Latency Arbitrage Reduces Liquidity

19 June, 2013 “We find that market fragmentation and the presence of a latency arbitrageur reduces total surplus and negatively impacts liquidity.”  The above statement is taken from a new paper that has just come out of the University of Michigan.

via Pocket June 19, 2013 at 09:44PM

Tweet this: Finra spot-checking firms for social media compliance

The Financial Industry Regulatory Authority Inc. is doing social-media compliance spot checks on some of its member firms.

via Pocket June 19, 2013 at 09:36PM

EBRD helps Russia save energy [EBRD – News and events]

EBRD helps Russia save energy [EBRD – News and events].

S&P Capital IQ launches new Portfolio Risk solution delivering Real-Time Risk Analysis for Multi-Asset Class Portfolios

S&P Capital IQ launches new Portfolio Risk solution delivering Real-Time Risk Analysis for Multi-Asset Class Portfolios

Solution incorporates leading risk and scenario analytics with essential market data and fundamentals to produce a one-of-a-kind offering

S&P Capital IQ today announced the launch of its Portfolio Risk solution, an advanced risk and scenario analytics tool that provides traders, portfolio and risk managers with the ability to make decisions about the pricing, hedging and capital management of multi-asset class portfolios in real-time.

Available on the S&P Capital IQ desktop, the product brings together leading risk and portfolio analytics acquired through last year’s purchase of R(2) Financial Technologies and S&P Capital IQ’s extensive market and reference data. The Portfolio Risk solution offers a fully integrated data and analytics platform, eliminating the need to invest in separate data to run risk systems. In addition, it gives users the ability to use interactive portfolio dashboards to aggregate data or drill down to the most detailed level of fundamental financials and research, enhancing understanding of impacts of potential changes on P&L at an actionable level. These views are comprehensive, yet easy to change and organized to suit individual needs.

The Portfolio Risk solution covers a diverse range of asset classes from cash, fixed income and equities to exotic derivatives. By offering best-in-class instrument pricing, portfolio analytics, scenario analysis and stress-testing capabilities via shareable dashboards, it facilitates communication and collaboration around risk and investment strategies while also providing full transparency into underlying methodologies and on-the-fly calculations. These features ensure that risk metrics can be calculated quickly and that new scenarios or market strategies can be tested and acted upon swiftly.

“In just over a year since our acquisition of R(2) Financial Technologies, we have successfully brought together rich data, sophisticated analytics, and relevant market commentary, news and analysis,” said Lou Eccleston, President, S&P Capital IQ. “The result is that our clients can quickly generate a transparent, fully customized risk picture enabling them to react quickly to changes in the market and to new investment ideas.”

“We are just beginning to leverage the depth of S&P Capital IQ’s data resources to deliver what we call ‘risk intelligence,’ including the power to gather new insights into how portfolios behave under varying scenarios,” said Dan Rosen, Managing Director, S&P Capital IQ. “We have assembled one of the most experienced teams of risk and financial engineering experts in the world and dedicated them to delivering interactive, real-time risk analysis as a central part of the investment decision making process.”

Prism Valuation Enhances Lat-Am Derivative Valuation Service

Prism Valuation Enhances Lat-Am Derivative Valuation Service

Prism Valuation has recently introduced two enhancements to its Derivative Valuation Service for Lat-Am products. Firstly, it now offers its clients the choice of discounting valuations for Brazilian Real (BRL) CDI zero coupon swaps using a curve constructed from USD/BRL non-deliverable forwards and swaps. This is in addition to the already existing option of allowing forecasting of the forward CDI rates using either an on-shore or an off-shore curve.

The non-deliverable curve discounting option is now being delivered to several clients trading these instruments. In addition, Prism has recently added support for the valuation of Colombian Peso (COP) OIS swaps, which can also be discounted using deliverable or non-deliverable curves. In addition to BRL and COP, Prism currently delivers IRS and other derivative valuations for Chilean Peso (CLP), Mexican Peso (MXN) and Peruvian Nuevo Sol (PEN) in the Lat-Am region.

“Supporting non-deliverable discounting for BRL and other Lat-Am and Asian interest rate swap types reflects Prism’s continuing commitment to providing a flexible, robust framework to meet clients’ derivative valuation requirements. We are always willing to make the effort to broaden our coverage and utilize emerging methodologies in order to deliver the best possible service” comments Keldon Drudge, CEO.


Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena – A white paper from Smarttrade



Meeting Multi-Asset Trading Challenges:

Workable Approaches for Success in a Dynamic Capital Markets Arena

a White Paper from

Meeting Multi-Asset Trading Challenges:

Workable Approaches for Success in a Dynamic Capital Markets Arena



There has been widespread change in the global capital markets in the last few years, and it has had significant effects on banks’ trading platforms. Banks must provide trading platforms that can access the global financial markets, manage increasingly complex transactions involving multiple asset classes, and handle a range of protocols and market structures that are constantly evolving. Add to this the requirements to respond to evolving regulatory mandates, client demands for increased functionality and transparency, and increasing volumes and volatility; and it’s clear sell-side banks face a new, challenging trading terrain where they must quickly react to changing markets in order to remain competitive.

Institutional dealing is extending globally with more liquidity sources to manage, and involves more and more disparate counterparties. This creates the need to aggregate, create orders, and deal or trade faster with clear market views in a fast moving trading environment. The stakes are higher. Clients demand transparency and best execution even while trading larger volumes in more volatile markets across various market structures and across multiple asset classes.

Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena



Multi-Asset Trading Landscape

Siloed trading operations are becoming less and less optimal in this new environment. Clients want sell-side banks to support complex trades, often involving multiple legs in multiple asset classes. These trades may include instruments traded in more than one geographic region, in more than one time zone, and with multiple settlement arrangements. To compete in this kind of trading environment, sell-side banks need harmonized trading systems that enable deeper and richer cross-asset functionality.

In addition, they now need systems that can monitor risk more holistically and in real time across client accounts with diverse holdings. The pressure for sell-side banks to more transparently manage exposure across all business comes from both regulators and banks’ own risk management mandates, both of which continue to evolve.

Focus on Dealing Systems

Tier 1 and Tier 2 sell-side banks generally grow both organically and by acquisition. In the process of this growth, they build or acquire a plethora of trading systems that are disparate in terms of infrastructure, architecture and software. Some are legacy systems using old code bases and outdated hardware, some are purpose-built and best-of-breed, some are asset-class specific, and some handle multiple asset classes. A typical large global financial institution might have as many as 20, 50 or even 100’s of separate trading platforms. Many of these platforms may have open systems with flexible and scalable architectures, but others may be brittle, unable to scale, and difficult to modify to comply with a changing market environment. These platforms often operate independently of one another, requiring a spider’s web of interconnections and interfaces to enable connectivity with clients and interoperability with compliance, risk management, clearing, and other back office functions.

Evolving market structure, regulatory pressure, client demands, cost reduction, and consolidation are forcing many firms to consider a new paradigm for trading systems. They look for ways to harmonize their trading infrastructure across multiple asset classes; re-using functionality, data models, database, message transports, and protocols while still supporting the distinct workflows required by each asset class and market. There are a number of business benefits obtained from unification of platforms, technology and processes:

Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena



Rationalize operations across asset classes by removing silos, eliminating redundant infrastructure, 1. and dramatically reducing latency as well as the maintenance and support costs associated with siloed IT environments.

Standardize messaging to the back office, enabling a unified and normalized approach to allocations, 2. clearing, settlement, and reporting.

Meet customer needs for more complex trades involving multiple transactions across multiple 3. asset classes.

Provide buy-side customers with the ability to trade different asset classes in the same manner, 4. with similar algorithms, and from one point of connectivity.

Manage risk more holistically by providing complete, real time views of exposure across asset classes 5. and traditionally siloed systems.

Better prepare trading desks to meet evolving regulatory requirements without having to recode 6. multiple systems.

Provide customers and regulators with improved transparency into pricing, liquidity, transaction cost, 7. and risk.

Integrated, Multi-Asset Trading Systems

A single, integrated dealing system can deliver dramatic improvements in cost reduction, risk control, and profitability. So what components would need to be included in such a system?

