Money Fund Rule First Big Test for XML
March 8, 2010
The Securities and Exchange Commission has taken a major step toward structured, automated reporting with its requirement that all money market fund activity be filed using the eXtensible Markup Language (XML) data-tagging format-an aspect of the updated Rule 2a-7 that was overshadowed by its net asset value disclosure requirements.
"This rule is a significant move toward industry adoption of structured content for regulatory reporting," said Scott Powell, a senior market analyst at the Pittsburgh-based data automation company Confluence.
The SEC is requiring money funds to use Form N-MFP, which must be filed electronically through the Commission's EDGAR system, using the XML language.
"Money market funds already maintain most of the information that will be filed on the form, and, therefore, the main requirement for funds will be the tagging of the data and filing of the reports with the Commission," the SEC said in last month's rule.
While the initial implementation costs might be significant, "the data required by Form N-MFP will be clearly defined and often repetitive from one month to the next, and therefore the XML format will provide us with the necessary information in the most timely and cost-effective manner," the rule said. "Over time, we expect these filings will become highly automated and involve minimal costs."
The SEC report said it decided to use the simpler XML format, rather than the business-oriented eXtensible Business Reporting Language (XBRL) it requires of mutual funds and large companies, because it is cheaper, simpler and better suited for money funds.
Rule 30b1-7 requires money funds to file their monthly reports within five business days after the end of each month. Information will be made available to the public 60 days later.
The SEC says the rule is intended to improve transparency of information about money market funds' portfolio holdings and facilitate oversight of money market funds. Compliance is mandatory.
"The information will permit us to create a central database of money market fund portfolio holdings, which will enhance our oversight of money market funds and our ability to respond to market events," the SEC said.
According to a report by the international law firm Shearman & Sterling LLP, Form N-MFP should include information on portfolio concentration, illiquidity information, weighted average maturity, weighted average life, seven-day gross yield, net shareholder flows, repurchase agreement collateral practices and other information.
"Most controversially, the form will both highlight a fund's shadow net asset value and allow security-by-security comparison of amortized cost values and the corresponding shadow mark-to-market values," the Shearman report said. "The form will reveal security-by-security capital support arrangements that may have been obtained."
The SEC believes that reporting shadow NAV information will enable investors to better judge the risk profile of they money funds and get used to the fact that money funds may not always maintain a stable $1 NAV, Shearman said.
The XML requirement will be a boon to companies like Confluence, which have been anticipating a move to XML for years.
"Confluence has been involved in automated reporting since 2004," Powell said.
He said his company has been improving its XML technology for years and developed a fully automated reporting solution, called Unity, which integrates back-office processes to solve a wide range of fund administration problems.
"New source/content-tagging technology will enable fund administrators to comply with the requirements of filing the XML-based Form N-MFP, while eliminating the high costs and risk of error associated with manual XML data tagging processes," Powell said.
He said the Commission has never required holdings to be reported to EDGAR in XML before, other than the temporary Rule 10a-3T passed in 2008 for short sales. That rule has expired. EDGAR filings are typically done in the web-friendly HTML coding or in ASCII, the American Standard Code for Information Interchange.
Powell said XML is a newer technology and can be a problem if mismanaged.
"Fund administrators should familiarize themselves with the new rule," he said. "They will need to look at their internal processes and make sure their people and technology are up to speed."
There are basically two methods for submitting information using XML, Powell said. In the traditional document approach, information is entered manually and can be expensive and error-prone. Instead, Confluence uses a one-step process that automatically tags information when content is created.
"Fund administrators must quickly examine and scale up their reporting processes to meet these new requirements, which involve shorter reporting cycles," said Kirk Botula, executive vice president and chief operating officer at Confluence.
Beginning on Oct. 7, 2010, funds will be required to post monthly reports of their portfolio holdings on their websites, with the first required posting to disclose holdings for September, Shearman said. Funds will be required to maintain this information on their website for at least six months.
Dec. 7 is the effective date for filing Form N-MFP, containing information for the month of November. The SEC will make this information public at the end of January.
The SEC recognizes that data tagging is confusing to people unfamiliar with the process, and is holding a seminar on XBRL taxonomy at 1 p.m. March 23 at its headquarters.
The event will also be webcast on sec.gov. Mutual funds are encouraged to make voluntary filings with the SEC as early as Oct. 7 to allow for better familiarity with the new requirements. Information from voluntary filings will not be made public.
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