Software Glitch Bogs Down Pricing Of US Mutual Funds

Software Glitch Bogs Down Pricing Of US Mutual Funds

It’s been a very tough week for mutual funds. It looks like the problem is now under control, but the U.S. fund industry was in crisis mode Wednesday as management struggled to deal with the ramifications of a computer glitch that meant many major mutual and exchange-traded funds could accurately not price their products as of Tuesday.

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The mutual fund industry computer glitch was not connected to the market sell off Monday, but it did lead to emergency meetings Tuesday and Wednesday at banks, fund firms and financial intermediaries, as the principals tried to sort through pricing data with backup software, and discussed the possible legal ramifications of any mispricings.

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Details on software glitch at mutual funds

Bank of New York Mellon, which is the custodian for many asset management firms, supplies accounting services including determining the price of the securities in the fund on a daily basis. A BNYM spokesman said that problems with a SunGard Data Systems software “has impacted a limited number of fund accounting clients and the processing of net asset values of certain mutual funds and ETFs.”

The problem apparently cropped up earlier this week, and has impacted several major mutual fund firms, such as Federated Investors, Prudential Financial Inc., Guggenheim Partners and Voya Investment Management.

Sector analysts point out that this the first big software stock price issue that asset managers have seen in more than 10 years.

Mutual Funds

“Funds have very sophisticated systems for dealing with this, so it doesn’t happen very often,” commented Niels Holch, the founder of the Coalition of Mutual Fund Investors.

Knowledgeable sources are reporting that many fund firms used back-up accounting systems to determine the net asset values of their funds. Moreover, emergency meetings were held with the mutual funds’ board of trustees, to determine how to proceed.

“The SunGard system became available with limited capacity late yesterday. Our teams have been working together to clear the backlog and we are working with SunGard to resume normal processing as soon as possible,” BNYM reported Wednesday afternoon.

The sources also noted that a good number of fund companies had received correct NAVs from the Bank of New York Mellon, and were working to reconcile the figures with what they had with their previous calculations. according to people familiar with the process.

Who is responsible? The blame game here has already started. First Trust issued a press release earlier today blaming Bank Of New York Mellon.

In a note sent to clients on Wednesday afternoon, CLSA analysts opined:

It was more the market structure and market flow related issues that drove. The first was the article in the WSJ on how mispriced ETF’s were at Monday’s open as many components opened later than the ETF’s. A real problem for market sentiment (read panic) as investors just don’t really know what they own and how the NAV is determined.

Following that we had many poking around to understand the swoon late day yesterday. The skinny is this. Financing desks get margin calls early in the day, but if people don’t act (or they can’t get in touch with clients) they force liquidation at 2.30. Told that is for both retail and PB’s….and clearly Carl Icahn knew that when he tweeted yday about his expectations that the market would roll hard. So when nothing happened around 2.30 and the sell imbalances for the close never materialized, we had a huge rally.

For point of reference going forward a customer did note that you can be notified anytime prior to 2pm about any funding gaps, but cannot make a cash distribution after 2:30.  Thus, if you do not send cash by 2:30, you need to sell assets.  The problem with the big global mutual funds, is they have to aggregate their margin calls from all regions and they usually do not finish their calculations until after 2:00.

We’ll likely be watching the last hour of trading a lot more closely going forward.

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