Fund Managers Re-Engineer Data Workflows for N-PORT

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. 

Long Time Coming

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.” 

He adds that around 80% of the funds industry files through Confluence, so he has confidence that the new datafeeds, data expertise and data management tools built by the firm show how ready the industry is for N-PORT reporting.

Data aggregation became the most important task for firms, because so much of the necessary information is spread across the entire organization and therefore had to be tracked down. It also became important that aggregation was made more efficient just to meet the monthly deadline. ICI’s Smith points out that a lot of the work prior to N-PORT was done manually, so changes had to be made. For some firms, this meant turning to automated data aggregation was the answer.

New Data Culture

The aggregation of data was not the only big issue, as firms and their vendors also had to improve data management workflows so the information that had been gathered could be called on easily and moved to the appropriate areas for reporting. 

N-PORT required more work around figuring out new data workflows and connections than it did upgrading technology. Funds needed to overhaul how they dealt with the way each piece of information moved from one department to another. Despite having access to most of the information the SEC is looking for, these data points did not always “talk” to each other. 

Brian O’Sullivan, senior vice president and global product owner at State Street, says it has been difficult getting all these data points together.

“A lot of the positions our clients have needed to get information that may not be easy to pull down from an account,” O’Sullivan says. “They realized a lot of the work was taking data, normalizing it and then doing a report. But these are thousands of data points and no one is going to hire thousands of people to do those checks.” 

O’Sullivan says the bank built a tool within its N-PORT solution that checks data en masse for accuracy and completeness. An example of a simple check the tool does is to automatically see whether the value of collateral baked into a holding is at least 102% of the value of a loan. If not, then there might be a problem with the completeness of the data. As the industry began to work towards N-PORT, many challenges emerged in the process of figuring out how to get all the necessary information together in a more efficient way. 

Keith Slattery, global head of traditional fund accounts at JP Morgan, says much of the challenge in getting ready for N-PORT was due to the many moving parts that had to be synchronized. 

“One challenge with any new filing requirement is giving clients the opportunity to conduct end-to-end testing to ensure each phase from data aggregation to review to filing is working properly. There are lots of moving parts leading up to implementation as requirements are finalized, applications are enhanced and testing needs to be completed,” he says. “We worked closely with clients to meet the original live date of June 30, 2018, enabling an early view of the official filings and the opportunity for enhancements throughout the extended implementation timeframe granted by the SEC.”

Slattery says the bank had to ensure it had a comprehensive database of all the information needed to do its reporting to be more efficient.  

“We created a comprehensive inventory of all data elements required for the filing, identified elements available from internal sources, such as our financial reporting security master database, and developed feeds from clients or third parties for the remainder,” he says. “The primary goal was to automate data capture and avoid manual touchpoints to provide straight-through processing.  We worked with our technology vendor on systemic controls to ensure data completeness and accuracy.”

He adds this process helped clients identify how best to approach the new regulations, but also gave them the chance to use more standardized and automated processes so they can aggregate and validate the data that they have. 

One of the biggest challenges facing firms is that this big data lift requires work they may not be able to do on their own. 

Axioma’s Tarpey points out regulatory reporting is not a profit center for these firms, so part of its work as a vendor involved helping change its clients’ data management and reporting culture to share information with others in the firm. 

“We had to do a lot of data-gathering exercises because data came from disparate sources. We basically had to act like wranglers and try to create workflows around data management,” he says. “Regulatory reporting is not a revenue-generating program for them, so when you put more reporting there is always pushback. The bigger issue is enacting that culture change to be able to do the reporting.”

Tarpey notes this is where the vendor community really flourished. Vendors such as Confluence and Axioma say part of the work of getting ready for N-PORT is shepherding clients through the data aggregation process, especially when this is not their core expertise. 

But the best solution for smaller firms is not always the same for other fund managers. O’Sullivan says State Street wondered whether something like N-PORT should be outsourced because of the amount of data lift that was required. Ultimately, the banking giant decided to build its own solution for the use of its fund clients. 

The work involved to get ready for N-PORT is expected to have far reaching benefits around portfolios, not just for the SEC but also for investment firms. N-PORT can potentially provide greater uses for the funds that have reported the information and help them understand more about each holding they have, such as using the information in N-PORT to run analysis for risk or to show liquidity when looking to raise additional funds.

O’Sullivan, for instance, says that while working with clients on the N-PORT solution, people have already asked State Street if they can have access to the report so they can use the data to gain more insights into their own portfolios, including figuring out where most of the risk lies. State Street itself can also have more data internally that it can use to help its clients better. 

Regulators’ increasing interest in greater transparency probably means N-PORT will not be the only granular reporting that funds will be required to do. But with the mammoth task of data aggregation already complete, companies may be able to handle future demands much better and not have to totally overhaul workflows again.