OTC Valuations Limited (OTC Val), a leading provider of independent valuation and transparency reports for structured products and OTC derivatives, is pleased to announce it has further increased its valuation capabilities of illiquid securities, outlined below.
VALUATION REQUIREMENTS
Many mortgage?backed securities, commercial paper, corporate debt, collateralized debt obligations, and other asset?backed products have attained illiquid status. Holders can no longer rely on broker quotes because the quotes have become stale, or otherwise fail to satisfy the level of price transparency required for financial and risk reporting purposes. OTC Val addresses these data issues through its transparent valuation service that is based on proven fair value estimation and model?based techniques. Current clients use the service to satisfy audit and internal risk compliance requirements for securities with no direct market observable prices.
METHODOLOGY OVERVIEW
Market participants are increasingly concerned about the assumptions and data behind a product’s price as much as the price itself. OTC Val’s methods address these concerns and provide the required level of transparency and disclosure. In addition to counterparty risk analysis, reasonableness tests are conducted to ensure consistency and accuracy, while utilizing [FAS 157 Level II] observable market inputs wherever possible, which is just one of the recommendations from the IASB Expert Advisory Panel’s recent publication titled Measuring and Disclosing the Fair Value of Financial Instruments in Markets that are No Longer Active.
METHODOLOGY DETAILS
We use an active and ongoing database of market information, inclusive of credit histories and prospectuses. Public data sources are used in conjunction with a variety of banking resources and government sponsored data sites. The general pricing approach uses actual market prices for securities more actively traded by the issuers along with a mapping process applied to market prices of comparable structures of other issuers. An integral part of the mapping methodology references recently available information on the issuers from sources such as the SEC, rating agencies, and others. Where no direct or comparable data is available, we apply a model-based approach with market inputs such as sector spreads, bankruptcy haircuts and markdowns, liquidity, and credit quality. Further, counterparty credit risk and non?performance risk of the security holder is incorporated, as appropriate.
ENGAGEMENT & PRICE CHALLENGES
When given CUSIPs or ISINs, a coverage check can be provided within 24 hours. After high?level discussions regarding portfolio makeup and size, and frequency of valuations required, a sample valuation report is provided on a proof?of?concept basis for a representative sample of the portfolio. Due to the nature of the securities in question, there are normally instances where a client price can vary from the one from OTC Val. Generally these differences can be resolved and attributed to differences in models, data, or assumptions where all parties are open?minded to the existence of other models, insights, and legitimate viewpoints. Any discrepancies are resolved during the POC phase or initial valuation reports to assess whether OTC Val’s pricing is consistent with what the client is seeing – any necessary amendments can be made at this point of the engagement.
OTC Val is committed to working with banks, fund administrators, investment managers, and other sell-side and buy-side organizations to address growing market pressures for transparent, accurate, and reliable valuations.
