About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

Julius Finance Calls for Standardised House Price Appreciation Scenarios for CDO Valuations

Subscribe to our newsletter

Standardised house price appreciation scenarios should be used in the valuation of complex financial products such as mortgage backed CDOs, according to Julius Finance, CDO valuation technology provider. Peter Cotton, CEO of Julius Finance, explains that a “rigorous approach” is needed to accurately price these products.

Julius Finance provides standardised scenarios for corporate defaults using model fusion technology, says Cotton, who claims that its valuations are the first internally consistent methodology to be deployed in this space.

Cotton explains: “The old saying about the whole being greater than the sum of its parts does not apply to CDOs. For years, banks have been able to tranche up CDOs and sell the slices for more than the cost of the pie – with inconsistent valuation and ratings models not exactly standing in the way. Now, there is the possibility of the entire financial community playing that game on a vast scale with the taxpayer on the other end of the deal.”

Julius Finance’s solution involves a set of agreed standardised scenarios for home price appreciation, combined with detailed loan level modelling of prepayment and default based on millions of historical data points, he says. A precedent is provided by the American Academy of Actuaries, which provides standardised equity return and interest rate scenarios used by insurance companies in the calculation of risk based capital. The procedure ensures that securities cost the same as the sum of the constituent parts, he continues.

“What’s required is a rigorous approach, in the sense that one cannot magically create value by slicing, dicing and rearranging alone. This provides an important constraint on what might otherwise become a free for all,” Cotton concludes.

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: Unpacking Stablecoin Challenges for Financial Institutions

The stablecoin market is experiencing unprecedented growth, driven by emerging regulatory clarity, technological maturity, and rising global demand for a faster, more secure financial infrastructure. But with opportunity comes complexity, and a host of challenges that financial institutions need to address before they can unlock the promise of a more streamlined financial transaction ecosystem. These...

BLOG

Why your Technology Spend isn’t Delivering the Productivity you Expected

By Gareth Evans, Chief Product Officer, FINBOURNE. An uncomfortable truth: technology spend in asset management has surged 8.9% annually over the past five years across North America and Europe. But productivity? Flat. Cost as a share of assets under management (AUM)? No improvement. Operational expenses in other functions? Despite the promises that technology would create...

EVENT

RegTech Summit London

Now in its 9th year, the RegTech Summit in London will bring together the RegTech ecosystem to explore how the European capital markets financial industry can leverage technology to drive innovation, cut costs and support regulatory change.

GUIDE

Entity Data Management Handbook – Sixth Edition

High-profile and punitive penalties handed out to large financial institutions for non-compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations have catapulted entity data management up the business agenda. So, too, have industry and government reports on the staggering sums of money laundered on a global basis. Less apparent, but equally important, are...