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Interactive Data Survey Highlights Importance of Fair Value Practices During Volatile Markets

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Interactive Data Corporation, a leading provider of independent pricing and valuation services, today announced key findings from its recent survey of mutual fund firms on fair value procedures for international equities.

The survey findings revealed that using “triggers” to invoke fair value procedures continues to be a common practice for mutual funds. These triggers may be employed every day or dependent upon certain movements in one or more relevant benchmark proxies. The various fair value strategies observed suggest a variety of opinions amongst funds as to what constitutes a significant event to trigger the application of fair value adjustments to local closing prices.

Interactive Data received responses from 134 industry professionals, including CFOs, CCOs, and valuation team members, representing 111 mutual fund firms.

“The heightened level of volatility in the market draws attention to the importance of fair value practices for mutual funds investing in international equities,” said Rob Haddad, director, Evaluated Services for Interactive Data. “Our survey found that mutual funds are generally well-prepared for volatile market scenarios, with predefined fair value procedures in place to handle such events, and formal back-testing processes to examine how these procedures worked in practice.”

Approximately 36% of funds responded that they are invoking fair value procedures every day (0 bps trigger), compared with only 10% of respondents from a fair value survey Interactive Data conducted in 2004. The remaining 64% of funds from the 2011 survey indicated that they use a systematic process that incorporates movements in relevant benchmarks to “trigger” the use of a fair value procedure.

The survey also found that mutual funds widely use triggering strategies that include a single benchmark proxy (e.g., the S&P 500 Index). However, the responses also indicated that more complex triggering strategies are increasingly being utilized. These include the use of multiple trigger levels depending on portfolio composition or time zone (e.g., funds investing in European equities vs. Asian equities), dynamic trigger levels, and multiple trigger levels and/or multiple benchmarks as a basis for triggers.

Approximately 92% of respondents also indicated that they systematically and regularly review back-testing performance data. This could include simulating the use of fair valuation processes for a number of portfolios at various trigger levels historically.

Interactive Data’s Fair Value Information Services are designed to provide subscribers with various information that can be used to estimate a price for an exchange-traded equity security, equity index futures contract, or equity option that would likely prevail in a liquid market, in view of market information available at the time of evaluation.

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