What's it worth?! BNY Mellon scrambles to fix SunGard pricing glitch
- Summary:
- One of the largest custodian banks in the world has suffered a software glitch that meant it wasn't sure if its prices were accurate or not. The financial sector is becoming a bit of a problem child for IT.
The financial sector seems to be one of the worst industries for technology failures. Maybe that's a perception issue because the failures often end up having a direct impact on someone else's money. But it has to be said that the banks and platforms running the markets are particularly volatile.
However, given the situation in China this week and the ripple effect on global markets, what the industry absolutely did not need was a software glitch that meant that one of the largest custodian banks in the world couldn't accurately relay net asset values (prices) to funds.
BNY Mellon had to admit this week that a software glitch associated with its InvestOne Platform, which is outsourced to SunGard, meant that it may have calculated inaccurate prices. This would have led mutual funds and exchange traded funds reporting these inaccurate prices during the high volume trading of the last few days.
Essentially, it's a cock-up of massive proportions that will no-doubt lead to BNY Mellon having to retrospectively look at the pricing it used and also attract the attention of financial regulators. BNY Mellon said in an update:
BNY Mellon is working with SunGard to resolve an issue with a SunGard system that has impacted a limited number of fund accounting clients and the processing of net asset values (NAVs) of certain mutual funds and ETFs. BNY Mellon has notified the impacted clients. SunGard is working diligently to resolve the issue and expects to restore the system as soon as possible.
Pending a full resolution of the issue, BNY Mellon is working directly with clients through the various alternative NAV production options available to them. BNY Mellon is also communicating with the relevant exchanges and industry participants in support of its clients.
As I noted earlier, these financial sector fallouts are happening too regularly. Only recently I commented on how the UK's Co-operative Bank has IT systems that are so poor and unstable that it doesn't have the proven capability to recover from a significant outage (such as the one suffered by BNY Mellon this week).
Equally, not too long ago, customers of NatWest, which is owned by the Royal Bank of Scotland, were left outraged as an IT glitch meant that they couldn't get access to their own money. This resulted in a multi-million pound fine by the Financial Services Authority and has resulted in NatWest needing to invest £750 million in its systems, which is over and above its existing IT budget.
The BNY Mellon example is less consumer facing, but it's still worth highlighting given the need for system stability during such a volatile time.
The burningpants blog eloquently explains how this industry relies so much on software automation; which if it goes wrong, can lead to all sorts of problems. I particularly like the point that the custodian bank, BNY Mellon in this case, relies on its software to tell it how much net asset values are worth – which is great until the software itself doesn't know the prices anymore.
In the world of mutual funds and ETFs, it turns out something is only worth what the custodian of
an asset manager tells them it’s worth… and the pricing is only made clear to the custodian by what the software provider tells them the price is.Confusing eh? Yes, particularly if the software falls over.
It’s meant to arm the software provider with the knowledge of what something is worth. In this situation the software provider cannot accurately relay the pricing to the custodian, the custodian cannot tell the asset manager, the asset manager cannot tell the broker/fund platform, and these folks cannot tell the client, or at least they can’t provide an accurate price.
Incorrect pricing creates mayhem.
According to the Financial Times, some of the firms that may have been affected include Invesco PowerShares, Prudential Financial, Federated Investors and Guggenheim Partners.
My take
When these events happen, it serves as a stern reminder as to just how vulnerable our systems are. And the ripple effect that can occur when they go down. It's unclear at present about the financial consequences of BNY Mellon's software glitch, but there will no doubt be some. I can't think of an example in recent years when a
bank has suffered a tech failure and got away scot-free.However, the fine/compensation needed to recover is likely to be minimal compared to what would be the consequence of a cyber attack that had consequences market-wide. It should be a worry at the forefront of every CIO in the financial sector's mind.
Software automation is great, but when it goes wrong, it goes spectacularly wrong. And I'm always surprised at the level of comfort companies and people take in the reliability of their systems. There doesn't seem to ever be a realistic failover option in place that can be introduced immediately.
Not the first, I'm sure it won't be the last.