The Professional Risk Managers’ International Association (PRMIA) and OTC Valuations Ltd (OTC Val) today released the results of a global Derivative Valuations survey titled "Transparency and Independence of Derivative Valuations – Current Practices, Trends, Challenges, and Recommendations".
Respondents came from 77 countries and included numerous specialties including risk practitioners, regulators responsible for derivative valuation practices, consultants and/or vendors working in derivatives solutions, and PRMIA members in other related professional roles.
The survey results confirm the emergence and importance of independent derivative valuations as a benchmark practice for achieving price verification and transparency. Bob Sangha, managing director at OTC Val says, "We are seeing a fundamental shift in the markets where organizations cognizant of the risks posed by mispricing are taking the necessary steps to gain an independent view of their derivatives portfolios and achieve greater insight into the models, methods, and market data used to generate prices."
While the survey highlights the significance of derivative valuations, only 5% of the respondents were very satisfied with their current valuation solution. Some of the reasons cited for the dissatisfaction with the current solution are inconsistent methodologies being used to price instruments, the need to use multiple valuation sources as the primary solution cannot price the entire portfolio, and valuation and risk systems unable to keep pace with the growing diversity and complexity of derivatives products entering the market.
With so many stating their dissatisfaction, it comes as no surprise that a majority of the respondents stated they would consider a third party valuation service vendor with derivatives coverage for vanilla and exotic derivatives, such as credit linked notes and other credit derivatives, equity linked notes, ABS structures, variance swaps, and inflation indexed securities.