Regulatory change has been kind to the valuations solution vendor community of late, with requirements for increased transparency and independence providing these firms with a perfect ‘in’ to financial institutions’ back offices. Accordingly, SunGard’s FastVal solution has witnessed this uptick in interest as a result of the increased investment in derivatives by the more traditional end of the buy side spectrum due to the advent of UCITS IV, says Paul Compton, head of product management for SunGard’s alternative investment business.
“More and more asset managers are looking at the processes they need to put in place in order to deal with greater use of derivatives as a result of the changes to the UCITS framework,” he claims. “The focus in the market is also on investing in independent third party valuations, rather than relying on prices supplied by counterparties or vendor arms of financial institutions.”
Compton’s recently penned white paper examines the benefits of the buy side opting for an independent valuations provider that is not linked to a large financial institution, ergo it promotes the lack of such a connection to its FastVal offering. SunGard has developed its own product strategy for the hedge funds and asset managers that are being increasingly required to provide more information around the processes by which they have derived their prices. This strategy has resulted in an increased number of asset managers signing on the dotted line, the last of which (publically at least) was London-based independent investment advisory firm CrossBorder Capital in December.
CrossBorder Capital was, in fact, attracted to the solution because of its ability to assist with meeting UCITS compliance requirements. UCITS Chapter VII Section V sets out that UCITS funds may invest in OTC derivatives provided that the OTC derivatives are subject to reliable and verifiable valuation on a daily basis, and CrossBorder therefore enlisted SunGard’s FastVal to help it meet these data requirements.
UCITS is not the only regulatory change that is driving investment into third party valuations solutions: the Alternative Investment Fund Managers Directive (AIFMD), which was passed last year and is due to be implemented over the next couple of years, is also having an impact, says Compton. As noted by Marcel Guibout, executive director of the fund accounting product in EMEA for JPMorgan Worldwide Securities Services, at an event towards the end of last year, the AIFMD is also compelling greater transparency into pricing models and methodologies. “The US market has always been more comfortable with evaluated pricing than Europe, but this is changing and there is much more acceptance of these methods now,” said Guibout.
Regulatory change also could also have a potentially negative impact on certain derivatives classes, with the move of OTC derivatives onto central clearing counterparties (CCPs). “The move to central clearing for the derivatives market will, of course, likely have an impact on the products being traded, with many opting to go down the more standardised derivatives route,” concedes Compton. However, he notes that margining will still be required and the demand for transparent and independent pricing is unlikely to disappear.
Compton also notes that the market for valuations providers has been healthy enough to sustain a large number of players and this is likely to continue, although some consolidation is going on, with larger players snapping up smaller boutique firms.
In order to ensure its own position in the market, SunGard has been focusing on a number of key areas, such as making FastVal more scalable. The vendor upgraded the platform underlying FastVal two years ago and Columbus Avenue Consulting was the first to sign up for the revamped solution back in February last year. The solution has been around since 2001, but the vendor took the decision to reinvent the service by moving it onto a new technology platform in 2009. The revamp included the addition of the option to deploy FastVal as a pay as you go service, where users pay as and when they need to use its valuations capabilities. It is also offered in the (ever popular) software as a service (SaaS) model and provides online access to the underlying data.
“When evaluating providers, asset managers need to look at a number of key areas such as the independence of the vendor’s valuations (including its internal structure and relationships to other firms), the quality of its processes and the data it sources and the expertise it holds. Of course, name and reputation also have a part to play in the decision,” he explains.
The vendor has also invested in its country specific compliance, as and when requested by clients, says Compton. One such request was met in June last year, when Italian banking and insurance company BNL Vita selected FastVal to enable it to independently value its client’s portfolios.
Compton indicates that as well as these client specific requirements and extending its coverage of new derivatives, SunGard will be providing two main technology related updates to FastVal over the course of 2011.