Multi-Sourcing Holds Key to Data Quality
Financial firms seeking to ensure the best pricing for illiquid asset classes and perform accurate validations must undertake rigorous vendor selection processes while also incorporating prices and models generated internally, according to panelists speaking at last week's Paris Financial Information Summit.
While long-term vendor partnerships have benefits, user firms should still shop around and go through a "proper procurement procedure" to select vendors that deliver data of sufficient quality, said Geert Fransen, head of KBC Group's market data services center of competence, while conducting trials with multiple vendors introduces an element of competition and can help in negotiating favorable commercial terms for data services, said Matthew Cox, head of securities data management for BNY Mellon Asset Servicing.
But even sourcing data from multiple external suppliers does not always guarantee quality, particularly in the volatile markets experienced during the financial crisis. "In the last years... if I go through back-testing analysis, I would have to say that our internal models were much more reactive and close to the truth than the market was," said Alberto Ricciotti, head of group pricing in the credit treasury, planning, finance and administration group of Italian bank Unicredit. However, Ricciotti noted that firms cannot always rely on internal pricing models, because of external pressures to use impartial sources and because model-based pricing depends on long time series for back-testing, which are often unavailable.
Volatility Challenges
Volatility has also made it hard for firms to validate prices between different suppliers, placing more emphasis on vendors to offer responsive support services to resolve any disputes. "In the past, if you had three sources, you might have two prices near each other and the other a little bit off, so you knew which one you would take. Now the volatility can be such that you have three different prices, so you need to talk to the providers about how they came to those prices," said Antoine Meyers, head of the market data competence center at BNP Paribas.
Providing full transparency into pricing models is therefore a key requirement from user firms when selecting partners for pricing data, with Ricciotti citing increased disclosure around the inputs used in models and improved support as his key requirements from vendors.
But intellectual property rights governing who owns the underlying price inputs could be a hurdle to providing this level of transparency. "If you get a complex OTC derivative, there are many components to it and there is a lot of underlying market data," Cox said. "If the evaluator is pulling in underlying market data from external sources, there may be clauses and agreements whereby the evaluator can't share that information."
Vendors must also provide prices at granular time intervals, to allow firms to value correlated instruments at the same point in time. "Where you have credit derivative hedging against a fixed-income exposure, you have to make sure both instruments are valued at the same time. All the vendors are talking about intra-day evaluations-that needs to be broadened out globally for all fixed-income instruments," Cox said.
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