Seeking A Third Way On Pricing

In our recently published special report on Pricing & Valuations, end-users of pricing services at firms such as Wells Fargo, Northern Trust and BNY Mellon all pointed to issues with transparency and credibility of pricing. Some end-users may want a concise and to-the-point documentation of pricing and valuation methods to feel they can trust a provider.

Others, however, take the approach of using secondary and even tertiary sources, and look at their own practices and techniques. This is the method advocated by Kerry White, global director of product strategy at BNY Mellon, both in the special report and additional conversations this past week.

White could be speaking to the providers when she says, "The best way to close the trust gap is by optimizing valuation practices and price modeling techniques." White relates that BNY Mellon is asked by its clients to provide those multiple valuations from different sources.

While the Dodd-Frank Act and the Governmental Accounting Standards Board (GASB) in the US, along with European Market Infrastructure Regulation (EMIR), are increasing scrutiny of pricing and valuation, market volatility is also beginning to play a part, as White sees it, particularly for counterparty exposure and credit ratings data.

Regulations put firms and their providers "in the same boat," where prices have to be corrected immediately if necessary, she says. Everyone has to be prepared to deal with challenges to prices. Providers know that a lack of transparency can damage their relationship with firms that consume their pricing data, according to White.

Fair value requirements from GASB and the Dodd-Frank Act, still pending, could complicate the use of multiple valuation sources. "The regulations are about getting under the covers of how assets are behaving, and whether they are priced appropriately," says White.

Getting a succinct summary of pricing and valuation techniques may be a desirable goal, but that will be much more difficult to produce if multiple, more complex valuation methods become necessary. This may be the next great challenge in pricing and valuations. Reconciling competing impulses to be brief and comprehensive seems necessary to establish the trust and credibility sought after for pricing.