Paralleling the boom in over-the-counter trading has been demand for an essential tool in portfolio and risk management: valuation services. Major providers of financial data have been jockeying with niche players for pieces of this market in recent years, and one, Bloomberg, has turned up the competitive heat with its announcement of an OTC derivatives pricing service. Bloomberg and its rivals in this fast-growing part of the data and analytics business – some of the bigger names include Interactive Data Corp., Moody’s Investors Service, Standard & Poor’s and Thomson Reuters – are no strangers to valuations. Fund managers, for example, have long relied on these and other sources for independent pricing of infrequently traded bonds to factor into their published net asset valuations. But complex, structured products posed new challenges, compounded now by tighter regulatory oversight and by the heightened due-diligence and transparency requirements of institutional investors.
Enter Bloomberg, which on July 7 unveiled the OTC Derivatives Valuation Service as an extension of the existing BVAL package, which provides end-of-day prices on more than 6 million publicly available securities including bonds, mortgages and equities.
“Bloomberg is uniquely positioned to help the financial community better manage its derivatives positions,” founding partner Tom Secunda, head of Bloomberg’s financial products and services, said in the announcement. He touted the OTC valuation service’s “unparalleled independence, expertise and transparency so critical to investment and risk professionals, regulators and investors.”
Vendors like Bloomberg are scrambling to attract end-user spending that is climbing into the billions of dollars. Celent, a Boston-based research firm affiliated with Oliver Wyman Group, said in a January report http://www.celent.com/124_2844.htm that front-office technology spending for intraday pricing is rising at a 4.6 percent compound annual growth and will reach $1.1 billion in 2013. On top of that, expenditures on recurring valuation services, after spiking in 2007-’08, are growing 1.6 percent annually, toward $550 million in 2013, fueled in part by steady growth in credit derivatives.
Celent described the valuation-supplier roster as “highly fragmented,” with the more illiquid, OTC segments requiring bespoke price discovery and calculation mechanisms, and with brands such as Markit, Pricing Partners, Statpro and SuperDerivatives in the mix. It is increasingly common for clients to seek second and even third opinions to confirm the validity of an asset or portfolio value.
In a second valuations market report, in May, issued jointly with Vancouver-based derivatives technology company Fincad, http://www.celent.com/124_2964.htm Celent said that a financial firm undertaking an in-house derivatives pricing and analytics effort would have to invest $9 million up front, and then 25 to 50 percent of that amount each year to keep the systems current. Thus there may be an incentive to buy third-party analytics that “reduce costs, accelerate time to market and increase overall efficiency,” said Fincad president and CEO Robert Park.
Bloomberg said it will provide “comprehensive end-of-day valuations and risk measurements for a full range of OTC derivatives and structured products . . . of all levels of complexity across foreign exchange, interest rate, inflation, credit, equity and commodity markets, using high-quality data and market-standard models.”
The service is addressing a market characterized by increasing investor sophistication and regulatory scrutiny, therefore requiring “pricing tools that are accurate, reliable and defendable” in portfolio management and risk measurement, according to Jean-Paul Zammitt, global head of core product development for Bloomberg Financial Products and Services.
“Bloomberg’s move comes at a very opportune time, when regulators are screaming for more transparency and better insight into valuations, ownerships and exposures,” said Andy Nybo, head of derivatives for research firm Tabb Group in New York. “A service targeting OTC derivatives, structured products and more opaque instruments is a perfect fit for the environment we’re in now.”
In addition to accommodating the multi-asset array of instruments, Bloomberg offers its clients direct access to its financial engineers, who evaluate customer positions. In the interest of transparency, the firm invites clients to inquire into how given prices were arrived at.
“New regulations in the pipeline... will require that the industry make broader use of firms who provide independent, trusted-third-party valuations,” said Anthony Kirby, head of the International Securities Association for Institutional Trade Communication (ISITC) Europe Regulatory Unit.
Added Nybo, “Regardless of a manager’s own assumptions, such outside valuation may be what shareholders or other participants may want to see. Furthermore, it opens up another layer of transparency and another aspect of the valuation process by providing model analysis and the parameters used in the independent valuation.”
