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Talking Reference Data with Andrew Delaney: Back to the (Valuations) Grind

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Back from a quick break in Bordeaux – well, Perigord – to the Spring term of 2013, and back to the thorny issue of valuations, the subject of our forthcoming special report and webinar combination next Tuesday April 9.

(If you haven’t registered yet you can do so here).

Back in November 2011, I posted a blog on the hard slog that is valuations. In it, I outlined some of the issues relating to valuation of so-called Level II and Level III securities, those difficult-to-price instruments the valuation of which regulators are keen to get to the bottom of.

Here’s a taster:

There is significant variation in the types of inputs, assumptions and models that make up an evaluated price. The range of variation is well illustrated by the hierarchy of securities within accounting rules, like IFRS and Topic 820.

Back in the day – Pre-Lehman, that is – the holders of securities enjoyed a stable if not perfect situation for pricing the full range of instruments on their books. Under various local accounting regulations, Level I securities – equities and other exchange-traded instruments – derived their prices pretty much in real time from exchange-based activities: quoting, buying and selling. A data feed.

For Level II securities – those not trade on exchanges but covered by aggregation like Xtraktr here in London or perhaps Finra Trace in the US – there was universal acceptance, by regulators, auditors and clients, of the validity of those services’ information.

And finally, for Level III securities – those OTC instruments that lack the liquidity to generate a meaningful market price on a regular basis – fund managers, their administrators and their brokers devised sophisticated models for coming up with what they considered to be a reasonable or fair value.

Today, the base landscape is the same. But at the Level III end of the curve, things are different. Those sophisticated models being used to value hard-to-price securities are under such intense scrutiny that firms are seeking to recategorise the securities they hold wherever possible, shifting them up the transparency curve … as best they can.

Seems things haven’t moved on enormously since then.

As you’re doubtless aware, valuations have loomed large on recent A-Team activities, what with our recent Performance Benchmarking report on European valuations and our panel discussion on the topic at last month’s Data Management Summit in London.

The message from both ‘events’ is that sourcing of high-quality valuations data is a fundamental keystone to sound risk management. And key to quality are the cornerstone issues of independence and transparency.

Post-Credit Crisis, valuations have emerged as a key data set for addressing risk of exposure to illiquid and other hard-to-value over-the-counter instruments. Regulators are pressing for more transparency around evaluated pricing, requiring more robust internal processes for generating valuations and increasing scrutiny of both pricing teams and external suppliers.

In our special report and webinar, we’ll look at the practicalities for ensuring valuations processes yield optimal risk management results. I’m thrilled that we’re able to welcome webinar panel participants:

  • Anthony J. O’Connor, Head of Product Management – OTC Pricing and Risk, at HSBC;
  • Cynthia E. Sachs, Global Head of Bloomberg Valuation Service (BVAL) Product Development, at Bloomberg; and
  • Peter Jones, Senior Director, Enterprise Solutions, at S&P Capital IQ.

Between them, they know more about valuations than you’ll ever truthfully need to know.

The session will examine the role of valuations in the risk management process, and offer insights into best practices for sourcing and managing valuations data. I’ll also quickly run through some of the top-line results from our European Buy-Side Valuations Performance Benchmarking Report.

Among the topics for discussion next Tuesday are:

  • Why are valuations important to risk management, and for which asset classes?
  • What lessons were learned from the Credit Crunch?
  • How are regulators viewing valuations in the risk management process?
  • What is the impact on practitioners’ valuations practices?
  • What are the pros and cons of using model-based evaluated pricing?
  • Where are practitioners using external vs. internal pricing sources?
  • What is current best practice for a hybrid approach?

If valuations are part of your remit, you should aim to join us. It will be interesting, informative and fun. Register here.

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