Adopting NAV Oversight and Resiliency Practices Helps Drive Significant Benefits

Adopting NAV Oversight and Resiliency Practices Helps Drive Significant Benefits

January 2023

Two leaders in the financial services industry—Allen Cohen, Head of Accounting and Administration at BNY Mellon, and Geoff Hodge, President for Fintech, Milestone Group, a BNY Mellon company—sit down to share their views on trends in the industry and discuss why NAV oversight and resilience is so important.

Q: Allen and Geoff, over the past several years, the role and expectations of oversight as a key control function to monitor and ensure the availability and accuracy of NAVs released to the market has gained significant attention. What is driving this need for NAV oversight and resilience?

Cohen: It’s been a chain reaction. As outsourcing has increased in the investment management industry—and this will probably continue—regulators around the globe have intensified the pressure on asset managers to take ownership for oversight responsibility. The relationships between asset managers and their service providers can be complex, and regulators are reinforcing the need for operational resiliency, as well as oversight of their outsourced fund operations, such as accounting and administration.


For example, in the UK, the Financial Conduct Authority’s1 Operational Resiliency rule, and in the U.S., the Securities and Exchange Commission’s2 recently proposed oversight requirements for certain outsourced services, have reinforced the need to have sound business continuity plans (BCPs) in place, and they’ve emphasized that firms have appropriate oversight for their outsourced fund operations. We’ve even seen fines issued for lack of oversight in certain jurisdictions.


Hodge: I think there has been a realization that the industry can further industrialize the NAV process to match the regulatory attention and trustee expectations that have evolved with market developments. The pressure for asset managers to ensure accurate NAVs through effective and timely oversight reflects the fact that (1) they have the primary responsibility for NAV accuracy, and (2) they should be working closely with their third-party providers to this end.


Similarly, there has been a heightened awareness to the new risks that could lead to service disruptions, such as the emergence of cyberattacks, which have different characteristics than the previously considered threats of power failures, natural disasters or acts of terrorism. As a result, asset managers are examining back-up arrangements across their supply chains in the event of a disruption or outage of business-critical functions such as NAV production. The approach to a potential disruption has evolved to having a reliable back-up NAV to ensure operational continuity if and when these challenging circumstances arise.

Q. What benefits can clients gain from adopting modern NAV oversight and resilience practices?

Hodge: In just a few words: greater efficiency, risk management, and transparency. A modern oversight approach means having reliable and repeatable processes for detecting a wider range of anomalies and accelerating the remediation of exceptions, ideally before NAV release. With an effective back-up NAV, this heightened level of oversight can help avoid business disruption in the event of a service provider outage.


But, these key benefits likely lead to another overarching one: stronger client relationships. By demonstrating more robust oversight processes and the ability to remediate issues more quickly, asset managers can generate confidence across the full spectrum of stakeholders, including regulators.


Cohen: Regardless of whether you’re performing fund accounting in house or through a third-party administrator, the bottom line is that you can’t delegate the responsibility for accuracy and resiliency. Service providers must deliver precise and timely NAVs to the investment industry, but firms need to monitor their providers, protect investors, and look to ensure superior levels of client service—and an effective oversight process fosters a tighter and more collaborative relationship with service providers, as well.


Moreover, if the oversight processes are automated and easily repeatable, they can achieve operational scale. For example, easily accessible NAV oversight that provides a full history of actions allows asset managers and their service providers to address issues quickly with comprehensive, digestible data. This kind of transparency, risk management and governance leads to better communication all around—from asset managers to clients, as well as between asset managers and their service providers.

Q. Okay, then what’s the foundation for a robust NAV oversight and resiliency solution? How does this happen?

Cohen: It’s all about independence and insulation. A back-up NAV provides insulation; and an independent calculation sufficiently isolated from the processes and infrastructure used to determine and disseminate the primary NAV ensures that if a service provider goes down—due to power failures, political unrest, terrorist attacks or any of the other factors we mentioned previously—the NAV can still be released so that asset managers can meet their obligations to investors and regulators.


Hodge: It’s also about efficient technology to underpin that independence. The need for a back-up NAV is only one side of the coin. The independent verification of daily NAVs and portfolio valuations across providers is the other. Today’s explosion of data and the market’s volatility are increasing pricing exceptions and instances of fair valuing, so an independent verification of NAV calculations reduces risk. Whether it be through software or a service offering, the best-practice approach is based on independent, evidence-based, repeatable workflows that demonstrate oversight for outsourced fund operations. It’s important to have a separate, independent verification of daily NAVs and portfolio valuations across providers.


