OTC Valuations (OTC Val) has increased its valuation capabilities of illiquid mortgage backed securities, commercial paper, collateralised debt obligations, and other asset backed products. Bob Sangha, managing director at the vendor, explains that as well as providing a price, OTC Val is also focused on providing data on the modelling behind the price for these complex products.
According to analysis by the Market, Credit, and Risk Strategies group of Standard and Poor’s, Level 3 assets rose 15.5% from the second quarter. OTC Val contends that many of these securities are being reclassified as Level 3 assets as holders cannot rely on broker quotes or quotes without the level of price transparency required for financial reporting purposes.
It is therefore claiming to address these data issues via its valuation process, which it says is based on proven fair value estimation and model-based techniques. The vendor indicates that clients can use these techniques to satisfy audit and internal risk compliance requirements for securities with no direct market observable prices.
Sangha explains: “In this environment, market participants are as concerned about the assumptions and data behind a product’s price as the price itself. Our valuation methods enable us to provide the required level of transparency and disclosure. In addition, we employ a variety of reasonableness tests to ensure consistency and accuracy, while utilising (FAS 157 Level II) observable market inputs where possible. We also follow the recommendations from the IASB Expert Advisory Panel’s recent publication titled Measuring and Disclosing the Fair Value of Financial Instruments in Markets that are No Longer Active.”