The best technology startups deliver a way for established firms to more efficiently compete or comply with regulatory requirements. Overbond meets that startup definition. A private company based in Toronto and New York, Overbond calls itself “the first end-to-end fixed income markets fintech platform for AI predictive analytics.”
This month it launched COBI Pricing, a proprietary bond pricing and liquidity risk management automation platform which should also be of interest to advisors and must be of interest to large and small asset management firms. That’s because those fund firms must comply with an SEC mandate on the liquidity and pricing of their mutual fund and ETF holdings this calendar year under the final SEC Rule 22 e-4.
Let’s put this platform and the mandate into context. Many investing vehicles have provided greater transparency to investors on their holdings and their philosophies, especially since the Great Recession. However, one investing segment remains quite opaque—fixed income. That is so despite the fact that the value of both the U.S. and worldwide bond markets is significantly larger than that of the equities market.
(Related: Fidelity Go Ranked Best Overall Robo-Advisor)
Moreover, in times of market volatility, such as was the case with equities over the past year, investors seek safety in bonds. On Jan. 28, Cerulli reported that mutual funds posted “staggering” net negative flows of $157 billion in 2018; ETFs also lost 1% of their assets during the year. But perhaps not surprisingly, Cerulli cited Morningstar data showing that a majority of the top-10 mutual funds and ETFs that had net-positive inflows for 2019 were in fixed income, notably ultrashort bonds, intermediate-term taxable bonds and intermediate national munis.
Partly in response to the financial crisis of 2007-2009, in which illiquidity of some assets (e.g., real estate) played a large part along with counterparty risk, and to modernize its systems of monitoring the capital markets, the SEC in 2017 ruled that registered investment companies (RICs) of all sizes must file Form N-PORT monthly beginning in 2019. The compliance deadline for large RICs, those with more than $1 billion in assets, is now April 30, 2019; for smaller funds, the deadline to begin filing Form N-PORT is now April 30, 2020, according to the SEC’s Division of Investment Management.
Among other requirements, the SEC mandates that all mutual funds and ETFs (not money market funds) must report each fund’s holdings as either highly liquid (HLI); moderately liquid MLI); less liquid (LLI), or illiquid (II), based on how quickly those individual holdings could be converted to cash.