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Talking Reference Data with Andrew Delaney: Valuations and Electronic OTC Markets

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While all eyes seem to be on the LEI and its tortuous birth, many of our clients and contacts are preparing – perhaps more quietly – for perhaps the other great challenge or opportunity of 2013: valuations.

Before I set off for New York a couple of weeks ago, I was fortunate to catch up with a couple of New Yorkers, in London to pick the brains of the market’s valuations experts, with evaluated pricing on their minds.

Rui Carvalho and Daina Senatore are both managing directors for enterprise solutions at S&P Capital IQ, which become somewhat less quiet than most on its valuations strategy earlier this year when it acquired CMA and QuantHouse. They outlined the S&P Capital IQ’s vision for the valuations space, which makes sense of QuantHouse’s role in the company’s line-up of valuations offerings and points to major changes in our marketplace over the next two to three years.

CMA, for me, was an obvious fit with S&P Capital IQ’s established valuations business. CMA’s coverage of the OTC derivatives space fills a gap in S&P Capital IQ’s valuations portfolio, with its strengths in municipals (via MSRB), US corporate bonds (via FINRA Trace), Euro and other bond data (via Euroclear’s Xtraktr) and its own evaluated pricing services.

QuantHouse’s role in this space, though, was more of a conundrum. For readers of our Low-Latency.com sister channel, QuantHouse is a familiar name, as a provider of high-speed market data and trading infrastructure for the high frequency trading segment. While it will continue to service that space, Carvalho says, S&P Capital IQ has identified the need to bring valuations of listed instruments into the fold as its client base becomes more multi-asset in its approach.

The overall aim, say Carvalho and Senatore, is to create a full picture of the marketplace: Evaluations for fixed-income and OTC derivatives, and pricing for listed securities, including equities, futures and options. In other words, to fit the emerging market need for a truly cross-asset view.

At the heart of this strategy is transparency, Carvalho says. CMA will play a major role in addressing transparency in the particularly opaque OTC derivatives market.

“Opinion is not enough,” says Senatore. To assess valuations in illiquid markets, clients need a range of inputs, she argues, including market data, trade data and details of models used to calculate values. “The model underpins everything,” she says. “Inputs into the model are what generate the valuation. How those inputs are chosen will drive the result. Our aim is to provide that data to clients to aid in their assessments.”

Aside from helping improve information in the trading and investment decision-making process, this approach could help valuations professionals better understand the risk profiles of their portfolios and aid in the price-challenging process. Challenging valuations is a time-consuming and costly process, and providing more data on how a valuation is arrived at could reduce the number of inquiries, saving time and money all round.

QuantHouse’s role in S&P Capital IQ’s valuations strategy is two-, possibly three-fold. First, it will be deployed to provide an end-of-day pricing service for listed securities, giving the company its own offering in this space. Second, as the client base becomes more cross-asset in its approach, S&P Capital IQ believes customers for its fixed-income and derivatives services will require equities and other listed instrument data. Using QuantHouse, says Senatore, “we’ll be able to service the entire portfolio.”

The third potential deployment provides an interesting twist, relating to incoming regulatory change, particularly posed by the likes of MiFID 2.

“QuantHouse comes with a network,” says Carvalho. “There has been a lot of talk about the ‘electronification’ of fixed-income and OTC markets,” and this is expected to speed up trading in those markets. With S&P Capital IQ’s growing strengths in these markets, QuantHouse could provide the underlying infrastructure as those markets start to resemble the listed markets it already serves.

Electronic OTC Markets. It’s almost a call to arms.

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