In line with its strategy to extend its valuations offering into the OTC derivatives area, Standard & Poor’s Securities Evaluations (SPSE) has entered into an agreement with Independent Valuation and Risk Services (IVRS) under which the two companies will provide their valuations to each other’s clients.
To date, SPSE has provided its asset-backed securities (ABS)/mortgage-backed securities (MBS) valuations through IVRS’s service to a set of hedge fund and hedge fund administrator clients. The next stage of the agreement will involve integrating IVRS’s valuations into the SPSE MasterFeed, a process which will be “client driven”, according to Peter Jones, director, securities evaluations at Standard & Poor’s.
“On the OTC derivatives side, there is a clear requirement across the whole marketplace for a valuation solution,” he says. “The liquid benchmark CDS valuations are well covered by the brokers, contributors and vendors. The difficulty comes when clients want to value bespoke derivative positions relative to the benchmarks. Access to valuations on those instruments becomes more difficult and documentation becomes a critical issue. A lot of work is required by all parties to set up the terms and conditions and deal-specific attributes to enable processing and valuation in an automated and scalable fashion,” he adds.
“IVRS has extensive, established expertise in the OTC derivatives area. It makes sense to offer our valuations through IVRS’s platform, and for us to add IVRS’s OTC derivatives universe into our feed. This is all part of our aim of offering flexible solutions to our customer base,” Jones continues.
IVRS is a subsidiary of Lombard Risk Management, provider of software and independent valuation services to banks, investment firms, asset managers, hedge funds and fund administrators. It has created an automated service for handling portfolios containing a range of OTC derivatives, including interest rate swaps, interest rate options, total return swaps, credit default swaps, FX options, variant swaps on equities and equity options. IVRS also provides web-based reporting and analytics frameworks to enable its clients to assess and analyse valuation results and accompanying risk measures.
For SPSE, the IVRS agreement follows a number of steps taken during 2006 to extend the coverage of its evaluated pricing service, as well as to add new delivery channels. Early last year SPSE added coverage of European asset-backed and mortgage-backed bonds (Reference Data Review, March 2006). The company also entered into an exclusive alliance with Complex Security Valuations (CSV) with a view to extending both firms’ capabilities in pricing illiquid securities and hard-to-value structures (Reference Data Review, April 2006). The CSV relationship added derivatives content for interest rate swaps, total return swaps and other OTC derivatives, according to Jones. Additionally, S&P forged a deal with Thomson Financial to provide its bond evaluations as part of Thomson’s intraday snapshot service (Reference Data Review, June 2006).
Jones emphasises the importance of being able to offer additional valuations in a fully automated fashion. “The key is not just the credible valuation and the methodology, but also it’s providing process, automation and scale,” he says. “The idea is not just to give clients a tool and tell them to do the valuation themselves, but to enable them to buy into a service from Standard & Poor’s, which will enable the data to flow through their operations.” The process of integrating the IVRS OTC derivatives valuations into the SPSE MasterFeed is “a work in progress”, he says. “It is a process we have already finished with CSV content, following our alliance last year, to deliver their content to our clients. As soon as we get a client requirement for the IVRS valuations, we will start the process and replicate what we have done with CSV for IVRS, to start the process of integrating the IVRS valuations and delivering to our clients.”
While all the providers’ focus on the valuations side is similar – targeting hedge funds, hedge fund administrators and custodians – there is no significant overlap in the SPSE/IVRS client bases currently, Jones says. “The two companies’ efforts are complementary. The basic belief is that neither of us can offer complete solutions for all assets alone, but together we can, and this is why we would pursue relationships with any other relevant provider of a niche content set. We are always talking to other providers of interesting, niche content, and this will be a continuing strategy of ours.”