Given the regulatory focus on increased transparency, financial institutions are putting much more emphasis on “control and influence” of valuations data, according to Dick Severs, senior buy side consultant at EDM solution vendor PaceMetrics. Severs, who joined the vendor in 2009 from ING Investment Management, reckons investment in pricing control and data governance by fund administrators and larger buy side firms is a way to differentiate them from the competition.
Severs was previously a valuation and pricing analyst for ING Investment Management, with involvement in valuation control projects, outsourced fund administration and development of ING’s European pricing framework. Here, he speaks to Reference Data Review about recent developments in the valuations data management space.
The valuations space has recently been receiving a lot more attention from the regulatory community as well as the industry as a whole, what impact has this scrutiny had on institutions’ development and investment in valuations systems and data feeds?
We are seeing greater demand for more precise and compliance-based valuations, which is difficult to address using managed services. Businesses require more control and influence and so demand is growing for a downstream driven and process-based approach. Additionally there has been increased spending in the development of, and investment in, data and pricing management systems, along with a trend towards outsourcing these activities. Meanwhile, data feeds are being judged and criticised more often.
What will 2011 likely see in terms of trends within the pricing and valuations technology sector? For example, are firms using this space as a differentiator and value add?
Increased investment in pricing control and data governance, particularly for fund administrators and larger buy side firms is a way to differentiate them from the competition, and so we expect spending in this area to rise in 2011.
Are centralised data management projects extending to the valuations space?
Yes, this has already been going on for a few years. Due to regulations, valuations are now considered a process of: price challenges, multiple source comparisons and audit trails, instead of only transferring single prices. So yes, centralised data management projects are moving into the space of valuations.
How have valuations data management systems changed over time and are they keeping up with the focus on enterprise risk in the current market?
Valuations data management systems are increasingly improving their products to allow institutions to comply with regulatory demands (such as multiple price comparisons) and changes in the market (including greater diversity in financial products).
Transparency has become a key issue – what are firms doing to ensure there is a sufficient level of transparency to the end client and regulators? What more needs to be done?
Firms are finding that investing in data governance helps boost transparency and ensure regulatory compliance. A lot more can be done here and often banks do not have front to back transparency built into all their processes, and so data governance is limited across systems.
What impact has the launch of central clearing counterparties for OTC credit derivatives had on the valuations space?
There will always be a drive to create derivatives that yield high returns. Those who understand them will make money, while those who don’t are still attracted by the high returns, and so take a gamble. So it’s not so much about central clearing counterparties as it is about understanding the products you’re trading. It is difficult to say at this point whether central clearing will apply to many different asset classes – if it does, this will result in more netting efficiency, liquidity and transparency.
How is the valuations vendor community (both on the data and application services side) meeting the needs of financial institutions and where could they improve their offerings?
The community could improve their products to incorporate regulatory demands, such as multiple price comparisons, and changes in the market, such as greater diversity in financial products.
What will drive forward investment in pricing and valuations technology and data this year? How can firms justify their investments?
I see regulatory demand and the need to differentiate through operational excellence driving forward investment in this space.
How will initiatives towards achieving greater data standardisation (such as the ECB’s proposed reference data utility) impact the valuations space?
It will increase transparency. As long as banks keep thinking that databases, data models and data standardisation compose the solution, it will remain a costly process. So its impact is minor unless you make good use of it in your process.