The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

Julius Finance Calls for Standardised House Price Appreciation Scenarios for CDO Valuations

Standardised house price appreciation scenarios should be used in the valuation of complex financial products such as mortgage backed CDOs, according to Julius Finance, CDO valuation technology provider. Peter Cotton, CEO of Julius Finance, explains that a “rigorous approach” is needed to accurately price these products.

Julius Finance provides standardised scenarios for corporate defaults using model fusion technology, says Cotton, who claims that its valuations are the first internally consistent methodology to be deployed in this space.

Cotton explains: “The old saying about the whole being greater than the sum of its parts does not apply to CDOs. For years, banks have been able to tranche up CDOs and sell the slices for more than the cost of the pie – with inconsistent valuation and ratings models not exactly standing in the way. Now, there is the possibility of the entire financial community playing that game on a vast scale with the taxpayer on the other end of the deal.”

Julius Finance’s solution involves a set of agreed standardised scenarios for home price appreciation, combined with detailed loan level modelling of prepayment and default based on millions of historical data points, he says. A precedent is provided by the American Academy of Actuaries, which provides standardised equity return and interest rate scenarios used by insurance companies in the calculation of risk based capital. The procedure ensures that securities cost the same as the sum of the constituent parts, he continues.

“What’s required is a rigorous approach, in the sense that one cannot magically create value by slicing, dicing and rearranging alone. This provides an important constraint on what might otherwise become a free for all,” Cotton concludes.

Related content


Upcoming Webinar: Brexit: Reviewing the regulatory landscape and the data management response

Date: 11 May 2021 Time: 10:00am ET / 3:00pm London / 4:00pm CET Duration: 50 minutes With Brexit behind us and the UK establishing its own regulatory regime having failed to reach equivalence with the EU, financial firms face challenges of double reporting, uncertainty about UK regulation, and a potential exodus of top talent. The...


GoldenSource Ushers Reference and Pricing Data into the Front Office with Quant Workbench

Extracting value from data is a priority for financial institutions as the business looks to increase efficiency, reduce costs, identify new opportunities and gain competitive advantage. Some source in-house tools to improve the quality and accessibility of internal and external data, others look to third-parties for solutions. A new tool from GoldenSource, Quant Workbench, brings...


RegTech Summit London

Now in its 5th year, the RegTech Summit in London explores how the European financial services industry can leverage technology to drive innovation, cut costs and support regulatory change.


Regulatory Data Handbook – Fifth Edition

In response to the popularity of the A-Team Regulatory Data Handbook, we have published a fifth edition outlining the essentials of regulations that are likely to have an impact on data and data management at your organisation. New to this edition is a section on RegTech, covering drivers behind the development of innovative regulatory technology,...