Markit has added in-house risk expertise and newly developed scenario analysis to its portfolio valuations service with a view to offering users improved risk management and increased transparency around valuations. The same market data and pricing models are used to drive both risk and valuations, allowing the service to provide value at risk (VaR) and stress testing results that are consistent with mark-to-market valuations.
The risk and scenario analysis solutions are, like the portfolio valuations service, hosted by Markit. The risk solution calculates market risk within a portfolio of trades and is based on the company’s in-house built risk simulation engine that is offered as an enterprise solution to sell-side institutions and has been tailored as a service for the buy-side. The scenario analysis element allows users to stress test market data inputs used to generate valuations, with scenarios specified by users run by Markit at the same frequency as valuations.
The extended service initially supports cross-asset class vanilla instruments, but Nosheen Khan, director of portfolio valuations at Markit, says the new functionality is being extended to include more complex instruments that are already covered in the portfolio valuations service.
According to Nigel Cairns, managing director and global head of analytics and portfolio valuations at Markit, “A key challenge for buy-side firms is to ensure that the market data and pricing models driving their net asset valuations are consistent with those used as part of their risk calculations. The combination of Markit’s standardised cross-asset data sets with its powerful risk calculation engine enables customers to measure liquidity, funding and market risk more accurately and efficiently.”
The risk and scenario analysis tools are available immediately and each carry a fee on top of the cost of the portfolio valuations service. Markit points out that the extended service will help clients meet regulations such as Solvency II and the UCITS IV and Alternative Investment Fund Manager directives, and hopes the service will attract not only existing Markit users, but also additional clients looking for a single service for valuations and market risk.
A third addition to the portfolio valuations service, a profit-and-loss attribution service, will be available in the second half of 2013 and is also designed to increase transparency by providing a breakdown of any change in the mark-to-market value of a trade according to risk factors including market data, model parameters and trade events.
Khan acknowledges that many competitive software firms provide similar discrete services, but says few offer a combined, consistent and flexible service in a hosted environment.