OTC Valuations (OTC Val) has expanded its securities coverage to address valuation for illiquid mortgage, credit card, and bank loan related products. The vendor claims the extension to these products will accommodate audit and internal risk compliance requirements for securities with no market observable prices.
Under liquid market conditions, the fair value of these asset backed products could be obtained from a broker quote, which would be based on that day’s trading activity for a specific security, says the vendor. This has and always will be an accepted practice in active markets. However, in today’s environment, a large number of these securities have not traded for several months, leading to stale broker quotes, which OTC Val explains are poor indications of current fair value.
To accommodate audit and internal risk compliance requirements for securities with no market observable prices, OTC Val says it is working with market participants to address their valuation and transparency requirements by employing model-based and fair value estimation techniques.
The vendor believes that the recent legislation submitted to Congress by the US Treasury Department to purchase up to US$700 billion of troubled residential and commercial related assets falls short of tackling pricing issues. OTC Val says these will continue to hamper this market segment due to limited underlying data availability, information on particular structural parameters of an asset, and credit standing of the component pieces of the asset.
Bob Sangha, managing director at OTC Val, adds: “In an inactive market, we believe that 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 this 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.”