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Waters Technology: Fund Managers Re-Engineer Data Workflows for N-PORT

Confluence

Sam Belden

Sam Belden

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As financial services firms move to diversify their investments and expand their holdings, it has become important for regulators to have a better understanding of fund managers’ portfolios. Regulators are now asking for more information on a more frequent basis to better understand—and respond to—emergent sources of systemic risk.

This increased transparency is not limited to the world of equities trading; it has also extended into investment funds. Mutual funds and exchange-traded funds (ETFs) have always reported on a quarterly basis to regulators, but soon this will change, with reporting becoming not only more frequent but also more detailed.

As regulators have sought more insight into areas they oversee, investment companies—mutual funds, and even asset managers—have had to overhaul their data management and aggregation processes to comply with increasingly forensic requirements.

Reporting for these funds will be more of a challenge as new requirements from the Securities and Exchange Commission (SEC) come into force in May. Fund administrators will begin reporting to the SEC using a new form, called N-PORT, which will see investment firms push out information on all of their holdings on a monthly basis instead of the quarterly period they are used to.

Greg Smith, senior director of fund accounting and compliance at trade group The Investment Company Institute (ICI), says the new reporting standards will allow the SEC to react more quickly in case of a market event, as well enabling it to figure out how such events can impact funds individually.

“Standardizing requirements makes it easier to compare funds and gives the SEC more information more frequently. [That means] they have more to work with, so if there’s a market event they can react better. That is the real benefit of the new reporting procedures,” Smith says.

The SEC wanted to modernize reporting by investment firms covered by the Investment Companies Act of 1940 through the new reporting requirements. It approved amendments to rule 30b1-9 in September 2018, and introduced three new forms that will be used in the reporting process, N-PORT, N-Liquid, which will track illiquid funds, and N-CEN, a census of a company’s holdings in an annual report. Large funds are supposed to start sending the N-PORT form to the SEC in May, with smaller funds—those with assets of $50 million or less—following suit a year later. Mutual funds and managers must report their aggregate portfolio holdings, including derivatives, and place them into four liquidity buckets—highly liquid investments, moderately liquid, less liquid, and illiquid—under N-PORT. Funds must also provide a narrative of their liquidity risk management processes, including any significant redemptions or risks to holdings that may affect liquidity.

Investment funds were required to start using N-CEN in June 2018, while N-Liquid will begin in June 2019. Unlike N-PORT, information from N-Liquid will not be made public by the SEC.

Reports sent to the SEC will be in XML machine-readable format, so the regulator can carry out its own analysis on the data more quickly using machine-learning techniques, such as parsing the data through an automated system to look for potential liquidity risks. ICI’s Smith notes that, prior to N-PORT and the SEC’s modernization exercise, much reporting was wed to PDFs, which made it difficult to glean any kind of insight in a systematic fashion, or to scrape data.

The idea behind the new forms is to paint a better picture of systemic risk within the market, especially in asset management. The SEC has been looking for ways to ensure more transparency into the potential risk for investors and wanted to ensure it has a better understanding of how each underlying investment sits within a portfolio.

The SEC and the investment fund industry have been in discussions about modernizing the reporting process for several years.

First planned for 2016, the requirements hit a series of delays, mostly due to issues around the final format and information in N-PORT. In fact, N-PORT was originally supposed to start in April 2019, but the industry had concerns over the security of its public data. Information from N-PORT will be made public on EDGAR, the SEC’s company database, which was hacked in 2016. This led the regulator to announce in February 2019 that it would delay N-PORT for one month and only make information on funds public every three months. Each firm is still required to send information on the N-PORT form each month despite this new timeframe.

This moving target has been an issue for the industry, says Axioma’s director for regulatory reporting, Denis Tarpey, so much so that it made it difficult for companies to fully commit to changes. Despite that, some firms had already begun the process of identifying data gaps in preparation for the new reporting requirements.

Tom Pfister, vice president of global product strategy at Confluence, says the new reporting rules have forced many companies to take a closer look into their holdings. But the industry, he predicts, is largely ready for N-PORT and SEC modernization.“Companies had to step up to enable their world to connect all of this information. They had to connect their legal team, their back end and their front end to review what data they have,” Pfister says. “I do think the entire industry is ready for it now, even though new data expertise had to be built. Most regulations don’t invent data points, they just ask for the information in a way clients didn’t have to think of before. And since their data is not stored in a single pool, they had to do gap analysis to figure out how to make these different datasets talk to each other.”

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