BNY Scrambles To Fix Unresolved ETF "Glitch" By Monday Market Open

Last weekend, someone at SunGard Data Systems tried to implement an upgrade to the accounting system that Bank of New York Mellon uses to calculate NAVs for the mutual fund and ETF industries. Well wouldn’t you know it, there was a "glitch" after which something became "corrupted" (so, kind of like what happens inside the Beltway on a daily basis) and so, come Monday, investors couldn’t get accurate assessments of the fair value for the funds. 

Speaking of last Monday, if memory serves us, something notable happened in equity markets... oh, that’s right, the Dow crashed 1,000 points out of the gate in a harrowing bout of flash-crashing, circuit breaker-tripping mayhem and that, according to SunGard, is completely unrelated to the fact that the company still, as of Sunday night, had not calculated NAVs for all of the affected funds.  WSJ has more:

Bank of New York Mellon Corp.’s chief executive warned clients that his firm might not be able to solve all pricing problems caused by a computer glitch before markets open Monday, the latest delay in an unprecedented outage that has frustrated investors and prevented nearly 50 fund companies from providing accurate values for their holdings.


It “has taken far longer than any of us would have expected,” CEO Gerald Hassell said in a Sunday night conference call.


More than 100 employees at the New York company worked through the weekend to correct the glitch and provide up-to-date pricing for roughly 1,200 mutual funds and exchange-traded funds that have lacked accurate asset value figures since last Monday.


Mr. Hassell said BNY Mellon had calculated the net asset values for all funds through last Thursday, with the exception of one company. BNY didn’t name the company. Mr. Hassell told clients that the task would be complete for mutual funds sometime Monday morning but didn’t promise to provide all values before the market opens. Correct prices for exchange-traded funds are expected to be fixed before the open, he said.


The outage has roiled money-management firms that strive to provide investors with accurate pricing for their funds. In its first attempt at quantifying the outage, BNY Mellon said that 20 mutual-fund companies and 26 providers of exchange-traded funds had been affected.


Setbacks in resolving the issue have put BNY Mellon’s reputation on the line, said analysts, likely prompting some clients to at least consider whether to move their business to a rival custodian.


Fund companies affected include Goldman Sachs Group Inc., Guggenheim Investments, Prudential Investments, Federated Investors and Invesco PowerShares. All have had to rely on backup methods for calculating asset values, and are now reconciling the values that they published last week with the new data provided by BNY Mellon.

Got that? Essentially, if you own an ETF or a mutual fund provided by one of the affected companies, there’s no way to be sure that the NAV you’re looking at is accurate. Here’s some color from FT:

When the new values are finally published, mutual fund firms will have to go back to see whether the interim numbers they used to process customer investments and redemptions last week match the final figures.


The impact has been less severe for ETFs because NAVs act only as a guide for investors, who mainly trade their shares on exchanges. [Still] the debacle added to investors’ headaches during last week’s wild market swings, leaving some investors trading on inaccurate information. For example, the PowerShares China ETF published a net asset value that was off by 2.5 per cent.

And a bit more from WSJ:

One money-management firm complained that BNY Mellon has frequently provided status updates while leaving open the most important question for investors, whether the overhaul will be complete and the system functional by Monday.


The problem stemmed from a SunGard Data Systems Inc. accounting system used by BNY Mellon that became “corrupted” last weekend after an upgrade, SunGard said in a statement Thursday.


Mr. Hassell said the bank was informed by SunGard on Aug. 24 that the system would be back up and running that afternoon but “the system did not come back as expected and when it did, it had significant performance issues.” He said that executives still do not know what the “root cause” was. Executives on Sunday night described the SunGard system as “reliable.”

So breaking that down, SunGard told Bank of New York Mellon last Monday that there was a problem, but that it would be solved within hours. Once the system did come back online in had "significant performance issues" which we imagine translates roughly to something like "could not for the life of it figure out what NAV should be given the extraordinary volatility plaguing the market." Here's what a "glitch" looks like (200 funds falling by at least 10% last Monday):

To this day, no one knows what the "root cause" was (we just know it was a "glitch") but we do know that the system is extremely "reliable" - other than the fact that it doesn’t work. 

Now to be fair, no one will ever know precisely what went wrong with the ETF pricing model last Monday, and our guess is that broken, manipulated markets are the root cause of the problem and to the extent that a “glitch” in SunGard’s systems is to blame, we can’t help but think that the sheer chaos which unfolded after the opening bell last Monday might have simply overwhelmed or otherwise confused the system. 

Of course Bank of New York Mellon can’t simply come out and say that broken markets broke its accounting software because that would be to place the blame squarely where it belongs and everyone knows that is a very dangerous thing to do.