When it comes to pricing exotic, illiquid, or hard-to-value instruments, few organizations manage it better than Markit, as illustrated by its win in the best pricing/valuation category in this year’s Buy-Side Technology Awards. James Rundle spoke with Nosheen Amir-Ebrahimi, director of portfolio valuations at Markit, to find out how the vendor performs difficult calculations with minimal information, and looking ahead, what it will be tackling in 2015.
How does Markit go about servicing buy-side firms’ pricing and valuation functions?
Nosheen Amir-Ebrahimi, Markit: We typically serve the buy-side community in a number of ways. Some don’t have independent valuation processes internally, while others might want a secondary check or verification, or they might be looking to outsource that function. That’s where we come in, and we provide them with independent pricing and valuation services across their portfolio.
Markit has added a range of new information and data to its service in the past year. Can you tell me a little about those enhancements?
Amir-Ebrahimi: One of the biggest challenges we’ve seen from customers has been around transparency. As you move to the more complex end of the scale, that becomes increasingly important. In the past, firms would rely on their counterparties to provide information on esoteric or illiquid securities, but we’re finding that increasingly they want more transparency, and they want a third party to verify that.
Specifically, we see this with illiquid debt and private equity, and for that we use transparent, observable data. We have a product called Markit Factors, which consolidates equity data across a number of different firms globally. It looks at their price-to-earnings (P/E) ratios, and for the instruments we’re trying to value, we map to these observables to arrive at a price for the illiquid debt and private equity.
In pricing, our regulatory dataset service helps customers reduce the amount of capital held as a buffer and to meet minimum liquidity and turnover thresholds expected in the context of section 1.3 of the General Prudential sourcebook, the Alternative Investment Fund Managers Directive (AIFMD), Ucits, and IFRS/GAAP regulation. The service is built on uncertainty metrics across more than 25,000 global bonds.
We have also launched a securitized products viewer, which offers users an efficient way to view evaluated bond pricing alongside market observations. The viewer also provides insight into dealer offerings and tracks bids wanted in competition (BWICs) delivering a streamlined approach to managing workflow.
The difference in this case being, of course, that you’re using verifiable information?
Amir-Ebrahimi: Yes, the key differentiator about our service is that it really is transparent, in that it uses observables. In this market, historically at least, people have been more geared toward using judgment, which is inherently hard to quantify. We’re attempting to bring more transparency into the inputs around the calculations.
Looking ahead to 2015, what areas are you focusing on, and what are you being asked to assist with?
Amir-Ebrahimi: One of the things we keep hearing from our customers is the challenge of streamlining their workflows. It’s really at the forefront of their minds, and doing that in a cost-effective way really is a challenge. If you put yourself in the shoes of a typical fund administrator, they receive pricing for a number of different funds, from a number of different vendors. They then have to set tolerances and thresholds, as well as execute their valuation policy. They need to have pretty good systems in order to manage all of that workflow, while maintaining enough transparency. We’ve just launched valuation comparison functionality, which allows firms to consolidate all of their pricing and valuations onto a single platform, and then manage the workflow from there. We’re also launching credit valuation adjustment calculations in response to IFRS requirements for measuring counterparty credit risk, and we’re seeing a lot of interest in Asia.
Bill Murphy, CTO of Blackstone, once again joins the podcast to discuss the private equity firm's new offices, designed to house its innovations team.Subscribe to Weekly Wrap emails