Fund managers no longer have to rely on their fund administrator’s backup plan or their own when striking or validating a net asset value.
BNY Mellon, the world’s largest custodian bank, says it can save the day by doing all the operational work using Milestone Group’s pControl platform which also allows for accurate backup NAVs to be generated at scale and rapid rate during an emergency. The bank will be the new “NAV agent” regardless of whether the fund manager uses BNY Mellon as its fund administrator.
At first glance, BNY Mellon appears to be an unlikely candidate to serve as a NAV agent. Its agreement with Milestone Group comes almost five years after the bank’s highly-publicized snafu in striking NAVs for about 66 fund managers using the former SunGard’s InvestOne engine. BNY Mellon quickly resorted to manual calculations and the glitch was ultimately fixed within a matter of days. Reputational cost aside, BNY Mellon was never fined by the US Securities and Exchange Commission or sued by any investors.
However, if one believes BNY Mellon’s assertions, the bank is the perfect choice for taking on the role of NAV agent. “We have learned from past mistakes and established a far more resilient backup process consisting of a primary and secondary backup facility,” says Allen Cohen, director of digital strategy for BNY Mellon. “We will use Milestone’s pControl as the engine to calculate either a backup NAV in the event of a fund administrator’s glitch, to validate the primary fund manager’s NAV or to calculate a NAV and use it in the event of a glitch.” He would not comment on whether BNY Mellon has replaced InvestOne as its primary NAV calculator saying it uses several “industry-leading” platforms to strike primary NAVs.
BNY Mellon and Milestone Group’s alliance certainly comes at a critical time when regulators and investors are pressing financial firms to prove their ability to overcome natural disaster and cybersecurity breaches without any impact to investors. “The resilience agenda has been extended beyond traditional disaster recovery and business continuity to include having a backup plan to provide insurance against a service provider outage,” says Geoff Hodge, executive chairman and president of the Americas for the Sydney-headquartered Milestone Group.
Striking a NAV is at the core of what fund managers and their administrators must do on a daily or monthly basis. Calculate the wrong NAV and clients will either be buying or redeeming their shares or units at the wrong price. Regulators don’t offer any guidance on how to calculate a NAV, yet they won’t hesitate to fine fund managers for breaching their fiduciary obligations and using poor operational controls. Even if fund managers successfully compensate disgruntled investors, those investors might decide to sue or take their business elsewhere.
BNY Mellon and Milestone insist that BNY Mellon’s new NAV agent service will relieve the operational stress and cost fund managers have when overseeing outsourced fund accounting operations as well as the dependence on the backup plans of one or more fund administrators. Service providers typically have disaster recovery operations in the event of a computer glitch or natural disaster, because their service level agreements require them to do so to meet pre-determined performance levels.
What’s wrong with a fund manager relying on its fund administrator’s back-up plan? Nothing as long as nothing unexpected occurs. “A good disaster recovery plan normally protects against defined scenarios and it therefore does not equate to insurance against unforeseen scenarios,” says Hodge. “The backup data facility might fail or maybe the backup staff can’t reach the designated location to do the calculations.”
Fund managers who do the backup NAV work on their own or validate the NAV of their fund administrators also have to host their own technology and maintain a sufficient number of employees. Even something that sounds as simple as verifying a fund administrator’s NAV can require the work of an entire team of middle-office professionals validating all of the fund administrator’s data sources and inputs. “It is like having a double set of suspenders,” BNY’s Cohen tells FinOps Report in describing the new service. “It is based on a platform and staff independent from the platform and staff used by either the fund manager or fund administrator. That independence is critical in a crisis and can help prove to regulators a fund manager has resilience.”
For Milestone Group, which has been offering pControl’s integrated oversight and backup NAV solution to fund managers for the past three years, the deal with BNY Mellon allows it to indirectly access BNY Mellon’s captive market of fund manager clients which will be switched over to the new service. The bank wouldn’t reveal how many. BNY Mellon could also nab new fund managers that want to outsource part of or all of the NAV oversight process. The bank has even opened up the service to other fund administrators, although remains to be seen whether they would embrace a rival’s offering.
Milestone Group brings a potential 16 fund managers to the table which already use the SaaS version of its pControl oversight solution. Those include Artemis Management, Jupiter Asset Management, Generali Investments, Janus Henderson and Oppenheimer. Those fund managers can also either continue to use Milestone Group’s pControl relying on their own staff or migrate to BNY Mellon’s service.
BNY Mellon’s service might sound like a dream come true for fund managers, but the bank might not have an easy sell proving it can outdo the current work of fund managers or their fund administrators. Even if fund management firms were to overlook BNY Mellon’s past glitch, outsourcing the most critical process of NAV oversight operations could be stretching the comfort level of their compliance managers who make the ultimate decision on what functions to outsource.
BNY Mellon’s service isn’t the only game in town. Other custodian banks, such as Brown Brothers Harriman and State Street, are providing fund managers with technology to calculate secondary NAVs. Although Milestone’s software rivals Linedata and Multifonds also claim to offer secondary NAV capabilities, Hodge touts BNY Mellon’s service as a head above the rest based on its cloud-based infrastructure, data flows, oversight unit, and ability to operate globally across mutual fund administrators.
Costs will also come into play in the decision-making process. While Cohen says thatusing the BNY Mellon service will likely end up less expensive than a hiring a secondary shadow backup administrator, he could not specify the average cost savings compared to doing the work entirely in-house. The fee will ultimately depend on the value of assets under custody and the number of fund administrators used as well as which of the three levels of service are used: independent NAV oversight, expected NAV or contingency NAV.
At the very least, the new BNY Mellon-Milestone Group affiliation has given fund managers a lot to think about. The question they will ultimately have to answer is whether they can rely on their current assurance or prefer insurance which is what BNY Mellon’s NAV agent program claims to offer.