06.03.2015

Defending Evaluated Prices

06.03.2015
Terry Flanagan

Evaluated pricing is at the core of fair-value measurement, so it’s critical that the evaluated prices can be defended, according to Jayme Fagas, global head of valuations and transparency services at Thomson Reuters.

“Whether it is for IFRS 13, FRS 102, or numerous other regulations, defending that evaluated price is really what’s needed,” Fagas said in a webcast. “Access to market observable inputs allows one to defend a price.”

Data vendors often provide a“prepackaged measurement, such as a liquidity score or confidence score. “While that’s good, it may not be enough because you’ve got this measurement, but if you don’t know how that measurement was derived, how good is the measurement?” Fagas said. “It would be a combination of that measurement plus all of the market observable inputs that really make for a full package.”

Evaluators have to feel comfortable about the “market color,” for the most part market data, plus other market color sources that they get every day. “It is in fact that market color that allows the evaluator to derive a price,” Fagas said. “So feeling comfortable about that is critical and then conveying that confidence to the client is equally as important. So it’s the evaluator’s interface with the client plus access to the data that allows everybody to be quite happy about an evaluated price.”

Practitioners not only need to assess and manage the quality of the data, but also need to consider how the data will be used.

“It is far more than the data, it’s how we use it,” said Fagas. “So pricing methodology is critical and clear insight into that methodology is very important. That’s what we need to give to our clients–to make the data accessible and to show how we implement that data in the methodology that we use every day to derive prices.”

Another imperative is to ensure that the methodology is being followed every day. “It’s market data, methodology, and then it’s insuring that sound processes and procedures are in place at all times,” said Fagas. “What’s particularly handy is something like a SOC 1 type II certification which in fact insures that processes are being followed and procedures are always the same, and a sound environment is always in place.”

Service Organization Controls (SOC) are a series of accounting standards that measure the control of financial information for a service organization. SOC 1 type II is a report on policies and procedures placed in operation and tests of operating effectiveness for a period of time.

“So when we put all three together—data, methodology, and sound environment–we know our clients can feel comfortable about the price in which they use,” said Fagas.

Related articles

  1. European Commodity ETFs Have Record Inflows

    The asset manager aims to grow its Xtrackers and passive business globally.

  2. Tradeweb’s credit trading solutions and data will be integrated into BlackRock’s Aladdin.

  3. Trading Europe From ‘Across the Pond’

    Despite difficult circumstances, demand for SFDR Article 9 funds remained sustained.

  4. Assessing Bond Liquidity
    Daily Email Feature

    Low Touch, High Liquidity

    Janus Henderson traders use a broad spectrum of electronic tools to optimize the search for liquidity.

  5. Florida CFO said ESG standards are being pushed by BlackRock for ideological reasons.