Though technical issues with Bank of New York Mellon's fund accounting system left an estimated 10% of U.S. ETFs and some mutual fund providers unable to accurately price their products for nearly a week, the bank's custody business is expected to remain intact.

One reason why, says Morningstar analyst Erin Davis, is because BNY Mellon didn't cause the problem - the InvestOne fund accounting platform, provided by Sungard Data Systems, went down on Aug. 22 because of "an unforeseen complication resulting from an operating system change performed by SunGard," according to the technology firm.

"The custody business didn't have any of these problems," Davis says. "So for a corporate customer who is really a risk averse individual, it's not hard to make an argument that it doesn't have anything to do with their relationship."

The cost of switching custodian banks, Davis adds, is high, and not easy for any provider to accomplish quickly.

"The risk of disruption that could be caused by moving is really material," Davis says. "That's why we don't see custody clients move back and forth between custodians very frequently. We've even seen instances where customers are suing their custodian and they don't leave.

"So I don't think that there's going to be a lot of disruption on that end of it.

"We view the custody side of the business as wide and I think those customers are very deeply integrated with the custody business."

As it worked through the week with SunGard to get its accounting system back online, BNY Mellon told Bloomberg at the time that 20 mutual fund companies and 26 ETF providers experienced pricing problems.

Providers were forced to devise their own means to report NAVs. Prudential, for instance, said 40 of its more than 60 funds were affected. Without real-time digital feeds, Prudential calculated closing prices on its own.

BNY maintains records, tracks performance and lends securities for institutional investors and as of June 30 oversaw about $26.8 trillion.


SunGard said its system change corrupted the support for BNY Mellon's U.S. fund accounting clients and caused the bank's back-up systems to fail also. SunGard said the failure was not caused by hackers, "nor was it related to the recent turmoil in the equity markets."

The software and technology service provider, which was recently acquired for $9.1 billion by Fidelity National Information Services, was able to get BNY's system back up by Aug. 31st.

SunGard's explanation of the technical issues included an apology from president and CEO, Russ Fradin.

"We at SunGard apologize to BNY Mellon for the adverse impact this unfortunate incident has had on its operations and clients.

We take this matter very seriously and truly appreciate the spirit of cooperation from BNY Mellon. We are committed to restoring the trust placed in us by BNY Mellon and all of our valued customers."

The bank said it still had confidence in the accounting system.

"We believe the new instance of InvestOne is reliable and sustainable," said Suresh Kumar, BNY Mellon's chief information officer, in a conference call.

"We also have a new disaster recovery system and it is receiving updates real-time. We are establishing a third instance and we are backing up the data, so we believe we have a reliable backup in place."

Added Brian Shea, BNY Mellon chief executive officer for investment services: "The underlying application software and calculation logic has been unchanged. Therefore, we are highly confident that the system-generated NAVs are now consistent with the process and experience our clients were used to before this unfortunate incident occurred."


Shea said the bank acknowledged the headaches caused by the system failure.

"We certainly understand the challenges our clients have faced during the course of this [incident]. Clients are understandably disappointed that they did not experience the consistent high level of service and system reliability they have come to expect from us.

"We know that our clients often wanted to know more information than we had available. This was a very fluid situation and we made every effort to give our clients relevant information as it became available throughout the week."

BNY Mellon Chief Executive Officer Gerald Hassell said to understand the root cause of the issue, the bank was undertaking "a thorough analysis, including engaging a separate, independent third-party," investigation.

Hassell also took a moment to apologize for the issues during the call.

"We deeply regret any disruption to your firms, your funds, your investors and all of you," he said.


For now, the firms affected by the technical issues refused to comment when contacted by Money Management Executive on whether they would re-consider their custodian relationship following the glitch.

Various company sources, who did not want to be named because of the sensitivity of the issue, said it was too early after the system crash for any firm to be making a decision about their relationship with the bank.

Morningstar's Davis said BNY could see some impact on its asset management business, because of its clientele.

"BNY Mellon's asset management business does tend to be more institutionally-focused rather than retail focused and usually we see that as a plus. Clients tend to be stickier, they tend not to chase hot performances that they see as part of their portfolio strategy and we generally see that as a pro.

"In this case it's probably a con. It's clearly something they would consider as part of a due-diligence process. We are likely to see some AUM attrition as a result of this technology problem."

But Davis notes that asset management represents only 10% of the bank's overall business. "[It] is not likely to be a really big detriment to overall shareholder value." 

- Bloomberg News. Additional reporting by Andrew Shilling. 

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