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Resilient Pricing Benchmarks are Needed for Europe, Agree Thomson Reuters Panellists

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In light of the current high market volatility, Europe is in need of resilient pricing benchmarks in order to more accurately model instrument pricing, especially for those at the complex end of the spectrum, agreed panellists at Thomson Reuters’ Global Pricing Forum in London last week. The push towards providing greater transparency around prices from regulators and clients means that these benchmarks need to stand up to a high level of scrutiny.

Matthias Leclerc, executive director of consultancy firm Value & Risk, elaborated on the challenge of valuing complex and illiquid instruments in the current markets where a lot of attention is being directed at the underlying benchmarks and discount curves for accounting purposes. “Firms need to use reliable benchmarks in order to make the basis of their valuations models transparent to their customers,” he said.

The German short selling ban is just one instance of a market move that has challenged firms’ valuations functions, agreed panellists. The high levels of liquidity risk in certain markets and intangibles such as political risk have made this process more challenging.

Attendees to the event supported this conclusion via their responses to an interactive poll. When asked if their benchmarks in Europe were proving problematic: 29% said they were extremely problematic; 51% said somewhat problematic; 18% said they could live with the current benchmarks; and only 2% indicated their benchmarks were not at all problematic.

A broad brush approach to these benchmarks is also not appropriate, added Malcolm Oldham, head of evaluated pricing for EMEA and Asia at Thomson Reuters. The more exotic instrument classes need significantly different benchmarks and regulators must be mindful of this, agreed panellists.

The majority of attendees indicated in another poll that they were in favour of a new framework for benchmarks to be introduced in Europe. An eager 24% indicated such benchmarks were imperative, while 56% said they were important but not a priority. The remaining 20% indicated they thought such benchmarks were either a waste of time or not of interest.

Panellists and attendees alike also agreed that Europe was not likely to learn much from the US in terms of how to structure these benchmarks. Only 3% of attendees thought Europe could learn from the US in this regard, whereas 58% said there was no relevance and 39% warned that such an endeavour should be mindful of the differences between the markets. After all, Europe is made up of many different political states and the US has one currency and one government.

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