Bob Proctor, global head of risk, oversight and compliance solutions
What system failure contributed to the demand for Contingent NAV?
On August 24, 2015, a software problem at a major fund administrator prevented the NAVs for about 1200 mutual funds and ETFs from being accurately priced for a full week for the first time but probably not the last. What made the situation worse was that the market was facing its worst one-day plunge since 2011. Thus, Investors were receiving outdated pricing information and were making investment decisions based on stale data.
The technical problem was caused by corruption of the fund administrator’s accounting data following an upgrade to their accounting software. Many asset managers were then nervously investigating other potential service providers and fund administrators. However, the underlying risks remained and the reputational, financial and regulatory consequences continue to be felt today.
The negative impact was compounded by what regulators did next. In June of 2016, the SEC’s Division of Investment Management issued a Guidance which proposed a new rule requiring registered investment advisors to adopt and implement written Business Continuity Plans (BCPs) designed to address the operational risks and to minimize investor harm. Many comments were made by the investment community and are still under consideration by the SEC. But regardless of the rule’s eventual implementation, the message was heard loud and clear by the industry that procedures must be put in place to allow them to quickly respond to any future situation.
Furthermore, the investment community realized that the 2015 outage could not fully be addressed by the fund administrator’s internal Business Continuity Plans given the nature of the total system failure. The need goes beyond this level of BCP plan because the asset managers have fiduciary responsibly to their investors.
How have firms responded?
As a result, the market (primarily large mutual fund complexes and ETF providers) has sought an independent means, separate from their fund administrator, to calculate a Contingent NAV to be used in the event of an outage of outsourced functions. This has pushed the technology community to develop new, advanced tools to safeguard against potential outages in the future.
What is Contingent NAV and how is it derived?
A Contingent NAV is an independently calculated NAV. Some firms take the position that a Contingent NAV would only be invoked if there is an outage; other firms seek more robust requirements to monitor a Contingent NAV daily as part of their overall oversight responsibilities. Still other firms want the ability to run further checks - to perform normal oversight not just on the actual NAV, but on the Contingent NAV calculations to see where any discrepancies may lie.
A Contingent NAV calculation includes material changes to the various impacts of a fund’s NAV. Daily, Linedata is able take the last calculated NAV received from the fund administrator and, using our contingent engine and the information available, Linedata can build the contingent NAV for the day or for multiple days in cases of an extended outage. For those firms interested in additional assurance, the Contingent NAV can be run through an oversight module to look for anomalies in price movements and to ensure the Contingent NAV is within prescribed tolerance levels. The information can then be presented back to the user in an exception-based dashboard which can direct them to areas where their attention is most needed.
Firms can utilize multiple accounting systems from which varied data requirements could be incorporated. One accounting engine can act as a “black box” to take in prior day information, calculate the Contingent NAV and feed it to the oversight module to process oversight controls, all without requiring further user interaction.
At Linedata, we are working in close partnership with several of the largest mutual fund complexes who have requirements across the Indicative to Contingent NAV spectrum. Our expert teams continue to refine and deliver additional capabilities to support their evolving internal and regulatory needs.