BNY Mellon pricing snafu highlights bank's fragmented technology

By Tim McLaughlin and Svea Herbst-Bayliss

BOSTON (Reuters) - BNY Mellon Corp's recent high-profile computer glitch has highlighted how reliant the bank is on a patchwork of in-house and third-party technology platforms despite a pledge by Chief Executive Gerald Hassell to simplify things.

The U.S. bank roiled about 5 percent of the U.S. fund industry last month when one of the accounting systems it relies on to generate prices for mutual funds and exchange-traded funds collapsed. The problems lasted a week and affected about $404 billion in assets.

"There were a series of events (last week) that really call into question confidence in pricing and execution," said Larry Glazer, a managing partner at Mayflower Advisors, which oversees $2 billion in assets in Boston.

Unlike rival State Street, which operates one global platform to calculate fund prices, BNY Mellon has five different systems, partly the result of acquisitions over the years and a need to accommodate different kinds of funds.

The one that buckled last month, however, was an outside system hosted by SunGard, a financial services software provider.

BNY Mellon says it still does not know the root cause of the problem with SunGard's InvestOne accounting system, which also is used by the U.S. Treasury to track more than $5 trillion in public debt. After a week of scrambling to fix the problem with an upgrade to SunGard's InvestOne system, normal fund pricing has resumed.

The bank says it is on track to get down to one custody platform by early 2016, and reduce its five fund accounting platforms to three. It declined to give a completion date.

BNY Mellon generally transfers new clients to a fund accounting system run by its Eagle Investment Systems subsidiary in suburban Boston. The SunGard system is generally used by legacy BNY Mellon fund clients who have chosen not to convert their assets to a platform hosted within the bank, according to people familiar with the situation

THE PLUMBING

As the world's largest custody bank, BNY Mellon holds and keeps track of nearly $30 trillion in assets. The bank, which is paid recurring fees for activities such as calculating mutual fund prices, relies heavily on technology to automate mundane tasks and to reduce human error.

The bank's technology is a key part of the plumbing to the world's capital markets, prompting CLSA banking analyst Mike Mayo to describe the company's Hassell as "the master plumber."

Hassell, who declined to comment for this story, has pointed to technology as key to helping the bank boost profitability. Between 2012 and 2014, the bank says, annual spending on technology infrastructure dropped 6 percent, despite increasing demand for services on those platforms.

Marcato Capital Management, which owns 18.5 million BNY Mellon shares, earlier this year delivered a scathing critique of the bank, saying its five different fund accounting platforms and fragmented technology are prime examples of excess costs.

Mayo estimates that BNY Mellon's annual budget for technology tops $2 billion, or about 13 percent of annual total revenue of about $16 billion. State Street is estimated by analysts to have a comparable tech budget.

Part of BNY Mellon's inefficiency is reflected in the company's lagging return on equity. In late 2011, Hassell targeted a 10 percent return on equity (RoE), but the bank fell short over the next three years. In the recent second quarter, annualized RoE was 9.4 percent, below Hassell's target but an improvement from 6.1 percent a year earlier.

FALLOUT

The financial fallout for BNY Mellon is still unclear.

If customers, already rattled by nearly unprecedented stock market volatility, suffered losses on a trade because of the pricing problems they could seek compensation from the bank.

There is also a risk of fines or penalties from regulators if flaws are identified in BNY Mellon's internal controls or its oversight of outside contractors such as SunGard.

BNY Mellon spokesman Kevin Heine declined to comment on what the bank may owe fund clients affected by the pricing disruptions.

(Editing by Carmel Crimmins and mSteve Orlofsky)

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