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

WEBINAR

Recorded Webinar: A new way of collaborating with data

Digital transformation in the financial services sector has raised many questions around data, including the cost and volume of reference data required by each financial institution. Firms want to pick and choose the reference data they need to fulfil their requirements. Emerging solutions with the potential to decrease the cost of data and increase flexibility...

BLOG

NeoXam Challenges Cost of Data with Savings Strategies, Software Solutions and Kalaxis Partnership

NeoXam has responded to client calls for help to manage the cost of data with a value proposition offering five savings strategies, tools to monitor and adjust data sourcing and spending, and most recently, a partnership with data cost optimisation consultancy Kalaxis. The company’s move to enable clients to not only manage their data, but...

EVENT

RegTech Summit New York City

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

GUIDE

Entity Data Management & the LEI

Just over a year since the Financial Stability Board handed over leadership and direction of the interim Global Legal Entity Identifier System – or GLEIS – to the Regulatory Oversight Committee (ROC) of the LEI the entity identifier is being used for reporting under European Market Infrastructure Regulation. This report discusses recent developments in the...