The recent restructuring of Standard & Poor’s Fixed Income Risk Management Services (FIRMS) division to combine its securities evaluations, valuations services and market research teams into one group is all part of the vendor’s strategy to provide a more joined up approach to the market, explains Lou Eccleston, FIRMS’ executive managing director, to Reference Data Review. The launch of the new Valuation & Risk Strategies group is a precursor to the introduction of the first in a line of cross market solutions in the second quarter of this year.
The division, which is separate from S&P’s ratings business, aims to bring together S&P’s independent research and analytics assets from across the business in order to offer solutions that allow investors to adopt a cross market approach to assessing risk and value in portfolios. The new group’s offerings will therefore be available to S&P’s customers globally through the S&P Global Credit Portal.
It is all part of the plan to extend its reach into the valuations and risk management space. “We have been operating a market evaluations business for a very long time and we launched our Valuation Scenario Services offering last year, which looks at day to day reporting in an integrated fashion, and we are now just about to launch a new risk related service,” explains Eccleston.
The new group is therefore based on what FIRMS calls its “core competencies” in the valuations and risk space, which comprises its Securities Evaluations, Valuation Scenario Services and Market, Credit & Risk Strategies product offerings. The Securities Evaluations service provides market derived price evaluations on approximately three million hard to price fixed income and structured finance securities daily. Valuation Scenario Services offers assessments of structured finance portfolios under a range of different assumptions and economic scenarios. Lastly, Market, Credit & Risk Strategies combines market and credit risk analysis to better understand the relationship between asset price and risk.
Eccleston reckons recent events have meant that transparency around asset price calculations is paramount in the fixed income market and this is the driving force behind the restructure. In terms of the new solution, he elaborates: “Our research group looked at credit and market risk strategies and came up with a new methodology for taking market risks, such as spreads and volatilities, and combining them into one methodology including credit risk and actually giving an indication to an investor how well they are being compensated with regards to the price of the securities in terms of the risk involved in the security.”
The logic is that the solution will provide investors with one place to scrutinise information from an evaluator and have an indication of how well they are being compensated for the risk in the security given the price. The groundwork for the offering has largely been completed, according to Eccleston. “All of the individual services are now available and the methodologies have all been completed but the combined risk to pricing scoring service will only be available in mid-February. We hope to have the combined product across these areas out by the second quarter,” he explains.
The vendor is looking at two areas in particular: cross market methodologies across the various risk sectors and the scaling of its intellectual property. With regards to the latter, Eccleston elaborates: “Up until now we have only seen analytics firms focusing on the rated universe but we are expanding our coverage to the entire universe of securities including private firms. So our methodologies, including both our risk analytics and our combined analytics, will not just focus on the rated universe, it will include the full global commercial universe.”
In terms of competition, Eccleston reckons FIRMS is in a space of its own. “There are different vendors focusing on different areas of that business but we’re the first ones out there with these innovative cross market methodologies. There are firms that are strong in market risk, credit risk or valuations but we are in the position of the one that has come to market first with a combined approach,” he claims.
Eccleston reckons there will be a high degree of consolidation across the vendor space and points to the events that have occurred this week as proof that a lot of firms have either been put up for sale or are looking for funding. He attributes this to a number of factors: “The larger firms are facing pressure for consolidation and, at the lower end, the niche players don’t have the scale to cut across all the different types of risk. Each of these smaller vendors will need to partner with larger vendors to be able to cope with this challenge.”
He also does not rule out S&P’s own ambitions on the acquisition trail in the future: “We are always looking at strategic partnerships and, if relevant, acquisitions in the market, but it would have to be something that would fit directly with our core strategy. This would be around areas such as portfolio risk management and valuations, or firms that would be able to accelerate our ability to produce cross market analytics.” However, he does note that the vendor doesn’t have any particular firms in mind at the moment.
Overall, Eccleston is confident that FIRMS is pitching its stand in the right space for the market: “There is a real understanding on the part of the investors that they need to evaluate what the returns and the risks are in their portfolios. The regulators are adding in requirements for this but investors are also looking for more data in this space. When you think about valuations there has got to be a better way to look at illiquid securities and to better understand what the risk is underlying these securities.”
Of course, the acquisition of either of the two vendors that have recently gone up for sale, Interactive Data or RiskMetrics, would seem to fit nicely into this strategy. The purchase of Pearson’s 61% stake in Interactive Data would, for example, net it key pricing and valuations data feeds and ancillary solutions to slot in with its FIRMS division’s combined approach. RiskMetrics’ risk analytics, on the other hand, would boost FIRMS’ intra-risk analytics offering. The coming months should indicate whether either of these appeal.