Cohen: That’s a great point, despite best efforts, errors in NAV calculations can occur. Even if NAV calculations are correct 99.9% of the time, a 0.1% error rate can cause considerable headaches. Asset managers and fund valuation committees must work closely with their service providers to determine both their tolerances and when exceptions requiring further review should be generated. With today’s market conditions, the number of exceptions requiring further review will typically increase, which makes the robust oversight of day-to-day operational continuity even more important to help ensure NAV accuracy.


Hodge: It’s important since this combination of insulation and independence leads to transparency. For example, a Chief Financial Officer (CFO) or Fund Treasurer should be able to evidence effective oversight to meet their governance requirements in a simple and consistent way across providers, without the need to assemble information from various reports or portals. The resulting transparency can lead to increased confidence in the NAV production process.

Q. What should clients consider to help attain NAV resiliency and oversight?

Hodge: Asset managers need to consider several questions when thinking about NAV oversight and resiliency to help ensure that fund NAVs are available to the industry even if the primary calculation approach fails, including:

  • Does the independently calculated NAV price allow for detailed comparison analysis with primary NAV and a timely detection of NAV anomalies?
  • Is there transparency and oversight into an independently calculated NAV that can be used in the event the primary provider is unavailable?
  • Does the computation of the back-up NAV use a different methodology than the primary NAV calculation, and is it sufficiently insulated from the processes and infrastructure used to produce the primary NAV?
  • What is the strength of the provider’s BCP? Are its teams able to perform their tasks remotely, ensuring continuity when BCPs are enacted?
  • To strengthen platform resiliency, is the solution platform fully independent of the primary NAV calculations?
  • Is the back-up NAV derived from data sourced independently from the primary accounting platform?

Q. What key principles should be considered regardless of the approach a client takes?

Cohen: There are several principles that should be considered, some of which we’ve already touched upon:

  • Independence: Beyond what we’ve already explained, the completion of an independent oversight process should happen prior to NAV release to the market. The controls and operational processes should also be fully independent, so there can be a detailed comparison analysis between the independently calculated and primary NAVs to identify and address any anomalies. 
  • Efficiency: Asset managers should work closely with their service providers to set accepted tolerances. Automation should be leveraged to help ensure exceptions are reviewed and handled correctly on T prior to NAV dissemination. This will help establish efficient, repeatable processes that are evidence based.
  • Transparency: To support audit and regulator inspection, there should be a full audit trail of controls performed, analyses and investigations made, and exceptions flagged. And, for those using multiple providers, aggregation of fund accounting data across service providers to deliver cross-provider validation and oversight should be strongly considered.
  • Accuracy and Timeliness: The accuracy and timeliness of NAVs is critical. As already mentioned, firms will want to consider a contingent NAV strategy as part of their BCP to ensure that fund NAVs are available to the industry even if the primary calculation approach fails.
  • Granularity: As mentioned earlier, market volatility and uncertainty can intensify valuation challenges, to address such issues quickly, granular data is needed to perform asset and market level checks against daily tolerances to identify exceptions.

When combined in the right way, these principles demonstrate a robust framework that can reassure fund boards, risk committees, regulators and investors, while helping to drive all the previously mentioned benefits—greater transparency, efficiency and risk management.

Q. What do you see on the horizon and will the need for NAV oversight and resiliency change?

Cohen: With that sustained focus, it is likely that firms will look to solution providers who can supply them with open, flexible digital solutions, whether that be software or a service offering, that can help solve the problems associated with the rising complexity and volume of data that must be digested to accurately perform oversight and protect them from potential reputational risk, loss of competitiveness, and financial loss.


Hodge: As the outsourcing trend and market volatility and uncertainty continues, we can expect there to be increased focus on automation of oversight and operational resilience, more generally so that asset managers are well-positioned to continue their operations through any future operational challenges, with an eye on cyber risk in particular. We are also seeing increased focus on intelligent analysis and prediction of anomalies, as well as exceptions being auto cleared using intelligent technologies.


By the Numbers

Oversight Trends


  3. Milestone Group’s Outsourcing and Oversight Report, October 2019, which interviewed North American and European asset owners and asset managers with between USD 3 billion and 5 trillion Assets Under Management (AUM)
  4. 2020 BNY Mellon survey of 200 global asset managers


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