As posted in Ignites Q&A of the week on 25th January, I thought I would share my response here
What is the potential impact on the industry now that some mutual fund firms are starting to disclose daily NAVs for their money market funds?
Scrutiny of money market funds has never been more intense, and the industry must prepare for further changes to the regulatory regime. Specifically, daily disclosure of money market funds’ net asset value (NAV) has become a reality, and that will have ripple effects throughout the industry.
Some of the key players in the money market fund business have taken a pre-emptive move to provide the transparency that regulators and investors have been demanding since the Reserve Primary Fund broke the buck in September 2008.
The daily NAV disclosures are obviously a step toward improving fund firms’ client services to investors. Clearly, it will benefit investors by increasing transparency and helping them to better understand money market funds and their risks. But there will be operational and compliance challenges coming from this trend that fund firms must consider. Some of the measures firms will have to implement include the following:
- Reassess existing investment processes. Fund firms will need to reevaluate their investment process to ensure that the daily shadow NAV does not materially deviate from the buck;
- Strengthen data-reporting process. They will need to ensure they have a systematic, auditable and repeatable process for distribution of the data to market; and
- Reevaluate communications strategy. Fund firms will need to reevaluate how they communicate the NAV to the market and gauge any potential impacts on their marketing and regulatory documents that are in the public domain.
Daily disclosure of the NAV for a money market fund gives investors the reassurance that the fund manager is committed to being transparent and open about the current state of the fund. In the past, most money managers were distributing this data monthly, which led to a level of investor angst that the fund manager was not always showing all their cards.
The breadth of securities that money market funds invest in means that each holding can have multiple levels of credit exposure, and so for many, transparency is a must.
In order to deliver the NAV daily, firms need 100% belief in their investment process. The shadow NAV must not deviate materially from the buck on an intra-month basis. Firms that are publishing daily NAVs will most likely guarantee redemptions at the buck if the shadow NAV drops below the buck.
Beyond daily NAV publication, I expect to see more announcements from asset managers on moves toward becoming more transparent in other areas as well. One of the key demands from regulators and investors is the timeliness of the publication of portfolio holdings.
Current practice sees most managers publishing data quarterly, with some publishing monthly. However, in nearly all cases, the data is embargoed or time-lagged to prevent front-running and free-riding. There is considerable pressure being brought to bear by institutional investors and regulators to increase frequency of publication to monthly across the board and reduce the embargo periods. Some asset managers are preparing for a situation where they believe ultimately a daily reporting of holdings will be demanded.
One of the biggest obstacles to becoming more transparent can be the exposure to manual processes. Fund product data comes from a variety of different sources and has to be checked and double-checked before the information can be released. An organization that validates its product data at the source and stores it efficiently can ensure it is always ready for publication. It is vital for fund firms to get their product data to market on a timely basis, ensuring it is always accurate and consistent. That includes daily money fund NAVs.
Firms must also consider the impact on marketing and regulatory documents that they distribute to the market, including their own website, in the context of any data reporting trends. Additionally, they should review how the external distribution networks, platforms, broker-dealers and other intermediaries will be impacted by any change to daily publication on short notice.
I am delighted to see this move toward transparency represented by the daily disclosure of money market funds’ NAVs.
We are going to hear more and more about investor and regulator demands for more information as the pressure to deliver transparency continues to grow. The overriding themes in asset management for the next 10 years will involve transparency and risk.
To adapt to the current environment, fund firms, especially those offering money market funds, should reassess existing investment processes, strengthen their data-reporting process and re-evaluate their communications strategy.
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Posted by Ronan Brennan 
