Between MiFID II in Europe and the upcoming SEC financial reporting modernization rules in the US (which includes the monthly Form N-PORT and annual Form N-CEN), most fund management firms are in the midst of a regulatory maelstrom. At the same time it never ceases to amaze me how often you meet the laissez-faire response of “What’s all the fuss about?” for what most shops see as a major milestone in the history of regulatory reporting. These firms are either superbly organized with 20:20 foresight, or they are suffering from wishful thinking.

When it comes to Form N-PORT and Form N-CEN, a common theme with firms that have no specific program in place is “We plan on leveraging our service provider…”, which is fine, but if the service provider is not geared up to deliver, where will that leave the herd with this specific mind set?

Before delving into this point in more detail, let’s first consider the data domains needed for N-PORT and the likely go-to source for each domain:

  • Asset & liability data is generally housed in the general ledger system – which is in the service provider where third party administration is in play
  • Securities lending data also tends to be found in the service provider, albeit not always with the full breadth of attributes required for form completion. This data should also have a defined home in the front-office
  • Returns should really come from the system of record for returns, which for many firms is not located on the service provider side of the fence; more often than not it’s generated by the performance team within the management company using a vendor platform
  • Risk analytics will come from the firm’s risk/performance attribution platform and for most the specific analytics required for Form N-PORT will be already calculated, tracked and available for use
  • Flow information will be sourced from the transfer agent system/provider
  • Holdings will either come from the service provider or an internal system of record. Again, as with securities lending, the breadth of data may not be immediately available from the security master and may require enrichment from an external market data vendor.

That’s a lot of data in a lot of different locations…

Now, look at the complications that start to arise when you have delegated management, multiple service providers, complex asset classes, fragmented or siloed data venues. Combine this with the potential of having to source lots of new market reference data, and you get a sense of how incredibly complex the data sourcing for N-PORT can become.

If a portion of the market genuinely thinks that there is no problem, and that their service provider will simply absorb Forms N-PORT/N-CEN as another bullet in the master services agreement, without an exact plan to how they will tackle so much data in different locations, then maybe those firms need to take a step back and think strategically. One thing you can take as an absolute certainty though is that there is no scope to pass the ultimate responsibility for sign off on these forms to their service provider.

Many firms that are progressing down the service provider route, but recognize that everything might not fall neatly into place, are engaging a third party to run shadow reporting and full reconciliation of the final report to allow them sleep a little better knowing their signature is on a form of such significant exposure. Why are firms so nervous about this? Some key reasons get mentioned:

  • Not all of the data required for Form N-PORT and N-CEN is ‘natural’ service provider data
  • Service providers often do not have a legal team available to provide best practice guidance
  • Advanced data management toolsets and operational capability are not available in many of the shops where fee pressure has led to historical build-up of technical debt.

The most prevalent point being raised though is the timeline – N-PORT/N-CEN requires immediate attention, with dry-run filings needed for April 2018. Working backwards means most firms need to be hitting the following milestones:

  • Now: analysis on all of the data points needs to be started with vendor selection process in end stage
  • June 2017: data analysis completed and signed off by the steering committee
  • July 2017: data configuration needs to have started to allow appropriate testing window
  • September 2017: data configuration needs to be complete
  • October 2017: system/integration testing needs to start with a filing playbook documented
  • December 2017: system and end-to-end tests signed off
  • January 2018: final production testing with December 2017 as-of data
  • March 2018: internal sign off needed on production testing
  • April 2018: firms do first mock filing with SEC
  • July 2018: firms go live with as-of June 2018 data

With all of this in mind, it is no surprise that many firms are seeking to grab direct control of their reporting modernization programme, and are partnering with a vendor that allows very close oversight. Vendors that deliver tight control, best-of-breed data management and sourcing, and on-demand access to best practice attorneys and CFAs will win the day. Only that approach can deliver the peace-of-mind most CFOs, CCOs and COOs need, where their signature on the form is the one that counts.