It would have to include functionality for liquidity aggregation, pricing, order management, position-keeping, smart-order routing, and internalization. Such a system should be modular, allowing a firm to turn on features or asset classes one at a time to manage migration. It should also enable the firm to turn on or off specific functionality at discreet levels (for example, turning on a specific liquidity seeking algorithm for use with equities in the US markets, modifying it for use in the EU, and leaving it disabled for futures).

The core of this type of integrated system is a reliable, scalable, low latency, and high-throughput messaging capability. Scalability is crucial. Equities, options, and forex volumes have all been growing for years. As more of the products traditionally traded over the counter (OTC) are migrated to central clearing and electronic trading, volume in these assets is expected to swell dramatically. Systems used for trading these instruments will need to scale easily using industry-standard hardware.

Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena



An open architecture that facilitates easy integration with external systems is also crucial. Open application programming interfaces (APIs) can simplify and standardize integration, making the trading platform more flexible, and more customizable. These APIs should allow integration of applications to extend functionality, custom analytics and algorithms, specialized compliance and risk checks, and client-, market- or asset class-specific functionality.

Such a system would also need a standard set of adaptors to facilitate quick and flexible integration with counterparties for both liquidity and order inflows and pricing and execution outflows. It should have multiple deployment options: internally within the firm, hosted/colocated, distributed across multiple centers, with all corresponding monitoring tools depending on the option chosen.

A standardized data model needs to be flexible and robust enough to preserve all the nuances and unique identifiers present in each asset class while normalizing the data to enable common processes to handle liquidity aggregation, order book management, order routing, state management, etc.

Lastly standardized tools should be available for managing and monitoring connectivity, latency, and performance across counterparty connections, liquidity venues, back office connections, and internal processes.

Aggregating Liquidity

Banks need to easily identify, connect to, collect and aggregate prices or market data from a growing number of increasingly diverse liquidity sources. Market data comes in different formats and often in different protocols, depending on the source and instrument. These market data require normalization to effectively capture prices, apply analytics, and determine the best available prices for each instrument set up to trade. These capabilities must support both the most simple and the most complex versions of pricing, providing capabilities to capture and determine top of book for OTC and listed flow based on price, size, and spread.

Price Distribution

Approaches to price distribution can vary by asset class, by trading objectives, and by client. A multi-asset system needs the ability to customize pricing on a client-specific basis, applying risk analytics, credit checks, spread data, and trading limits based on customer-specific criteria.

Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena



In addition, the system must be flexible in the way it distributes prices. Some clients may wish to receive every price update streamed into high-frequency trading systems, while others may require only incremental snapshots of conflated data. Some clients may need conflation to preserve system resources or to support click-trading. Scalability and resilience are also critical, enabling the system to function smoothly during periods of extraordinarily high volume and volatility.

Order Management

Effective order capture, whether from internal or external sources, is another given in a high-speed, multi-asset trading environment. Standardized formats ensure orders are normalized in the trading book and properly managed, tracked and reported throughout their lifecycles. A critical feature of an order management component is the ability to track and monitor state throughout the order’s lifecycle. By standardizing the approach to order management across asset classes, firms can better track state and monitor complex, multi-leg orders involving multiple asset classes, each with multiple executions and fills.

In addition, a single, multi-asset platform gives traders and risk managers a holistic understanding of client positions, outstanding orders, and buying power across all their trading activity to better manage pre-trade risk in real-time. By aggregating all the order flow and positions for all asset classes together, firms can also get a real-time view of P&L dynamically and apply analytics as needed to ensure the highest level of risk management while pursuing best execution.

Internalization and Matching

To internalize or cross orders for best execution and maximum advantage to the bank also requires advanced tools that route to match orders within trading books. Normalized data model technology ensures parallel buys and sells in the trading book execute and move to trade reporting. A matching engine should be flexible, accepting and matching internalized orders based on pre-set rules implemented by asset type, security being traded, and by region to accommodate varying market structure and regulatory demands.

With increased volume and the technological means to pre-evaluate orders, sell-side banks can establish their own dark pools for trading in different instruments. The ability to show or not show the trade – based on pre-set rules – will need to be an integral part of order management with the continuing development of these internalized markets.

Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena



Smart Order Routing

Dynamic trading environments require sophisticated smart-order routing capabilities, and multi-asset trading systems demand even more sophistication. The system must be able to route orders for execution, separating multi-leg trades for routing to different execution points. The system should support execution algos to ensure best execution. A router should also manage the life cycles of orders, reconciling “child” orders to parent orders for reporting, allocations, settlement, and for proving best execution. The router should have access to the current top of book and depth information from the liquidity aggregator to manage best execution strategies.

Tracking the state of an order – monitoring the level of fills versus open orders, knowing where the child orders are and the state of those open orders, and knowing the status of internal and external markets enables cross-asset trading desks to dynamically manage trading activity. Along with the order’s state, current views of market price/volume activity, internalized or crossing trade books, and rules, such as credit tolerance and client preferences, further enable dynamic management of orders to ensure best execution.

Messaging Layer Real-time Multi-asset Trading Environment (Pre-Execution) Normalization to a Standard Data Model Price and Order Aggregation Smart Order Routing Business Rules/Algos Crosses Internalization Liquidity Sources Other OTC Fixed Income Futures Equities FX Other OTC Fixed Income Futures Equities FX

Order Entries Credit/Pricing Rules Price Distribution



eal-time Multi-asset Trading Environment (Pre-Execution)Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena 8

The Importance of Post-Trade

Rapidly increasing volumes across asset classes like equities, options, futures, and FX create challenges because most legacy post-trade processing systems have difficulty keeping up during spikes in activity. Automation of post-trade operations is growing in importance and in complexity as firms work to consolidate their trading activity in multiple assets that clear and settle in multiple markets, across different time horizons, and with different settlement arrangements.

Systems that enable post trade convergence, providing all the messages related to order handling and executions in a standardized data model, with infrastructure capable of handling sharp volume spikes, can simplify post-trade challenges and therefore streamline post-trade operations.

A standardized approach can also help optimize risk management by enabling real-time clearance and settlement reporting. By processing in real time, firms gain global, real-time views of actual positions and exposure. This provides them with a better grasp of client opportunity and risk in a demandingly dynamic trading environment.

This approach also adds flexibility to respond to market structure changes. When, for example, interest rate swap trading becomes centralized, volumes are likely to grow exponentially. Sell-side banks with established operations in a multi-asset trading environment will be better prepared to quickly scale to meet this new demand. Accommodating new volume will impact everything from the trading desk operations to clearing and settlement.

A standardized data model ensures that post-trade reporting is uniform and universally accessible firm-wide. This way, all the post-trade systems for confirmations, allocations, settlement, the accounting systems, post-trade risk management and regulatory reporting systems can be updated in real time as trades complete. Real-time Multi-asset Trading Environment (Post-Execution)

Exchange OTC Dark Pool Profit & Loss Clearing & Settlement Messaging Layer Data Model Execution Reporting Consolidated Book


eal-time Multi-asset Trading Environment (Post-Execution)Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena 9


We operate today in a global trading environment that is significantly different from just a few years ago. Volumes are growing rapidly in every asset class, complexity is increasing as clients demand abilities to effect multi-leg trades in a variety of instruments. Asset classes are more correlated than ever, creating needs to effectively manage complex trading workflows to achieve best execution and effectively hedge. Successful trading in this environment requires not only algorithms and speed, but integrated tools to provide order life cycle intelligence for risk, position and asset management, always with an eye toward firm-wide impact.

Solutions must work in open architectures to enable integration across trading functions with multiple applications while remaining flexible and responsive to client and internal trading needs based on business demand and anticipated regulatory mandates.

Business demands from buy-side clients will be driving these processes, even while sell-side banks face resource pressures from regulatory changes, consolidation and cost-cutting. Clients will continue to look to the sell-side to handle more complex trades and provide tools to facilitate their trading and trade reporting. At the same time, the need to effectively manage exposure and risk across all client business also requires effective real-time tools. Implementing a standardized, multiple-asset trading platform that unifies all this trading activity and workflow can create an opportunity for firms to service a client’s entire book of business, enhance execution quality, improve risk management, and reduce infrastructure and support costs.

About smartTrade Technologies

Founded in 1999 by former IT and trading professionals from Citigroup, Credit Agricole and Société Générale, smartTrade provides the industry’s most sophisticated Liquidity Management System (LMS) to banks, broker-dealers, ECNs, asset managers and large hedge funds. Cross asset by design, smartTrade’s LMS platform performs best execution as defined by both the market and your firm.

