Addressing Best Practices for NAV Resiliency and Oversight

Addressing Best Practices for NAV Resiliency and Oversight

May 2020

By Allen Cohen

With the guidance and support of regulators globally, the asset management industry continues to develop and refine business contingency strategies. In order to avoid disruption of critical activities such as the calculation of net asset values (NAVs) for both in-house and outsourced operations, the efficient implementation of alternative operating models remains a top priority. The staff of the Securities and Exchange Commission¹ in the U.S. and the Financial Conduct Authority² in the UK have reinforced the need to have sound business continuity plans (BCPs) in place, and to consider having appropriate oversight in place regarding their outsourced fund operations. The recent Covid-19 crisis has led to a renewed consideration of the sufficiency of such plans.

 

While asset managers can outsource important aspects of their fund operations, they cannot delegate the responsibility for accuracy and continuity. Service providers must deliver accurate and timely NAVs to the investment industry as asset managers monitor their providers and protect investors. Business continuity planning is not only a regulatory issue; insufficient oversight and the lack of resiliency plans may expose funds to potential reputational risk, loss of competitiveness, and financial loss.

 

Regulators have encouraged asset managers to examine their own, as well as their critical service providers’ BCPs, assessing how natural disasters, acts of terrorism, hardware or software failures, or the unavailability of key personnel due to pandemics would impact them. While the Covid-19 pandemic has affected all of us, organizations with more robust planning have a greater chance to maintain operational continuity under these challenging circumstances.

 

Attaining NAV Continuity

 

Asset managers need to consider a number of questions to help ensure that fund NAVs are available to the industry even if the primary calculation approach fails. These include:

  • Is the calculation of a back-up NAV sufficiently insulated from the processes and infrastructure used to produce the primary NAV?
  • What is the strength of the provider’s BCP? Are its teams able to perform their tasks remotely, ensuring continuity when BCPs are enacted?
  • To strengthen platform resiliency, is the solution platform fully independent of the primary NAV calculations?
  • Is the back-up NAV derived from data sourced independently from the primary accounting platform?

 

Oversight as a Best Practice

 

The need for a back-up NAV is only one side of the coin. The independent verification of daily NAVs and portfolio valuations across providers is the other. Despite best efforts, errors in NAV calculations can occur. Even if NAV calculations are accurate 99.9% of the time, a 0.1% error rate can cause considerable headaches. In today’s operating environment, with market volatility causing the inflow of massive amounts of data, pricing exceptions and instances of fair valuing are increasing substantially.

 

When market volatility and uncertainty further intensify valuation challenges, manual approaches to determining and instructing the fair market value of an investment can add significant risk and complexity. Asset managers and fund valuation committees work closely with their service providers to determine the tolerances that drive when exceptions requiring further review are generated. Validations can be set at the instrument level and can allow certain variations from day to day. Frequently, for instruments such as equities or bonds, daily variations exceeding the norm flag exceptions and require investigation. With the market volatility spurred by Covid-19, the number of exceptions requiring further review and validation has increased dramatically. As a result, robust oversight of day-to-day operational continuity has become even more important to help ensure NAV accuracy.

 

Perhaps one of the few positive things to emerge from the Covid-19 crisis will be an enhanced focus by asset managers on oversight and operational resilience, making sure that they are well-positioned to continue their operations through this and future crises.

Allen Cohen

Head of Accounting & Administration


 

¹ https://www.sec.gov/investment/im-guidance-2016-04.pdf

² https://fca.org.uk/publication/consultation/cp19-32.pdf

 

 

The views expressed within this article are those of the authors only and not those of BNY Mellon or any of its subsidiaries or affiliates.

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