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System Failure at BNY Mellon Rattles U.S Funds Industry

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A recent technical glitch at The Bank of New York Mellon Corporation (BK - Free Report) has rattled the U.S. funds industry.  Assets under administration worth billions of dollars under the world’s largest custody bank are queued for pricing since Wednesday, according to a Reuters report.

Notably, BNY Mellon uses an accounting system developed by SunGard Data Systems Inc. for pricing of certain mutual funds and exchange-traded funds (“ETF”). A failed software upgrade by SunGard led the system to eventually crash on Monday, rendering the company unable to calculate the net asset value (“NAV”) of several funds under its custody. As a result, a majority of the company’s clients were incapable of disseminating accurate price information to their respective customers.

However, the company managed to partially restore the system late on Tuesday. Further, BNY Mellon spokesperson Kevin Heine informed that the company is in the process of clearing the backlog and is working with SunGard to resume normal processing as soon as possible. The company’s clients, however, believe that it could take several days for the chaos to settle.

According to Morningstar, NAVs for 796 funds were missing on Wednesday.

Given BNY Mellon’s leading position (more than $28 trillion in assets under custody), it mostly caters to large companies. The list of affected companies features leading ETF provider, Invesco PowerShares, which had as many as 11 ETFs affected by the system lapse. Notably, Invesco claimed that it was using Tuesday’s NAV to price trades on Wednesday.

The list also includes First Trust Advisors, which complained that the technical failure led to a NAV calculation error of more than 1% for its certain funds. Federated Investors, Inc. (FII - Free Report) , Prudential Financial, Inc. (PRU - Free Report) , Voya Investment Management, and Guggenheim Partners are among others affected by the glitch.

The total number of funds affected, however, was not disclosed.

What Next?

Given the collapse of its accounting system, BNY Mellon has resorted to alternative means to calculate fund NAVs. Moreover, the Securities and Exchange Commission (“SEC”) has come forward, and is presently working with BNY Mellon and the affected companies to resolve the matter.

Separately, the Federal Reserve is closely evaluating payment systems of big banks amid heightened volatility in stock markets. Reportedly, the Federal Reserve has issued related notices to major banks including Bank of America Corporation, JPMorgan Chase & Co. (JPM - Free Report) and Citigroup Inc.

Bottom Line

The system failure will likely lead to higher trading costs for investors, as traders have reportedly widened spreads to incorporate the higher risk of trading driven by inaccurate pricing data. Moreover, there remains confusion among affected entities as to who is to be held liable if investors trade on erroneous prices.

We believe that the technical glitch will call for heavy spending from BNY Mellon in terms of time as well as money as it works toward resolving complaints from clients as well as potential claims from distressed investors, if any. More importantly, the incident has likely dented the company’s reputation to some extent.

BNY Mellon currently has a Zacks Rank #2 (Buy).

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