This year’s Sibos was an unusually sombre affair, as the storm clouds both literally and metaphorically gathered over the Austrian city of Vienna and the banking delegates therein. The first day witnessed an exodus of delegates being called back to their head offices as the news broke that Lehman Brothers had filed for Chapter 11 bankruptcy, the Fed had been forced to step in to bail out AIG and Bank of America had successfully bid for Merrill Lynch’s business.
The opening plenary on the first day of the conference seemed in keeping with the headlines, as the panel of Swift’s inaugural “big issue debate” discussed the need for a fresh approach to risk management in light of the economic downturn. And, although data management did not get a session of its own this year, data certainly played a large part in the discussions throughout the week, beginning with this debate.
David Hodgkinson, group chief operating officer for HSBC, stressed the need for independent risk management and a better handle on data within an organisation with a view to monitoring risk more effectively. The panel agreed that one of the biggest underlying causes of the current financial crisis was the failure to adequately understand and price risk. Accordingly, Hodgkinson called for a simplification and standardisation of areas such as pricing in order for the business to “return to normal”.
Bill Rhodes, senior vice chairman of Citi, seconded this notion and called for the board level of financial institutions to place a sufficient amount of importance on getting this part of the business right, rather than risk their reputations. This must have been music to the ears of the valuations vendor community, which appears to have grown substantially larger over the last few months. Where once there were only a few contenders, providing a mixture of niche solutions tailored to specific complex products and larger players with catch-all coverage, there appears now to be a glut of vendor offerings.
For example, vendors such as Telekurs, Thomson Financial and Interactive Data have all stepped into the fray with new products in the derivatives valuations space in particular, bringing them into competition with an already crowded market. Surely with the increased pressures on bank spending, the market will be unable to sustain this many players in the valuations space over the long term? Just how many pricing sources can one bank afford, after all?
The increase in the number of players in the market has certainly made it challenging for institutions to select sources for their pricing data. However, given the overcrowding, it is likely that more partnerships, alliances and tie-ups, like that of S&P and SuperDerivatives earlier this year, will occur, which may force smaller players to decide to either partner or exit the market. Moreover, as reported in last month’s Reference Data Review, the institutionalisation of a number of these pricing sources via the creation of a centralised clearing house for credit derivatives, will further complicate the matter.
Recent research by A-Team Group has highlighted this increasingly competitive environment and the plethora of different approaches that can be adopted to valuation. The author of the report, Ian Blance, explains that despite the choices available, many of the respondents to the survey were vocal about their dissatisfaction with the current vendor offerings in the market. This was particularly evident in the more esoteric and complex asset types where users felt that vendors had failed to keep pace with instrument developments, he says. It seems that the quality and coverage of the sources on offer are still questionable from the point of view of the user community.