Covid-19 Piles Pressure on Fund Accounting

Fund administrators and back-office teams have been struggling to process unprecedented volumes of pricing information and transactions since the beginning of March, when the spread of the coronavirus sent global markets into a frenzy.

In the first weeks, as workforces were ordered to work from home, fund accountants scrambled to gain access to the controls, technical arrangements and data they needed. Tech teams had to engineer industrial set-ups, enable remote connectivity, and scale-up server and bandwidth capacity.

Fund accounting teams had to produce net asset values (NAVs) and perform other routine production duties while managing logistical issues, says Arnaud Claudon, head of asset owners and managers client lines at BNP Paribas Securities Services.

“In the context of extreme situations like the one the industry faced, it could have been a perfect storm because there could have been, and has been, lots of disruption through what is normally a well-oiled process of performing all of these data flows, captures and reconciliations at massive scale,” Claudon says.

He says that although the pandemic triggered huge volumes and volatility, the firm’s global team continued to produce fund services and calculate NAVs for 10,000-plus fund accounts during that time. Its IT teams deployed remote solutions and increased bandwidth capacity in a matter of a few days.

Fund accountants reconcile securities prices at market close to ensure each NAV is accurate and review prices to detect any significant variation or exceptions day to day. The NAVs are generated using data from capital events, corporate actions, applications, redemptions, and reconciliations data. Tolerances are set for price movements, and if a tolerance is exceeded the exception must be investigated and reviewed.

In addition to the tech disruption, fund accountants’ workloads grew exponentially, and many are still having to sift through a backlog of thousands of pricing exceptions at the end of each day.

“The pricing exceptions were just enormous. I’d almost say most securities had some sort of an exception in terms of the percentage they moved at some point during the month of March, up or down, and we were able to systemically handle something that normally would have been checked by a human,” says Chris Remondi, who is responsible for relationship excellence and capital markets at BBH investor services.

Brown Brothers Harriman’s securities servicing arm is in the middle of incorporating supervised machine learning (ML) into its fund accounting processes and aims to fully modernize the tech stack by 2021. In 2018, the bank developed an algo called Anomaly NAV Tracking System (ANTS), which uses supervised ML to identify pricing exceptions in securities by testing share prices against market movements and indices.

As March and April saw significant waves of volatility, Remondi says the algo helped manage the bulk of the workflow and ensure the most important exceptions were flagged to internal teams early on to avoid pricing failures downstream.

Prior to incorporating ANTS, BBH’s analysts had to review thousands of exceptions each night for its fund manager clients, with less than 1% representing a true issue.

Under pandemic conditions, however, those numbers of exceptions were “exponentially higher”, Remondi says.

Yet, during this volatile period, Remondi says ANTS learned from abnormal market activity, and the IT team could develop new code in real time to train it further.

Domino Effect

Geoff Hodge, co-founder and chairman of Milestone Group, a provider of investment solutions, says that fund accountants not only have to cope with the increased workloads, but have the added pressure of validating the NAV within a short window of time.

Accountants have on average one to two hours to review all these exceptions and carry out investigations, from when the NAV is cut at market close, to when the NAV is released out to the market. 

Hodge says back-office teams are working long hours, and increased volumes have meant that some have taken longer to process the workload, causing delays downstream when sending the data to transfer agencies and trading venues.

“The recipients of those prices, other transfer agencies and all the places that need to put them into platforms and use it to do their own pricing, those downstream firms get held up before they can start the processing that needs to happen overnight. So there is a sort of domino effect that starts to occur,” Hodge says.

To avoid late submissions, some fund accountants are conducting checks throughout the day, reviewing capital events, corporate actions, and so on when they occur. Hodge adds that recipients of the data are also trying to be flexible about the terms of their service level agreements, and accept data that is an hour late.

An accountant’s work doesn’t end with the release of a NAV.

“There is a lot of preparation for getting ready for tomorrow. There can be validation checks or oversight of their clients, which might be generating queries even after those NAVs have been delivered out into the market,” Hodge adds.

Milestone Group’s pControl Oversight platform is designed to automate daily NAV validations and allow buy-side firms to monitor their NAV activity. The firm also has a Backup NAV service, operated independently from the fund management system, which automatically calculates the NAV based on the last known valuation and independent data using its NAV Protect methodology.