Thomson Reuters has joined the valuations vendor community with the launch of a new service that it claims will provide financial institutions with independent valuations across a number of asset classes and instrument types. The vendor says that its new service is based on an “open model” approach to pricing and valuation and is integrated with the Kondor and Reuters 3000 Xtra pricing libraries.
Jon Robson, president of Enterprise at Thomson Reuters, explains the rationale behind the launch: “We are at a moment in time where our industry as a whole has to respond very effectively to the needs of our community. Clearly there are a number of problems that need to be understood in the market today and one of them is for C-level executives to understand an institution’s exposure to the markets, across a whole range of structured products and all of their underlyings. They need to understand the extent to which any one institution is exposed to counterparty risk.”
Given the current state of the market, Robson believes all of the assumptions that were made in valuing securities clearly need to be modelled again in real time to make sure that the balance sheet of these institutions is well protected from risk. Accordingly, he feels the introduction of Thomson Reuters Valuation Risk service supports calls from regulators and the industry for fair and transparent valuations of financial instruments from independent, unbiased third parties.
“The current financial crisis has exposed the importance of independent and transparent valuations. To achieve the level of transparency investors deserve and regulators require, firms need the support of an unbiased independent supply of traded prices and data that allows clients to reverse engineer and evaluate derivative structures with multiple models and methodologies,” he contends.
Shifts in volatility and correlations, as well as liquidity constraints are having a massive impact on valuations, demonstrating the limitations of conventional pricing methods, he adds. Thomson Reuters Valuation Risk service, on the other hand, claims to provide a new “open model” approach to pricing and valuation, which it hopes will lead to greater transparency, agility and proactive risk management.
The Valuation Risk service is aimed both buy and sell side institutions and combines Thomson Reuters’ global pricing and security reference data service with its risk management portfolio Kondor and Reuters 3000 Xtra pricing libraries.
According to Robson, its open model approach enables the simultaneous use of the bank or firm’s own models, plus an unlimited number of external libraries with a view to providing greater transparency and coverage across asset classes. The service valuations across a range of asset classes and instruments including corporate bonds, bank loans, residential mortgage backed securities (RMBS), asset backed securities (ABS), structured products and derivatives.
Robson elaborates on the benefits of the solution’s integration with risk management: “One of the things that we think we can bring to the table is to provide a dashboard that does not require our customers to tear out legacy systems and put in one consistent system. Instead they can dig into the systems that have been built for specific parts of the market and are therefore variable in their source and design, which makes it difficult to see across all the different asset classes and businesses. With the dashboard, they can see across these systems in one coherent view.”
The dashboard layout therefore sits on top of the risk systems and normalises the output of those solutions, says Robson. This is aimed at providing the C-suite with a view of all the elements of risk an institution is exposed to. “If you add to that the need for much more clarity around all the components of pricing in all areas of the marketplace, then I think that what Thomson Reuters can bring to the table is a very pure quality set of pricing data points that can be used reliably within those models. They actually can be fed real time into that environment so that exposure can be monitored to keep pace with the fast pace of the market,” he continues.
The real-time pricing data can be used with the dashboard functionality to allow the institution to make its own assumptions about what that impact is on their balance sheet, he elaborates. “So it is not a closed environment with somebody else’s view of the market, it really does allow a standard consistent underlying framework from which the bank can go on to make its own assumptions. The approach is far more a partnership approach and this is what the market needs right now.”
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