For more information, visit

© 2012 smartTrade Technologies |

CameronTec’s FIX Catalys Muscles in on Central and Eastern Europe

CameronTec’s FIX Catalys Muscles in on Central and Eastern Europe

CameronTec providing CEE Stock Exchange Group with connectivity technology and trading infrastructure to manage and support the entire trading lifecycle.

CameronTec, the global standard in connectivity technology and trading infrastructure today announced that CEE Stock Exchange Group (CEESEG) has selected the Catalys line of products.

The Vienna Stock Exchange established the central execution interface (CEESEG FIX) for the four CEESEG members (Vienna, Budapest, Ljubljana and Prague). It also acts as market data hub for the six “cooperation” exchanges of Banja Luka, Belgrade, Bucharest, Macedonia, Sarajevo and Montenegro, and a further three energy exchanges in Eastern Europe.

CameronTec’s Catalys infrastructure will provide the CEESEG with an open-standard-based and centrally managed platform to truly harness performance, data interoperability, and business insight. This five year agreement includes CatalysTrade Front Ends, Market Data Layer and EnBS / ETS Adapters which will enable the exchange to seamlessly monitor, manage and control the entire order and trade flow as well as the market data flow from all respective venues. Catalys is underpinned by CameronTec’s market-leading connectivity technology, and engineered on the widely acknowledged standard in FIX engines, CameronFIX.

“CameronTec looks forward to further expanding its valued partnership with CEESEG for the long-term to provide state of the art FIX connectivity and trading infrastructure for what is undoubtedly the largest exchange operator in the region. We look forward to working with Wiener Börse to bring the broader benefits of Catalys to all members of the CEE Stock Exchange Group,” comments Anders Henriksson, CEO for CameronTec.

Catalys is designed to further empower brokers, banks and the buy-side to aggregate, view and manage related trade data. FIX transactional data and also latency, risk and operational data, all from a multitude of disparate third party systems, gateways and applications. Earlier in 2013 CameronTec announced latest technology enhancements included in Catalys v2.1, designed to further expand the Catalys offering and addressing critical areas of the deal life-cycle – pre-trade, trade and post trade, for a complete, modular FIX infrastructure platform built to address multi-asset, multi-market trading.

SS&C PORTIA Connects to SS&C’s Investment Intelligence Solution

SS&C PORTIA Connects to SS&C’s Investment Intelligence Solution

SS&C Rolls Out Its Newest Technology Platform to SS&C PORTIA’s Client Base

SS&C Technologies Holdings, Inc. (Nasdaq:SSNC), a global provider of financial services software and software-enabled services, today announced that SS&C PORTIA, a leading middle-to-back office investment operations platform, is connecting to the SS&C Investment Intelligence platform.

For investment managers, getting the data they need, when they need it, is essential to making smart and timely decisions. SS&C Investment Intelligence enables users to turn data into actionable insights by aggregating information from multiple systems, providing easy to use tools for analyzing data, and enabling access to reliable information anytime, anywhere, through browser and mobile-based platforms.

Now that PORTIA is connected to this platform, firms can combine the investment information from PORTIA with pertinent data from other sources and deliver it in a customizable format to address the unique needs of all types of users.

“SS&C is focused on meeting the needs of global financial services firms that want to leverage vast quantities of data across their systems and take advantage of new technologies such as mobile and cloud,” said Bill Stone, Chairman and Chief Executive Officer, SS&C Technologies. “SS&C Investment Intelligence allows firms to easily aggregate data into meaningful information from multiple sources, so they can make smarter investment decisions, improve agility and reduce costs.”

“The Investment Intelligence platform is a great example of how SS&C PORTIA is leveraging SS&C’s capabilities to offer clients expanded functionality,” said Christy Bremner, Senior Vice President and General Manager, SS&C PORTIA. “By utilizing this new platform, we are able to support one of the biggest challenges our clients face — getting detailed, timely information in a format that is easy to digest and accessible where and when they need it.”

SS&C PORTIA provides a broad set of middle-to-back office capabilities to allow investment managers to track and manage the day-to-day activity in investment portfolios to support global accounting requirements. Offered on a deployed and hosted basis, the solution supports a wide range of functions including corporate action processing, internal reporting, client reporting, regulatory reporting, performance measurement and attribution and post trade compliance.


