Placing a value on portfolios of fixed-income securities has always been a tricky business. Because of the securities’ complexity and, often, illiquidity, managers have a hard time sourcing reliable pricing. The U.S. has relied on evaluated pricing services for the past 20 years or so. Finally, it seems, Europe is beginning to follow suit.
A-Team Group, publisher of Reference Data Review, was asked by Reuters to find out how managers prefer to price their fixed-income securities. We surveyed 50 industry participants – sell-side, buy-side and custodians – and asked them how credible was the concept of evaluated pricing, and what issues they faced in attempting to find reliable and credible sources of prices for fixed-income securities. Contact us for your copy of the report at firstname.lastname@example.org.
It’s largely taken as given that evaluated pricing sources haven’t been accepted in Europe with the same degree of gusto with which they’re embraced in the States. Our survey seems to indicate that attitudes are changing.
Fully 83% of respondents to our survey believe that evaluated pricing is becoming increasingly accepted as a credible price source. Two-thirds of respondents believe that this is becoming increasingly true in Europe also.
Key to this acceptance were a number of business drivers. These include the growth in more-complex instruments being traded (i.e., structured instruments and derivatives). These instruments are hard to price and therefore evaluated pricing can often be the only option for valuation, other than calling the broker or person that one bought it from. Regulations are also a significant driver with Sarbanes-Oxley mentioned as the key relevant regulation with impact.
Although front and back offices are centralizing data management, each may select different sources for fixed income prices/evaluations using different criteria. Typically the front office looks for “accurate” data and methodology whilst the back-office looks for breadth of coverage, timeliness and reliable quality/accuracy. Increasing availability of central reference data repositories offers both more options to each department and could enlighten departments, outside the front offices, on the potential benefits of evaluated prices. This is another reason why evaluated prices are gaining acceptance.
That said, contributed pricing is still the most widely used data type (used by 88% of responding firms) particularly among traders, risk managers, and within operations/securities administration. The importance of “getting close to trade” and difficult-to-price instruments are key reasons for continuing this practice beyond legacy procedures.
But evaluated pricing follows closely (84%), used more in operations/securities administration, fund pricing, risk management and portfolio management, but less so by traders.
We found that daily, end-of-day updating is the most prevalent frequency of pricing required within the U.S. Comparatively, the U.K. requires pricing on an intraday basis (most often at 12 p.m. and 2 p.m., followed by end of day, then 10 a.m.). Only 7% saw a need for real-time valuation updates, and 4% (mostly custodians with legacy systems) still rely on monthly updates. However, all respondents were clear that movement has been to daily, at least. Traders, and sometimes, portfolio managers will track market movements in real time; but, they are doing this through terminal services and electronic platforms, like NASD’s Trace, and prices are usually from contributors, rather than evaluations.