Numerix, the leading independent provider of advanced analytics for the derivative and structured products markets, and CMA, the credit information specialist, today announced the publication of a new industry report discussing the importance of consistent pricing policies for the accurate valuation of complex derivatives and structured products. The paper outlines the process of implementing an “enterprise pricing policy” as a consistent, repeatable methodology for valuing complex financial instruments and creating an audit trail from the front to back offices. As a result, financial institutions can address the main challenge for today: developing the necessary internal support for complex products.
The credit crunch has revealed the market inefficiencies and forced institutions to evaluate their participation in complex markets in terms of the valuation, model validation and overall risk management involved with structuring and managing portfolios. While organizations will continue to invest in software to develop better pricing strategies, there are several key requirements to meet: standards between trading desks, which support different asset classes; model validation for new products; and trade capture from the front to back office.
“Financial institutions understand the crucial value of transparent pricing policies, but the obstacle is effectively implementing a consistent policy throughout the organization to foster transparency,” said Steven R. O’Hanlon, president and chief operating officer at Numerix. “Organizations must use industry-standard analytics and proven models to create a foundation for an enterprise pricing policy. It is the only way institutions can maneuver the current market volatility and remain confident in their portfolios.” Press Release
The paper also advises on the importance of high-quality data for a robust enterprise pricing policy. It is critical for financial institutions to ensure that data used internally is the same data seen by counterparties, risk managers and administrators, as well as auditors. This will eliminate inconsistencies in reporting and moreover, enable better back-testing strategies that are critical to confirm accuracy before bringing instruments into the market. To enable this transparency, valuation providers need to ensure that services are agile enough to allow fund managers to provide accurate and timely valuations regardless of the complexity of the financial instrument.
“The quality of data being used within an organization dictates its ability to create accurate and timely valuations, particularly with complex derivatives that are inherently difficult to value. If there is poor data flowing into a valuation system, there will be inaccurate data going out into the market,” said Laurent Paulhac, ceo of CMA. “In partnership with Numerix, we have a better understanding of how clients use valuation systems in conjunction with our data and ultimately, help investors remain competitive in a challenging market.”