SS&C join TMX Atrium’s community in Toronto

SS&C join TMX Atrium’s community in Toronto

SS&C join TMX Atrium’s community in Toronto

Ensuring additional and instantaneous access to TMX Atrium’s infrastructure reach


LONDON, 19 June, 2013 – TMX Atrium, provider of smarter infrastructure solutions for the financial community, today announced that SS&C Technologies Holdings Inc., (SS&C) has joined the TMX Atrium community.


SS&C, a global provider of financial services software and software-enabled services, has connected to TMX Atrium from their physical location in Toronto.  Connectivity from this key location into the TMX Atrium community ensures that SS&C will automatically gain access to community members and also benefit from the capabilities of multiple venues and participants already ‘on-net’ with TMX Atrium.


TMX Atrium’s ability to offer a wide range of access options continually attracts firms looking to expand their depth of reach.  SS&C’s initial TMX Atrium connectivity point at Toronto, allows SS&C to instantly benefit from access to TMX Atrium’s community across a wide range of market types.


TMX Atrium’s venue neutral platform is designed to maximise trading participant opportunities by offering a simple access point onto the world’s largest liquidity centres.  From whichever network point firms come ‘on-net’, they instantly benefit from fast, robust and highly scalable connectivity and have the ability to tap into a growing number of financial trading participants.


Emmanuel Carjat, Managing Director, TMX Atrium said, “We’re delighted to welcome SS&C to our community of on-net members.  We are now connected to more than 30 venues across North America, Europe and into Russia, which ensures our customer base can expand their reach using the TMX Atrium infrastructure more efficiently.  Our proven track record within the North American markets demonstrates our extensive knowledge of the key liquidity centres and the major players operating within the region.”


Robert Moitoso, Senior Vice President and General Manager, Financial Markets Division, SS&C Technologies, added, “Finding a partner with extensive global coverage such as TMX Atrium, ensures that we can accelerate FIXLink, SS&C’s broker neutral global FIX network, geographical expansion plans.  We joined TMX Atrium to take advantage of their North American reach, but immediately benefit from access to their European capabilities too.  Our wide range of solutions, software and services complement the needs of TMX Atrium’s financial services participants and allows us to focus on our core competencies, confident in the knowledge that TMX Atrium will manage our network and community connectivity.”

Q&A: Ian Blance of Six Financial Information on the Importance of Evaluated Pricing

Q&A: Ian Blance of Six Financial Information on the Importance of Evaluated Pricing

Q and A | September 27, 2012 – 9:53am

Ian Blance is head of evaluated pricing business development at SIX Financial Information, a major supplier of valuations and pricing services across global financial markets.

Why are valuations such an important aspect of the data business?

The valuation of assets is fundamental to the functioning of the financial system. Without an appropriate value, mission-critical activities would simply not be possible – fund NAV calculations, client reporting, book P&L, performance measurement, risk measures, company accounts, collateral management … the list is endless.  Many of these valuations are collected or calculated and then disseminated by the data industry, which makes the data vendors key players in this piece of the business. When it comes to exchange-traded asset classes, the collection and delivery of valuation prices is relatively uncontroversial. But when it comes to illiquid or thinly traded instruments, the challenge – to vendors and to users – is much greater.

What’s driving the current industry attention to valuations quality?

Two things. First, regulatory and audit oversight of valuation sources and processes has increased markedly since the financial crisis. The G20 placed valuation – in the sense of the essential need to know the true value of assets – at the centre of the turmoil, and initiated a programme to ensure that the issues highlighted by the collapse or bail-out of financial institutions were addressed. The way financial firms value their asset holdings has come under unprecedented scrutiny. Second, those institutions have themselves learned many lessons from the crisis and are determined not to have their fingers burned again!

Which markets and classes are best served by current industry offerings? Which are worst served?

For regular corporate and sovereign fixed-income securities, there are a number of well developed evaluation services, driven by the data strengths of the main data vendors, which have accepted methods and a good track record. There are fewer participants in the markets for mortgage products, and there is certainly more to take into account here from a data management and model calibration perspective. But the vendors in this space also have proven services.

