The calculation of Net Asset Values, or NAVs, remain in the spotlight of regulators. Why? Well, NAVs are absolutely mission critical for the regulated funds industry, calculating the all-important value per unit of mutual or exchange-traded funds that are made public at the end of each day.
This scrutiny by regulators is not new, as I highlighted in a blog back in February 2018. But what has happened over the past 18 months is a growing realization by fund managers that they can no longer blindly rely on the NAV calculated by their fund administrator. They need an insurance policy, rather than just assurances from their third party administrator, that the NAV is not just correct, but that it will be published on time every day.
History has shown that processing errors can and do occur and, even worse, technological outages can happen. The biggest wake-up call for the industry took place in 2015 when an accounting system failure at a major US fund administrator prevented the calculation of NAVs on dozens of funds over multiple days, and similar, less extensive issues have occurred since then.
The SEC and other regulators around the world are very clear on where the responsibility lies – just because a fund manager outsources their fund accounting, they cannot outsource their fiduciary duty to distribute timely and accurate NAVs to investors. Failure to deliver a NAV can potentially lead to regulatory fines, investor lawsuits and reputational damage.
As a result, fund managers have recognized the need for a backup plan and are now getting serious about the need to calculate NAVs on their own, both as a back up to their fund administrator and as a tool to check the accuracy of their main provider.
The Pressure Window
US asset managers and their fund administrators only have a short window to deliver NAVs, between the market close at 4pm and a typical required delivery time of 6pm every business day. The pressure is on, with a very tight timetable for a complex process which, if not automated, requires considerable human resources.
NAV oversight has evolved into a critical daily function for treasury and fund administration teams. But for many, oversight resources are stretched thin, and there’s not enough time in the short window before NAVs are distributed to perform a complete set of checks across all funds and classes to ensure their accuracy.
The Rise of the Contingent NAV
The pressure exerted both by time and regulators has led to an accelerating recognition amongst fund managers of the need to calculate contingent NAVs, to not only protect from system outages, but to also industrialize daily professional oversight of NAV calculations. To facilitate this, fund administrators need to provide their clients with more data-driven digital solutions, allowing fund managers to check both the progress and accuracy of daily NAV calculations, for example through APIs (application programming interfaces) which feed directly into the fund managers’ own processing checks.
Over the past year, many large fund managers and ETF providers have sought an independent means, separate from their fund administrator, to calculate contingent NAVs on a daily basis. This, in turn, has pushed technology providers to develop new solutions to sit alongside existing fund accounting systems. We at Temenos announced in January 2019 a new partnership with Bloomberg to help buy-side firms meet their need for dependable and independent NAV back up and oversight, to support operational contingency plans.
While the calculation of contingent NAVs is a growing trend with very positive impacts on oversight and control, it must be remembered that a contingent NAV can only ever be an insurance policy. What’s much more critical is the requirement to digitally transform the antiquated fund accounting systems that are still being used to calculate NAVs. Only then will regulators, asset managers and their fund administrators have the true assurance to sleep well at night.