As part of these rules, mutual fund firms would be required to monitor fund liquidity, and some may respond by adjusting their net asset values multiple times in a given day. However, more than three quarters of asset management firms across North America are unable to strike multiple NAVs during the day, according to data from SimCorp. Without the ability to measure liquidity in real time, funds may not be able to respond to market forces in time to reallocate their portfolios into more liquid positions. Therefore, they risk being unable to meet redemption requests.
Many managers underestimate the technological and financial resources needed to comply with SEC regulation, including those concerning liquidity management. Indeed, many firms will require significant technological and operational improvements to their trading and reporting systems in order to comply with the rule as it was proposed in September. These are the three most important tech changes firms should consider implementing in order to be ready to comply with the SEC’s liquidity-management rules.
1. Uniting front and back offices
The SEC’s new rules will require mutual funds and ETFs to classify the liquidity of each of their holdings and track and manage the fund’s overall liquidity risk. This is best accomplished if a fund can evaluate each of its investment positions — and the portfolio as a whole — in real time. This evaluation requires high-quality market data (such as prices and event data), as well as real-time position data to accurately measure market movements and liquidity changes. However, most current systems are too technologically limited to support real-time updates.
An investment book of record (IBOR) would continuously track position changes, allowing your front, middle and back offices to operate using the same data. An IBOR brings together different asset classes and investment strategies on one platform and provides managers with a holistic view of the risks and opportunities associated with any action or inaction.
Currently, 80% of asset managers do not receive investment performance numbers based on intraday position calculations, according to data from SimCorp, and only 59% are able to evaluate the trades, prices, FX rates and classifications that are driving each portfolio’s performance numbers. Most fund managers are trading on the previous day’s investment performance numbers. If a crisis hits the market and investors begin demanding their money back, managers won’t know how much to sell without crashing the fund.
An IBOR would prevent this scenario by allowing portfolio managers to see all their investment positions in real time, and to continuously calculate overall portfolio risk. By connecting the front office with the back office, managers can more efficiently manage fund liquidity and risk exposure.
2. Upgrading accounting systems
The SEC’s proposal would also give managers the option of adopting swing pricing, which would enable the firm to adjust the value at which investors can redeem their shares during periods of intensified redemptions or purchases.
Although swing pricing is common in Europe, it presents challenges for many U.S.-based asset management firms. Many modern accounting systems don’t allow fund companies to categorize whether trades are influenced by redemptions or purchases versus general market activity, which is essential to calculating a fund’s NAV and implementing swing pricing. These systems also don’t allow firms to act on significant investor inflows and outflows in real time, leaving them susceptible to significant market movements.
Firms need accounting systems that can track these movements and automatically calculate NAVs and implement swing pricing. This system should then be linked to the front office via an IBOR so that fund managers can see the impact of their trades in real time. A comprehensive accounting system that brings together all these functions is essential to taking full advantage of swing pricing.
3. Expanding reporting systems
As the nuances of fees, returns and portfolio data become increasingly complex in the wake of recent regulatory changes, asset management firms should enhance their reporting systems. Most asset managers are not completely confident in the accuracy of the investment performance figures they report, according to a SimCorp survey, implying that most firms are stuck using outdated systems.
A modern reporting system should complement a firm’s IBOR to bring all client data — including that related to fund liquidity, swing pricing and performance — onto one platform. The reporting system should also be fully automated, cutting down on the time spent on manual processes and allowing funds to scale and add new products. Implementing a reporting system capable of each of these functions should result in significant time and cost savings across the firm, all to the benefit of the end investor.
It’s unclear when the SEC may finalize its liquidity-management rules, but mutual fund and ETF companies should start thinking about their technological needs now so they can comply in time. Firms that can gain reliable visibility into the value of each of their investment positions in real time and employ robust accounting and reporting systems will emerge with a competitive edge as these changes take hold.
This article was originally published on Ignites – A Financial Times Service