Stephen Bruel, Securities & Capital Markets Practice at TowerGroup
The inability of buy-side and sell-side firms to value positions and portfolios accurately and efficiently impedes risk management. An institution that holds over-the-counter derivatives must ensure that its current valuations processes improves, or it faces an increase in risk: liquidity risk, market risk, regulatory risk, and counterparty risk, to name just a few. The focus of this TowerGroup Research Note is the OTC derivatives pricing process. This Research Note identifies the trends that are influencing the valuations of OTC derivatives and highlights technology best practices that all institutions should comply with as they manage their OTC book of business.
TowerGroup Take-Aways:
* The current valuations process for over-the-counter (OTC) derivatives impedes the ability of firms to measure, manage, and mitigate their risks.
* Regulatory fiat and institutional pressure are just two reasons why firms that trade OTC derivatives will bolster their valuations process.
* To improve the valuations process, business managers will look to their IT departments to ensure their technology architecture is efficient and data management is robust.
* TowerGroup recommends that firms build an enterprise data management structure and develop a robust valuations process to ensure a strong, integrated risk management system.
* Deploying high-performance architectural tools such as virtualization will improve the overall speed and efficiency of the OTC derivatives valuations process and aid firms in their risk management process.
* An impediment to a robust valuations process is the multitude of systems that support the OTC derivative trading process; tools to integrate the component parts will be a competitive differentiator.
