation point instead.
Traps
- Assuming the price quoted at order entry is the dealt price.
- Ignoring FX when subscription currency differs from the class currency.
- Treating a switch as tax-neutral.
- Accepting an order before AML clearance and unwinding it later.