More and more buy side firms are turning from proprietary and broker-supplied pricing to third party valuations and this is set to rise even further, according to a recent A-Team Group benchmarking study. 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.
These results are part of a recently released in-depth benchmarking study conducted by A-Team Group, involving 67 European asset managers and securities services firms and aimed at finding out the dynamics of the current valuations community and the vendor solutions therein (available to download at http://www.valuationsdata.com). The focus of the benchmarking report is also to highlight where valuations are being used and what approach firms are taking to data sourcing, be it broker or counterparty pricing, third party sources, or internal proprietary valuations, down to each asset class they cover.
Firms are also seemingly continuing to use in-house systems to price both vanilla securities and those at the complex end of the spectrum. This is likely due to the limited availability of complex instrument pricing data on the market and the risk involved in dealing with these assets.
Unsurprisingly, the key driver for investment in the valuations process and valuations data was therefore cited as risk management by a whopping 88% of respondents (all of whom defined it as “important”). Other high ranking priorities include the threat of regulatory action, defined as important by 86% of respondents, and client requirements, at 84%. Accordingly, the usage of this data closely mirrors these requirements, with client reporting and regulatory reporting at the top of the list.
Third party data vendors may get more business, but they will also face a great deal more scrutiny from their clients: accuracy was the top rated attribute for 97% of respondents with regards to sourcing valuations data. Also deemed important were reliability, timeliness, coverage and transparency, all of which will be under the microscope going forward.
In terms of satisfaction with the data they currently receive from their third party vendors, it seems that the community has been granted an assessment of ‘could do better’. Vendors were given an overall average satisfaction level of 76% by respondents, with a lack of innovation and value for money being the biggest complaints. However, respondents felt that vendors performed rather better in the categories of timeliness and technical and data support.
As for the vendors themselves, the top five ranked vendors in terms of overall satisfaction as per a weighted average included (in alphabetical order) Bloomberg, Interactive Data, Markit, SuperDerivatives and Thomson Reuters. Markit performed especially well in the rankings, bagging top slot for satisfaction, data support and accuracy. Bloomberg and Interactive Data performed particularly well in the timeliness category. The full details ranking vendor performance are being made available to respondents who took part in our survey and sponsors Interactive Data and Markit.
Respondents cited timeliness and increased frequency of reporting as a key trend within the market going forward. Currently, two thirds of assets are valued daily and there is a general correlation between the complexity of a product and the frequency with which it is valued, with the more complex instruments being valued the least often. Larger financial institutions are also apt to carry out valuations more frequently, tending to conduct valuations on a daily rather than weekly basis.
However, regardless of size, the frequency of valuations is set to increase over the next few years. More than half (57%) of all respondents said they expected the overall frequency at which they value assets to increase over the next two to three years, with an average increase in the rate of valuation of 35%. Almost half of all current daily valuations were expected to become more frequent, according to respondents, thus highlighting the trend towards intraday pricing.
Vendors will also be happy to note that budgets for investment are looking healthy: nearly 40% of respondents indicated that they have secured a budget of US$1 million or more. Unsurprisingly, the securities services firms have rather larger budgets than the buy side respondents, who on average have budgets of around US$500,000. Furthermore, over half expect their budget to increase over the next two to three years, by an average of 11%.
Priorities for investment in valuations data and technology over the next year varied quite dramatically from one respondent to another, although the majority of the firms indicated that they were keen to improve the automation of the pricing process over the next 12 months (cited as a priority by 18%). This suggests an increased focus on systems and data source integration, as well as work?ow processes. This was closely followed by support for more instruments and asset types (14%), and broader and more in-depth coverage of their existing asset classes (7%).