Thomson Reuters: Current valuation requirements are beyond price discovery
In the second part of an interview, Jayme Fagas (pictured), global head of valuations and transparency at Thomson Reuters, talks about how regulatory changes have increased the need for transparency around valuation and pricing for structured products, the importance of data inputs such as risk analysis, value-at-risk (VaR) and credit valuation adjustment (CVA) to determine the price of structured products.
Have you seen a change in your clients’ needs around valuation and pricing?
Issuers are approaching us to ensure comfort around the valuation process of financial instruments. Issuers and investors need to know that independent evaluated pricing will be available going forward. They need to know that evaluations also will include access to pricing methodologies, assumptions, market data, underlying formulas and cash flows, and all variables used. All of this data must be transparent and easy to understand. All of these data elements are made available by Thomson Reuters Pricing System (TRPS), and TRPS Plus our valuation/pricing system for structured notes and hard-to-value over-the-counter (OTC) derivatives.
Again, regulators indicate that investors can only make informed investment decisions when clear transparency and disclosure is available with regard to an instrument’s structure and price. And, as previously stated, access to an accurate, independent price must be available.
How important is the quality of the data you use when pricing a structured note?
My background is in fixed income trading and I know that deriving a price on an instrument will only be as good and accurate as the data inputs used to determine that price. The data used in the valuation process is fundamental to being accurate. Thomson Reuters data and TRPS methodologies are of the highest quality but as we move towards an increase in the volumes of data required for transparent pricing, those who can add capabilities and tools which allow users and investors to more efficiently navigate their way through this massive amount of data will benefit because that is what clients need and must have.
How important is automation?
Automation of process in the pricing and valuation segment is critical to streamline internal pricing workflows and valuation processes. We have recently launched Navigator, a software solution that supports automation of reference data and pricing workflows. Navigator is designed to enable back-, middle- and front-office teams to analyse and search across complex data sources, compare multiple pricing options and optimise valuation and risk activities. This further addresses pricing and valuation requirements that go well beyond price discovery and offer easy access to high quality data, in an efficient way that allows user-friendly comparing and contrasting of the data.
What is the aim of TRPS Plus?
TRPS Plus is a good example of a pricing and valuation value-add that we can offer customers, as it provides full transparency into the pricing of a given structured note. It also provides risk analysis, such as value-at-risk (VaR), credit valuation adjustment (CVA) and Greeks. TRPS Plus also gives customers a tailor-made evaluated price with complete access to cash-flow descriptions, market data inputs, numerical methods and model assumptions to help address transparency and regulatory requirements. This new tool also allows users to determine if the credit rating of the counterparty of a particular instrument was downgraded.
Additional enhancements have been implemented and Thomson Reuters DataScope Select now covers more than 650 structured notes and derivatives. Combined with the legacy-Pricing Partners financial library, TRPS Plus via DataScope Select will deliver transparent pricing on all standard or non-standard derivatives. Valuation and risk reports will also be delivered intra-day or end-of-day, according to customers’ requirements.
Has credit risk become a more visible element when pricing a financial instrument?
Credit risk analysis has become a more important element of the valuation and pricing process. We essentially mimic the process and the way a trader will look at an instrument. We look at all of the market data inputs including credit default swaps (CDS), credit valuation adjustment (CVA), etc. It’s not only about providing access to the price but also the traceable details of the valuation with clear line of sight into the instrument and its value.
Thomson Reuters’ enhanced credit risk capabilities provide access to 388 different credit agency ratings alongside the proprietary credit models from StarMine Credit Default models, for a more holistic credit risk picture. The credit risk capabilities also include entity hierarchy information, including country of risk data to provide a granular assessment of exposure to risk, fundamentals and content -- allowing clients to calculate key ratios, as well as news sentiment scoring to facilitate automation of alerts to news that may have a credit impact.
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