Form N-PORT

by Ronan Brennan

101 Guide

On October 13th 2016, the SEC voted to adopt the rules that will ultimately bring reporting under Form N-PORT into effect. Prior to this the SEC revealed that it was planning to modernize its approach to data collection from asset managers. The announcement of reform is leading many management firms to question if their data, technology and service provider architecture is up to the demands of reporting the new data set within the time constraints outlined.

Background

This document zeroes in on a central pillar in this proposed reform, the new Form N-PORT. Firms with exposure to N-MFP will have some insight into the potential uptick regarding exactly how onerous Form N-PORT will be. Our estimation is that Form N-PORT looks to be roughly two to three times more complex than N-MFP as a baseline.

This guide is a high level run-down on the content required to populate Form N-PORT and the issues that firms are likely to encounter in the workflow needed to ensure readiness to populate it once the first reporting dates arrive.

What is the scope of Form N-PORT? The proposed reporting requirement applies to all registered management investment companies / funds, other than MMFs, UITs (except ETF as UIT) and SBICs (small business investment companies).

What is the Data Model?Within the Form N-PORT, funds will be required to report a wide breadth of portfolio holdings information – including reference and analytical data, as well as information related to liquidity, derivative usage, securities lending, purchases and redemptions and counter-party exposures.

What is the format? The reporting format will be a new structured data format (XML based) report that will be filed electronically.

What is the reporting deadline? Reporting will be monthly, with each fund required to file with the SEC no later than 30 days after the last business day or last calendar day of each month. Only information reported for the third month of each quarter would be available to the public, and such information would not be made public until 60 days after the end of the third month of the fund’s fiscal quarter.

What about Amendments? A fund may file an amendment to correct erroneous data in a previously filing at any time. A fund that files an amendment to a previously filed report must provide information in response to all items of Form N-PORT, regardless of why the amendment is filed.

What are the Compliance Dates?Most funds will be required to begin filing reports on Form N-PORT after June 1, 2018, while funds with less than a $1 billion in net assets will be required to begin filing reports after June 1, 2019.

What does this mean for Form N-Q? The SEC is proposing to eliminate Form N-Q.

FAQs

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Content Form N-PORT will primarily involve the monthly reporting of portfolio position data – including security reference data and analytics for each holding position. The following is an overview of the proposed data content in the form.

General information: Specific data about the fund including the basic identification data you would expect, including LEIs (Legal Entity Identifiers).

Assets and liabilities: Funds will be required to report total assets, total liabilities and net assets. Funds will also be required to report any investments (including underlying exposures) in CFCs (controlled foreign corporations). Additionally, there are specific requirements to report certain liabilities including (but not limited to): fixed income security payments, payments related to standby commitments and delayed payment terms as well as details on the liquidation preference for fund issued preferred stock.

Portfolio level data and metrics: Funds will be required to report specific analytics and risk metrics in addition to verbose disclosures in the registration statement. Specifically, certain funds with positions in debt instruments or derivatives with underlying fixed income or interest rate securities will be required to calculate and report portfolio-level analytics related to duration, and spread duration across the range of maturities in the related portfolio security positions.

Performance: Funds will be required to report monthly total returns for the previous three months for each reporting share class. The analytics themselves will be aligned to the risk/return data already shared in factsheets and prospectus documentation.

For a range of typical derivative types (commodity contracts, credit contracts, equity contracts, fx contracts, interest rate contracts as a sample) funds will report monthly net realized gains/losses and net unrealized appreciation or depreciation for the preceding three months.

Portfolio holding position level data and risk metrics: Funds will be required to report granular holdings data in a new schedule of portfolio investments, including risk measures and terms at the investment level for options and convertible bonds. Regarding some of the proposed specific reporting requirements – note the following:• Every holding position in the portfolio will

have a common basic level of information to be communicated. For example the name of the issue and issuer, the investment amount, the security type, the payoff profile and the GAAP fair value categorization.

• Funds will need to report if a position held, is in a restricted security or an illiquid asset

• Specific disclosure is proposed on debt securities, convertibles, and repo / reverse-repo

• For derivative positions, funds will be required to disclose specific T&Cs and identifying information of the counterparty. Depending on the type of derivative the range of terms/conditions to be disclosed is different.

