Regulators and participants in fixed income markets are calling for more frequent valuation updates, but an emerging trend towards real-time valuations will be neither universal nor useful for all securities. A webinar hosted last week by A-Team Group editor- in-chief Andrew Delaney, and joined by experts from Bloomberg, Interactive Data and S&P Capital IQ, discussed the possibilities of higher frequency valuations and the realities of real-time valuations.
Delaney set the scene for the webinar, Toward On-Demand Valuations: Increasing the Frequency of Update for Evaluated Pricing, quoting statistics from a recent A-Team Group European Performance Benchmarking Survey. The survey included 36 European buy-side institutions, 72% of which were asset managers and 28% securities services providers.
Its findings on the frequency of pricing updates show 11% of survey respondents saying improved frequency is among their top three goals for this year. Some 12% say timeliness of updates is an important consideration and should be better, while 9% say timeliness should be an improvement point for vendors of evaluated pricing. Reporting on asset classes, the survey shows OTC derivatives as the asset class believed to have the greatest potential for improvement in terms of pricing frequency.
Turning to the webinar panel, Delaney questioned whether panel members were experiencing the expectations of more frequent pricing identified in the A-Team survey. Mark Hepsworth, president of pricing and reference data at Interactive Data, answered: “We are seeing requirements for what we call on-demand pricing that takes end-of-day feeds and delivers them earlier in the day, and for real-time continuous pricing flows. The demand is from across the enterprise.”
Hepsworth said the back office wants to create multiple net asset values as part of best practice risk management, so there needs to be a flow of prices, not just end of day prices. It would also like to get ahead of the pricing window in case anything needs to be investigated before end of day. Similarly, back offices in firms with a high volume of international securities would like to address pricing during the day and not leave it all until the end of the day.
Hepsworth also noted conversations with middle offices about real-time pricing as a means to stay on top of what is happening during trading, and a desire in the front office for real-time pricing data to support pre-trade transparency.
Cynthia Sachs, global head of product development at Bloomberg’s valuation service, BVAL, concurred with Hepsworth, saying corporate credit asset classes are showing a trend towards more frequent pricing.
One driver for this is the Securities and Exchange Commission’s use of Form PF that requires registered investment advisers to submit information on the operations and strategies of the private funds they manage on a quarterly basis.
Gareth Moody, senior director of valuation and pricing at S&P Capital IQ, suggested one justification for the higher frequency of pricing is vigilance with a view to improving risk management. Considering the timeliness of valuations delivery, he acknowledged that there is space in the market for real-time delivery, but questioned how big that space may be, commenting: “Only a few securities relative to the entire universe are seen trading on a monthly basis, let alone a daily basis.” Sachs suggested that, at the moment, desire for real-time pricing is coming from the front offices that want to negotiate trades before execution.
With a trend towards higher frequency, but not necessarily real-time, pricing established, Delaney asked webinar panellists where regulation fits into the pricing puzzle. Sachs referred again to Form PF and, in Europe, the Alternative Investment Fund Managers directive. Both centre around reporting and increase the momentum of vigilance, and there is some cross-over between their requirements. But as Sachs pointed out: “They are similar, yet different, as they come from different organisations.”
Other regulations, such as Basle III, Solvency II and the Fair Value Accounting Standards ASC20, also require a focus on best practice valuations as part of risk management and may prompt an acceleration towards real-time pricing.
Moody described a change in market structure that could lead to real-time valuations. He said: “Reduced latency and the rise of electronic venues has changed trading. There are more real-time services across the trading framework and while different clients drive trading in differing ways, liquidity issues could lead to valuations in real time.”
Delaney moved on to question what higher frequency valuations in fixed income markets might entail. Hepsworth responded, saying: “Higher frequency valuations in fixed income won’t look like equity market updates that are made in microseconds. The frequency will vary across use cases and asset classes. As we build out a real-time offering we are looking at asset classes and considering, for example, that prices for liquid assets such as treasuries could be updated every 10 to 15 seconds. With less liquid assets it is more important to get a good price than a fast price, updates every hour would be fine.”
Sachs pointed out that about 3 million securities are priced every day by the companies that took part in the webinar. She agreed that in a liquid market it may be possible to price in real time, but said situations that are more credit sensitive are a different game and take longer. Bloomberg’s BVAL service offers seven valuation snapshots a day for many of its asset classes, which is meeting most customers’ requirements. It also provides higher frequency where necessary, with Sachs exampling the swaps market, where 26 pricing snapshots a day are provided.
With such a large volume of securities to be priced, Delaney turned the discussion to the infrastructure and organisational barriers to higher frequency and real-time pricing. Sachs noted infrastructure as a barrier as it is not possible to group all fixed income securities together. Instead, Bloomberg is addressing different asset classes in terms of pricing frequency. S&P Capital IQ is taking a similar approach.
Recognising that the fixed income market is becoming more electronic, Interactive Data is tackling the operational challenge of increasing pricing frequency with both number crunching technology and internal workflow changes that will help its 200 global evaluators evolve from working on end-of-day pricing to work on a more continuous pricing process.
Combining the trend towards higher frequency and real-time pricing with increasing regulatory requirements and a growing securities universe, Moody concluded: “The need is to invest in technology and people, and focus on demand”