The risk data requirements of clients and regulators have resulted in an increase in the need for intraday pricing and much more data around a price, explained Marcel Guibout, executive director of the fund accounting product in EMEA for JPMorgan Worldwide Securities Services, to attendees to last week’s SIX Telekurs valuations roadshow in London. This and the increased complexity of accounting regulations have put valuations teams under significant pressure to produce prices, alongside the supporting data required for price transparency, in a timely manner.
Guibout’s job involves focusing on improving the client experience for JPMorgan’s fund accounting product and, as a result, he has oversight of the 8.5 million net asset values (NAVs) that it produces every year. “It used to be largely about producing NAVs for close of business, but now there is much more of a requirement for intraday production of this data,” he added.
The increased volume of data means that firms are turning to automation in order to survive the onslaught. Guibout indicated that JPMorgan produces around 850,000 prices a day, with around 300,000 for Europe alone: quite an undertaking. JPMorgan has therefore established its own internal utility for the production of derivatives prices in order to cope with the increased volume of trading in this market, he explained.
“Firms must automate their processes in order to keep costs down but also to remove manual processes and improve accuracy,” Guibout elaborated.
The impact of incoming regulations such as the Alternative Investment Fund Managers Directive (AIFMD), UCITS IV (or even, god forbid, UCITS V) and the revision of global accounting rules have meant that the world of pricing is also becoming much more complex. All of these regulations are compelling greater transparency into models and methodologies.
The focus on transparency in the market means that ‘independence’ of pricing data has become more important than ever before, he added: “This trend is set to continue for some time to come.” The shift from broker pricing to evaluated prices from independent software vendors and vice versa goes in swings and roundabouts, according to Guibout, who notes that market conditions often determine the perception of which of these sources is more reliable. He highlighted two clients that have moved back and forth between these two perceptions over the course of this year alone.
“The US market has always been more comfortable with evaluated pricing than Europe, but this is changing and there is much more acceptance of these methods now. However, brokers are closer to the market than other players and that is the benefit of that type of pricing,” he explained.
The challenging of vendor prices is required regardless and JPMorgan is engaged in dual sourcing in order to validate any evaluated prices. “These challenges increase with market volatility or if out clients change their policies through the course of the year. On average though, we challenge around 625 prices a month and around 10-15% of those challenges result in a price change, which equates to around 80 price changes a month,” he explained. Asset backed securities (ABSs) and mortgage backed securities (MBS) account for the majority of the 625 challenges, at 53% on average.
The majority of the price challenges result from internal control limits being exceeded but they do not mean the price is inaccurate, added Guibout. “That is why you need a good relationship with your vendors to be able to gain transparency into the price and the models underlying that price.”
As for the future, Guibout reckons there will be an expansion in the number of vendors in the market and a greater focus on the quality of the valuations they provide. “We will certainly be inclined to switch vendors more often if they are not providing us with the level of service that we require,” he said.
Overall, he indicates that JPMorgan sees these complexities and challenges in a positive light. “We see it as a business opportunity for us, as we have the global scale to be able to invest in our systems and infrastructure to be able to provide the client support that is needed,” contended Guibout. “You need global distribution in order to be able to produce the prices required by firms present in different countries.” The custodian is keen therefore to offer its services as an outsource provider to the smaller players in the market.
Guibout’s perceptions reflect those of many of the buy side participants in A-Team Group’s recent valuations benchmarking exercise. The majority, at 82%, of the asset management and securities services firm respondents indicated that they rely on third party external sources for valuations across all asset types. Moreover, 67% said they expected to increase their usage of these third party sources further still over the next few years. Good news for the vendor community.