Michael Shashoua: Pricing’s Progress
Concerns about transparency of pricing and the credibility of pricing sources have never been more prominent in pricing and valuations circles, which sets up a dilemma for those charged with performing this function within their firms. Executives at Wells Fargo, Northern Trust and BNY Mellon point to these issues when discussing pricing and valuations. London-based Daniel Johnson, vice president for valuations at Wells Fargo Global Fund Services, says it’s “debatable” whether end-users are comfortable with vendors’ evaluated pricing, although the providers think they are making their methods much more accessible. Dublin-based Paul Sharkey, pricing manager at Northern Trust, considers transparency the most important aspect of evaluated pricing. He adds that excessive explanations of the justification for a price are no longer acceptable, and that rationales should be brief.
Fund administrators need pricing delivered in a standard format for multiple asset classes, including equities, loans, swaps, options and cash bonds, says Johnson. With that, portfolios may be valued and prices may be distributed quickly. Yet this requires the collection of complex price valuations, such as market close vs. live snaps; closing price vs. mid price vs. the bid-offer spread; exchange close vs. clean price vs. market value; onshore vs. offshore vs. book-currency price. “We must be able to explain to all our clients what sources and checks we use and why, and what sources, methods and checks our providers use and why,” says Johnson.
Visualization Solutions
Boston-based Kerry White, global director of product strategy at BNY Mellon, acknowledges the importance of transparency, but says a combination of vendors is needed to get high-quality information. This can involve secondary and even tertiary sources, she says. Optimizing valuation practices and price modeling techniques can help close any trust gap that exists. White’s firm is often asked to provide multiple valuations from multiple sources.
The speed of the markets creates a challenge for getting a current assessment of Value at Risk (VaR), says White. Investors who are focused on alternative investments are particularly affected by the gap between urgency and completeness, she says.
If multiple, more complex valuation methods are now necessary, producing succinct summaries of pricing and valuation techniques will become more difficult. How can pricing and valuations professionals make these seemingly incompatible ends co-exist?
All the factors appear to be in place to foster innovation in pricing and valuation services.
Could graphic displays of data be a solution to give a quick and to-the-point depiction of complex prices and valuations? BNY Mellon enlists the services of an outside visual analytics provider to pick up where core mainframe processing systems leave off, when it comes to presenting data in comprehensible and analyzable form.
The Regulation Factor
Still, firms must avoid ending up with multiple views due to different sets of regulation in different regions or countries, says White. Using Risk View, a BNY Mellon system that encompasses those outside visual analytics, firms can get an holistic view of VaR that may affect pricing and valuations. The European Market Infrastructure Regulation (EMIR), Dodd–Frank, and the Governmental Accounting Standards Board, all have provisions that are not yet fleshed out when it comes to fair-value pricing rules. These could require the use of more valuation sources. That may lead more providers and firms to seek systems that can solve the problem of managing and visualizing multiple sets and sources of prices. And closing the gap between fast real-time information and completeness improves risk management, White adds.
All the factors appear to be in place—risk management and regulatory drivers, solutions already available or at least in demand, and the functional problem now in better focus—to foster innovation in pricing and valuation services.
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