Settlement, cash management and foreign exchange in fund dealing
Settlement questions test the plumbing: who holds the money, when it is truly cleared, how FX is applied, and how breaks are avoided.
Subscription and redemption cash
Subscription monies are received into the fund's collection account, or an account held by the TA as agent, and must be cleared funds by the contractual settlement date. Late settlement creates a dealing loss typically charged to the investor or distributor. Redemption proceeds are paid to the investor's verified bank account only - never to a third party without full CDD - on the settlement date stated in the prospectus, typically T+2 to T+3 and within UCITS limits.
Client money and segregation
Where the TA holds money before it reaches the fund, client money rules (CASS 7 in the UK) may apply, bringing segregation, daily reconciliation and approved-bank requirements. In many structures the money is held as agent of the fund, which changes the analysis - the contractual capacity in the TA agreement governs.
FX in fund dealing
Dealing in a currency other than the class currency requires conversion. The rate may be the TA's prevailing rate, a rate from a named FX provider, or a WM/Reuters fix at a stated time. The investor normally bears the FX cost and the bid/offer spread. Hedged share classes use FX forwards or rolling hedges to reduce class-currency exposure against the base currency, with hedge costs and gains or losses allocated to that class only.
Worked example
A EUR investor subscribes EUR 250,000 into a USD class. The trade-date rate is 1.0850 EUR/USD, giving USD 271,250. Units = 271,250 ÷ NAV per unit. If settlement is two days later and the rate moves, the investor bears the movement unless the prospectus fixes the rate at trade date.
Traps
- Confusing trade date with value or settlement date when computing FX.
- Assuming the TA may net subscription and redemption flows across investors without contractual authority.
- Paying redemption proceeds to a newly notified bank account without verification.
- Ignoring bank charges and the allocation of interest between capital and income.