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Reuters Aims to Price 100% of Customers’ Derivatives Holdings

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Reuters’ recently announced service for delivering bespoke valuations for derivatives and complex securities (ReferenceDataReview.com, January 28 2008) formalises an activity the vendor has been testing for a couple of years, and reflects a recognition that firms increasingly want to offload the valuations burden on to a third party. Reuters has been providing bespoke evaluations to some clients for two years, relying on them to provide the terms and conditions, says Karl Mackelburg, its global head of evaluated pricing and structured products. “We have the bandwidth to take on more such business, and we see this as a growing part of our business,” he adds. “With fixed income and equities there is a limited number of securities we can price. There is no limit on the number of derivatives we can price.”

Using the Reuters DataScope Derivatives Pricing Service, customers can request a price for bespoke transactions, and receive transparent Reuters pricing and methodology behind each valuation.

The service complements Reuters DataScope Select, the vendor says, which already provides prices for instruments that have a broader market adoption. Reuters reckons it now provides valuations for more than 1.1 million hard-to-value financial instruments.

Since its clients have been using Reuters tools to price OTC derivatives themselves for some time (deploying models on 3000 Xtra and data on IDN, Reuters’ real-time network), what’s really new here is Reuters providing this as a service for clients, Mackelburg says. “Customers have been using the Reuters terminal and desktop products to price derivatives for years,” he reckons. “We realised however that a big proportion of the customer base doesn’t want to do this themselves. So it was a natural evolution to take our models and the data from our contributing dealers and help our customers by providing them with end of day and real-time valuations,” he adds.

DataScope Select has provided pricing for credit default swaps and interest rate swaps since December 2006, he continues. “But we found out that clients wanted more than just fixed income derivatives and credit default swaps, and this service is our reaction to that, for use by clients as both a primary pricing source as well as a secondary source to verify their internal marks.”

Reuters’ derivatives coverage today includes CDSs, IRSs, swaptions, currency swaps, equity options and currency forwards. Mackelburg says he is working with Reuters’ evaluation desk and outside software vendors – no contracts have yet been signed – in order to price more complex instruments such as total return swaps. “We will incorporate our own analytics from Adfin in Paris and outside vendors, with a view to being able ultimately to price 100 per cent of our customers’ derivatives holdings,” he suggests.

The real advantage of deploying a third party like Reuters to value complex instruments lies in avoiding having to dedicate internal resource to the task, he believes. Customers also “appreciate the quality control standards that we apply”, he reckons. “There are various methodologies and schools of thought about how instruments should be priced,” he says. “We solicit Street information and come up with the best methodology for a particular derivative. There could be alternative ways to price an instrument – our job is to update the methodology to take into account how Wall Street is looking at that instrument currently. This is consistent with FAS157 which defines the fair market value as the price at which an
instrument would be sold in a hypothetical sale.”

Mackelburg also emphasises the value of the transparency Reuters enables by providing pricing and methodology for each transaction. “We reveal the inputs used to generate the price, and clients can talk to our evaluations team about how the price was derived,” he says. “We offer transparency and that is very helpful for our clients.”

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