Firms Unprepared for NAV Changes, Audit Expert Says

Financial services firms' preparedness to manage valuations after net asset value (NAV) regulation changes taking effect on October 14 may be lacking, according to Sam Mulliner, an audit partner at Deloitte, who discussed the topic on a recent webcast sponsored by Thomson Reuters.

The regulation by the US Securities and Exchange Commission requires firms to calculate a floating NAV for institutional prime and municipal money market funds instead of a fixed $1 share price. The fixed $1 price will remain in place for money market funds sold to individual investors.

The coming floating NAV requirement means that firms need to set alternative procedures to find valuations on these funds if amortized cost proves insufficient, explained Mulliner.

Increased market activity following the Brexit vote exacerbated an existing issue with daily NAV calculations, typically performed at 9am, noon and 3pm, Mulliner added. "Under normal market conditions you have enough time to get through the process, but how much thought has gone into instances where the markets are under duress and you have high volatility?" he said. "What will the process be? What levers will you pull to make sure you complete a full floating NAV in those three-hour windows? We have seen firms [after Brexit] reach out to service providers ahead of getting the feeds to research the differences they thought may occur."

Front offices and portfolio managers will need to coordinate NAV calculation, according to Mulliner. "Large purchases and redemptions that come in may require some portfolio management moves," he said. "The front office needs to be aware of that, and the portfolio management group needs to manage the portfolio so redemption requests can be fulfilled."