Miscellaneous securities: Where funds wish not to disclose publicly certain holdings, classifying them as miscellaneous securities, funds will be required to disclose information on these miscellaneous securities to the SEC. The SEC proposes that funds report miscellaneous securities on an investment-by-investment basis, including the aggregate value of all the miscellaneous securities held – noting that the SEC has promised not to disclose this information in the public filing.

Security lending: Form N-PORT will usher in a new level of deeper granularity regarding transparency in security lending and the related counterparties to such arrangements. Funds will report data on securities lent from their portfolio, with a focus on the revenue generated from this activity and any related costs, including the use of reinvested collateral. On the counterparties to each security lending relationship, the fund will be required to report the value (in aggregate) of all securities on loan to each counterparty along with the registered full name and LEI (where applicable and available) of said party.

Flows: For each of the preceding three months funds will report the total net asset value of:• Shares sold, including exchanges but

excluding reinvestment of dividends• Shares sold in connection with

reinvestment of dividends• Shares redeemed or repurchased, including

exchanges.

ISSUESForm N-PORT is expected to precipitate significant issues for firms, both in terms of preparation for the new regime, as well as the ongoing servicing of the new report generation operating model. So with the principle of ‘forewarned is forearmed’ in mind, consider carefully the following likely pain points:

Understanding the requirement: The first challenge for many firms will be sourcing subject matter experts that understand the breadth of the challenge, in order to lead the analysis and implementation effort. Many firms will need to use external consultants and vendor firms to help deliver to a challenging timeline.

Source identification: In the analysis phase of the project the firm will need to identify a source (be that internal or external) for each of the reporting fields. There will be numerous challenges in making tactical or strategic decisions when it comes to source choice, with accessibility and expedience being the trade-off. The typical financial statement requires six to eight different data files. Our estimate on number of sources that will be required is in the range 10-15; note that Invesco, in their response to the SEC specified “With respect to Form N-PORT, implementation will require us to undertake significant systems development and operational updates. Based upon a preliminary internal analysis, we have calculated approximately 1.8 million data points, 72 manual inputs and 37 automated inputs per 250 funds, with information being pulled from over 10 separate data sources”.

Data collection: Setting up a collection operating model, which includes a data quality management process with appropriate stewardship and governance to gather the data on a monthly basis, will be a serious data management and organizational challenge.

Aggregation to a central model: Aggregating data from multiple new sources and normalizing it to a central reporting model will be a major challenge for most firms.

Reconciliation: Reconciliation of data will be a serious task many firms will want to do in order to double check the filing. Specifically firms who outsource or use an existing back-office service provider will probably want to reconcile their accounting book filing with a shadow report built off the investment book record used in front and middle office. This will allow the PM and product manager for each of the strategies/products to verify the report’s accuracy in a timely manner.

Reference data gap: 70% of required data will be current use for a number of other reporting requirements, but we approximate 30% of

the reference data could be new and pose a real challenge. Firms will need to do a careful reckoning of their security/reference master dictionaries to identify this gap across all security types.

Analytic gap: The calculation and/or the sourcing of the risk metrics is probably the most daunting of the challenges for some managers where the analytic requirement is not familiar. Determining which of the existing vendors can calculate the analytics, and then confirming these vendors can tap into the source data required to feed the risk engine will be a critical element in most firms’ implementation programs.

Costs: This will not be a ‘quick and easy’ type response, but rather a long, painful and potentially costly journey, both in the initial build and in the ongoing operating model, although the XML electronic filing will help in terms of ongoing costs. From the view of resourcing alone, firms are looking at potentially needing to double existing reporting teams. Remember: the data set to be reported is expected to be at least double current size – double the amount of data in half the time. Many firms will need to be four times as efficient just to keep costs level!

Building a HubAs a result of these challenges, many firms will be looking to leverage a regulatory reporting hub to serve as a strategic reporting platform; if they don’t have an existing strategic regulatory project to tap into, many firms will use Form

ISSUES

A note on Rule 18f-4:

The SEC is also proposing amendments to Form N-PORT which needs to be noted. 18f-4 is an exemptive rule with respect to a fund’s use of derivatives and leverage. The proposal requires segregation of assets, limitations on the use of derivatives and other leveraging arrangements. These Form N-PORT additions include risk metrics relating to some derivatives, but only for funds that are required to adopt a DRMP (derivative risk management program) which would also include the appointment of a derivatives management officer.

Rule 18f-4

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