Stepping outside of the fixed-income space, OTC derivative and structured product evaluations have more recent provenance.  There are some newer vendors, as well as smaller niche providers, involved in this segment, but Big Data has yet to come up with a truly comprehensive response here.  The specialist nature of the methodology and data, as well as the sometimes highly subjective calibration and input assumptions, make the evaluation of these asset classes a more uncertain business. OTC structured retail products, in particular, do not yet have a robust source.

When assessing third-party valuations services, what are the key parameters financial institutions should assess?

There are the usual questions relating to independence, reliability, consistency, etc. (and from a user perspective, cost is a much more important factor than many like to admit!). But we believe that in today’s world, the most important factor to judge is the defensibility of evaluations. The fundamental question a user needs to ask is: ‘Can I defend the use of this evaluation to anyone who may ask?’

To SIX Financial Information, ensuring defensibility means two things. First, the user must fully understand how the evaluation was produced. This implies that the full details of the methodology, data inputs and assumptions need to be provided to the user – full transparency. A user should never have to ask ‘how’ an evaluation was generated. 

Second, the user must be able to justify the use of the evaluation to any external party – client, regulator, auditor, risk group, etc. Having all of the necessary information to understand the evaluation is part of this. But so is having the comfort and assurance that there has been some kind of review and oversight of the vendor models and process.

In the case of SIX Financial Information, we felt that it was appropriate to have our Evaluated Pricing Service reviewed and assured by a major international audit firm, and their report on our service is available to our clients.

How important is transparency of methodology, both for suppliers of valuations data and for consuming organisations, who need to assure their own clients of the robustness of their models?

We believe that this is fundamental to the acceptance of an evaluated price; not only transparency of methodology, but its suitability for the job (preferably judged by a source independent of the vendor) and also the data inputs and assumptions that drove the model, operational process and controls. The age of the black box is dead! Above all else, the user needs to trust the robustness of the service and be comfortable recommending it to their clients.

Another factor here is the delivery of transparency not only to the users, but also to their end-clients. Connecting the vendor, the user and the end-client with the same amount of information greatly improves the quality and timeliness of resolving any queries or price challenges.

What about timeliness? Are we heading toward real (or near real)-time valuations pricing?

Given that the asset classes that lend themselves to evaluated prices are, except in some limited areas such as on-the-run US Treasury benchmarks, not real-time tick-by-tick markets, the notion of a real-time evaluation seems a little unusual. There are some services promoting this concept, but it is still new and remains to be seen whether it will develop into the orthodoxy.

Having said that, it is clear that many users now require multiple snap times and this trend is accelerating. The availability of this for all asset classes, however, is patchy. For some complex markets and OTC derivatives, an overnight batch valuations service, which allows the collection of all the required market data prior to evaluations, remains the norm. It is possible that this might improve with increasing access to liquid market data when some of this trading moves on-exchange.

Is there cross-over between valuations services designed for front office applications like trading and those geared toward portfolio valuations in the middle/back office?

This is the Holy Grail: front to back consistency on valuation. But it is surprisingly difficult to achieve in practice.

The whole approach to valuation differs in the front and back offices. In the front office, valuation tends to be forward looking – a trader or a fund manager will have a view, and possibly a position, in a specific instrument and, within reasonable limits, their assessment of the value will be informed by this view.

In the back office, and for vendors who service this market, the approach to valuation is essentially backward looking. A value is produced that reflects all the known market information relevant to this instrument at the time of the valuation. There is no attempt to second-guess this information or to tweak it to reflect a proprietary market or security-specific viewpoint. It would certainly be useful – and arguably sound practice – if the prices used in the front and back office were broadly aligned, but there are no guarantees.

What will be the next major developments in the valuations business?

We have already mentioned defensibility, which we believe will be the major driver for evaluations over the next few years. Increasing frequency of snap times and further expansion of coverage into previously poorly served areas are also likely.

One of the more interesting developments, though, relates to the requirement that many hitherto OTC-traded derivatives be exchange-traded and/or centrally cleared. This raises the prospect that much more market data on these rather opaque markets will become publicly available and consequently available for use in the evaluation process. One can expect that this will greatly improve the process for valuation of these asset types, but could it also be the spark for Big Data finally to get seriously involved in this segment?

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